RSM in Canberra advises construction businesses to plan ahead to protect them from insolvency. Photo: RSM Australia.
As businesses emerge from recent COVID-19 lockdowns, an Australian Securities and Investments Commission (ASIC) report showing that insolvency activity is up 21 per cent to September 2021, compared to the same time last year, is a timely reminder for all businesses to assess their financial position in the lead up to Christmas.
This is particularly important for businesses in property and construction, where the sector traditionally ranks highly for total insolvencies each year. Even though construction is booming in almost every part of Australia, the holiday shutdown period can be especially difficult.
Having supported many construction businesses in restructuring and recovery, RSM in Canberra restructuring and recovery partner Jonathon Colbran says a lack of work is not a typical reason for insolvency.
“Whether your construction business is struggling, or you have more work than you can handle, there are a number of pressure points to be wary of as we round out 2021,” he warns.
Many business owners in construction are flat-chat right now. Certain incentives, such as the Federal Government’s HomeBuilder grant, caused a huge spike in demand at a time when people were also looking to direct surplus cash – for example, savings from not being able to travel – into home renovations or a new home build.
However, trying to deliver all these projects amid COVID-19 shutdowns and supply chain disruptions is certainly not easy.
“You may also find yourself too busy to dedicate time to record-keeping or invoicing, while having to shell out large deposits to secure materials well in advance,” says Jonathon.
“It’s vital to take a step back to gain a little perspective. The last thing you want to do is get caught in a loop of seeking expensive short-term funding solutions, which will impact your profit margin and could eventually sink your business.”
RSM in Canberra partners Jonathon Colbran and Frank Lo Pilato. Photo: Thomas Lucraft.
Forecasting and budgeting can often take a back seat when you’re busy. But if you don’t stay on top of it, all the work you’re doing could amount to big project losses at the end of the day.
“It’s important to talk to an experienced accountant or business adviser, and have them map out your cashflow to ensure you have enough working capital reserves to meet your project needs now and into the future,” says Andrew Fernance, principal of business advisory at RSM in Canberra.
Given the steep rise in demand for construction, the cost of materials such as timber and steel have gone through the roof. This is also the case with labour costs, with many subcontractors raising their rates as more companies compete for their services.
“If you’re still working to complete last year’s projects, or are still quoting based on last year’s pricing, you could run into trouble,” says Jonathon. “Unfortunately, you may not realise it until the project is complete.”
Andrew says: “A fast and thorough review of your pricing will ensure you are appropriately quoting jobs to protect your profit. Getting your books and compliance obligations up to date also gives you a much better understanding of your financial position.”
There have been cases recently where clients of construction companies are refusing to accept delays due to COVID-19 lockdowns. This places some builders at risk of penalties for not completing works on time, even though the circumstances are completely out of their control.
“With increasing demand for services, we’ve also seen some builders taking on more than they can handle, which has left them struggling to meet deadlines,” says Jonathon. “This then leaves them open to liquidated damages if clients seek compensation for breach of contract.”
If you’ve been struggling to keep up with the business side of running your company, don’t let it get out of hand. Now is the time to bring in reinforcements to assist you in capitalising on opportunities without making rookie mistakes that could lead to insolvency.
“We can also assist with an Options Report to help you gain a complete understanding of the options available to you in a scenario where you feel you have a business problem that might be getting out of control,” says Jonathon.
For a free and confidential discussion on any concerns you have about your construction business, contact the team at RSM.
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