Get your share of the boom!

It’s undeniable that the construction sector is booming. However, for many businesses that isn’t reflected in their bottom lines  

The ANZ Bank recently released the results of its Privately Owned Business Barometer, which included survey data on the construction industry.

Many people will be both pleased and concerned to know that the survey’s results line up with the view of the sector that it’s tough out there.This month, we look at a few key financial areas that ANZ highlighted in its report and what business owners can do to address those issues.

Maintaining margin

A major point to come out of the survey was the main difficulty for many companies in maintaining a strong margin on work performed. The gross margin – sales minus costs of sales (payments to workers, materials, etc) – is arguably the most important metric fora construction-based company to track.

This is because it identifies wherea company’s profit sits. If a company has low margins, then it cannot cover overheads such as accounting fees, rents, telephone charges, etc.

The ANZ survey reported that builders are struggling to maintain a reasonable margin. This means that there is a lot of competition out there for work, and many companies are dropping prices in order to win work. This phenomenon is known as the ‘race to the bottom’ for a reason. If retail companies sold products for less than what they paid for them, they would never make a profit.

This serves to reinforce the importance of accurately costing out jobs and knowing prices before bidding on work (see this month’s article about quoting jobs on page 22). An alternative approach could be to choose jobs carefully and compete on something other than price, such as becoming renowned for quality or speed of work. This approach, however, isn’t as easy as it sounds, given that many start-ups will initially accept low margins in order to secure work. While this may be a strategy for some companies, it’s important to keep in mind that, if a business can’t afford to drop its prices in order to win work, it shouldn’t.

As a barometer, businesses should aim for a minimum gross margin of 20-25% (gross margin as a percentage of sales) on every job.

Getting paid

After low margins, the research identified that business owners are too busy to follow up slow payers and invoices are often not collected in a timely manner. This sounds crazy – why would a business perform work for free? Most companies pay suppliers on 30-day terms, so if an organisation isn’t collecting on its own invoices then it will quickly run out of cash. This will leave the business exposed on its next job and forever chasing its tail. That kind of approach gave rise to the old saying: ‘working on the business rather than in it’.

Invoice collection needs to be a major focus for any business owner. If an owner doesn’t have time to chase invoices, then it should be given to a third party company that chases collection and takes a percentage of the payment. We have many clients who use this option and they, more often than not, have great collection rates and never have to consider using a debt collector.

Measuring performance

Benchmarking also rated a mention in the ANZ report. According to the survey, only 15% of companies benchmark annually, while 28% of businesses stated they never do. We suspect the latter figures to be much higher. Benchmarking is hugely underutilised and is crucial for really knowing how a business is performing.

Using the gross margin as an example, a business may be achieving a gross margin of 25% and find that it is not making a profit. If the industry average is 20% and other businesses are turning a profit, then pricing is clearly not the issue. In this case, overheads would need to be examined to determine what needed to be cut back on, in order to be in-line with the rest of the industry.

Crowe Horwath has run a number of successful benchmarking sessions with construction industry clients that have led to large increases in both gross margin and profit.

About Crowe Horwath

If you have any questions about points raised in this article or would like to discuss how your business is going in these busier times, we can help. Please contact Peter van der Heijden at peter.vdh@crowehorwath.co.nz; or your local Crowe Horwath advisor.

Crowe Horwath has teamed up with Minter Ellison Rudd Watts and the BNZ to provide a free comprehensive training session to give you and your business the tools it needs, in order to achieve success. The next session is in South Auckland, 18 November. For further information or expressions of interest, please contact us at Auckland@crowehorwath.co.nz.