Recent media reports have highlighted volatile trading conditions in the building industry, with concern that these could affect the solvency of many companies. Indeed, we are already seeing a spike in liquidations both here and in Australia. What measures can builders and other trade businesses take to be prepared for the financial pressure that might be coming?
Financial Competence
The most fundamental requirement for any business to help navigate challenging economic conditions is to have a very clear understanding of their own financial position. This must as a minimum include a cashflow forecast, operating margins and working capital metrics. These will allow you to quickly see if there are periods ahead where cash is tight, margins are being squeezed or if your short term liabilities (eg. what you owe to suppliers) exceed current assets (eg. what you’re owed or have in the bank). The key is to be prepared and make sure if there is a potential problem that you see it coming.
Speak to your accountant about setting up a dashboard where you can check these figures regularly and take action if it looks like they are heading in the wrong direction. If you’re not especially financially literate can you lean on your accountant or someone else with the right skills to help you?
What our accountant says:
- Give a cost range rather than a fixed price if possible
- Squeaky wheel gets the oil – ring customer (continually) to get paid – don’t keep working without getting paid
- Look to ‘restructure’ your business (redundancies etc) on a timely basis – do not keep paying staff in the hope that new work comes in the door
- Do not work for free – if there is no margin in the job then don’t take on the work (and look at restructuring etc)
- Non payment of PAYE is a criminal offence – so pay the PAYE!!!!!!
- Don’t become complacent because you have a pipeline of work – you need to plan (on a timely basis) for what to do when the pipeline comes to an end
Costs & Credit Terms
Can you reduce costs, refinance or obtain extended credit terms? It’s better to make these decisions before it’s too late and the dashboard mentioned above can help give you that advance warning.
Sell Or Downgrade Assets
Can you switch from owning to leasing vehicles, which then frees up capital that you might need? Or can you downgrade to something more affordable, at least in the short term?
Contractual Terms
What does your contract say about cost inflation, does it allow you to pass this on to customers? Many builders are moving away from fixed price contracts because margins can quickly get eaten up by price increases and project delays.
Don’t Take On Too Much
It can be tempting to accept every job that comes along, on the basis that it’s better in your pocket that someone else’s. Especially when there’s concern about demand softening over the coming months. Yet, taking on low margin jobs can come back to bite you, particularly when prices are rising and there are difficulties with supply. Better to spend that time on seeking out good quality work.
Replacing Retentions with a Bond
Having retentions withheld on a contract can have a big impact on cashflow, so providing a bond in lieu of those retentions can help. That way your invoices are paid in full rather than waiting for months to get that money out of the principal or main contractor.
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Good Risk Management
In good times the business might be able to weather an unforeseen event and finance might be easier to come by to to pay for an unforeseen problem or loss. But when the economy is tighter finance becomes harder to get and there might not be as much money in your rainy day pot. That’s why it becomes even more important that you have insurance in place in a downturn. Here are some examples of insurance cover that you might not be in your basic package, but could be a financial lifesaver in tight financial times:
- Directors & Officers Liability
If insolvency cover is included and the company gets into financial trouble the policy will protect company directors from a liquidator trying to recover losses from their personal assets. If some situations liquidators have powers under the Companies Act to do this on behalf of creditors. - Crime/Fidelity
This reimburses losses due to theft, typically by an employee or someone in a position to siphon money out of the business. The most common means of doing this is by setting up and paying fake accounts. Over time these losses grow and can end up in the hundreds of thousands of dollars. - Employee Disputes Liability
You never really know a person until you see them under stress. In a downturn this stress can result in all kinds of negative behaviour, and business owners are no exception. If an employee has a grievance this can not only add a significant amount of stress but also a substantial financial burden to you and the business. This policy covers the legal bills for defending cases taken to the Employment Relations Authority and any compensation awarded. - Tools Cover
For many builders and tradies tools are probably the most uninsured assets you own, while also being some of the most critical to your ability to continue operating your business. As the economic squeeze goes on property crime rates increase and trade tools are an easy target. The price of tools insurance is not as much as most people think, especially when the cost of not having could be much greater. Make sure the cover you do have is full replacement value regardless of the age of the items. - Stock Cover
Incidences of materials theft are also on the rise and in many circumstances this may be uninsured. Builtin’s tools policy includes cover for stock at any site. It can be included in most contents/material damage policies as well, but be wary of the fine print, such as whether the cover is limited to a single fixed location.
Rather than paying all at once, paying your premiums monthly can also help with good cashflow management.
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In a Nutshell
A Scout’s motto is “be prepared”. This applies equally to businesses going into uncertain economic times, the more prepared you are the more you’re going to be able to weather the heavy seas. Make sure you have key financial early warning indicators set up; have your costs, credit and contract terms optimised and aren’t taking on too much work with narrow margins. Lastly, there are good costs and bad costs, so consider what risks you should be insuring to help mitigate significant financial shocks to your business.
The information presented in this article is general in nature and not intended to be financial advice for individual situations. You should speak to an expert about your specific circumstances and needs.
