Don’t let the boom become bust!

It’s a boom time for builders right now, but there are still some companies going bust. Ensure you’re not one of them, by setting yourself up for success  

Here’s a snapshot of the latest business headlines: net migration is climbing (more people are moving to New Zealand than leaving); there is a massive shortage of commercial and residential construction in Auckland; the Christchurch rebuild is ongoing; interest rates remain low; banks are looking to lend.

Yet among those same headlines are stories about construction sector companies going under. Surely, in this ‘rock star’ economy, everything should be going well? Unfortunately, that isn’t the case.

At times like these, an expectation that a business should be profitable and successful tends to gloss over the fact that the construction sector is always a tough industry to be in. In this month’s article, we’ll look at a few reasons for this and some solutions.

The right system

It’s an undisputed truth that the most successful companies have a strong handle on their back office from day one. They have robust processes in place for their financial reporting and the collection and payment of debts; they track their jobs well from start to finish and generally know on a day-to-day basis how much any overrun or gain will affect the profit on every active job.

If you find that you aren’t making the money you expected to on a job, and aren’t sure why, it may be time for you to invest in a workflow management tool. These systems can tap straight into your accounting system (system dependent), making your life a lot easier.

Using the right system allows you to issue a quote to a customer, turn it into a full job and invoice the client once the quote is accepted. It also allows you to track costs more efficiently. Typically, a quote will include how much you expect to spend on materials and labour.

 

“If you find that you aren’t making the money you expected to on a job, and aren’t sure why, it may be time for you to invest in a workflow management tool

 

A workflow management tool can enable you to track the actual cost of key parts of the job against budget/quote. If you run over, it doesn’t solve the problem, but it allows you to take a closer look at the driving forces.

Are your materials costing too much? Did you miss the scope of the work in your initial quote? Are your employees and contractors costing too much? Whatever the answer may be, a workflow management tool can open up conversations between you, your suppliers and your customers.

If you’re aware of overruns early on, it’s possible to discuss the increase with the customer and adjust your quote. The key point is that you understand where, when and why things are running over budget, so you can act accordingly.

The system will also show what areas you are most efficient in. This can often be as important as knowing why you aren’t making as much as you should.

Open relationships

Of all the successful construction sector companies I’ve dealt with, each and every one of them has had robust relationships with their suppliers. It cannot be overstated how important this is, as suppliers are in business for the exact same reasons as you – to make money.

Advising them when you may fall short or need extra time to pay an invoice makes a big difference to ongoing business relationships. When dealing with suppliers, it’s useful to think of how you would like to be treated by your own customers. Silence is extremely unsettling, particularly when it comes to an overdue invoice.

With this in mind, try to avoid using your suppliers as a form of workable debt wherever possible. Again, consider how you would like to be treated if the roles were reversed.

 

“If you find that you aren’t making the money you expected to on a job, and aren’t sure why, it may be
time for you to invest in a workflow management tool

 

Equally, chasing customers for payment is important for your business. Having the difficult conversation with a customer about an invoice is key, as it will give you an indication about when to expect payment. Early notification regarding a delayed payment will help you determine what steps you might need to take.

These could include securing the debt or, if necessary, stopping work on a project to save you from falling into the dangerous position of not being able to pay your own costs. While no one gets into business to become a debt collector, chasing debts early helps avoid problems further down the track.

 

More information

If any of the topics covered in this article raise additional questions for you, we are more than happy to help. Crowe Horwath has teamed up with Minter Ellison Rudd Watts and the BNZ to provide a free comprehensive training session to cover these areas in more detail and give you and your business the tools it needs, in order to achieve success.

The next sessions are in Queenstown (17 August); Christchurch (9 November) and South Auckland (16 November). For further information or expressions of interest, please contact us at Auckland@crowehorwath.co.nz.

If you have questions about how to grow your business, or you would like to attend a free training session in your area, please contact Peter van der Heijden at peter.vdh@crowehorwath.co.nz or your local Crowe Horwath advisor.

For the contact details of your local office, please visit: www.crowehorwath.co.nz/locations or telephone 0800
494 569.