The building industry is facing one of the biggest challenges in its history. It is no wonder, with government grants increasing demand, material prices skyrocketing and a very tight labour market. When builders have financial challenges, it is often the subcontractors who bear the brunt. Regardless of what industry you are in, there are measures a business can take to reduce the risk when their customers are facing financial challenges.
1. Warning signs
There are a few tell-tale signs that a builder is under financial stress. A few examples are not returning calls, paying bills progressively later and ‘word on the street’ from other suppliers that they also are having challenges being paid.
2. Credit check
If you have one client who is a large percentage of your revenue, or a large total value, you should undertake a credit check on the organisation hiring you. In the grand scheme of things, the cost is minor, but it may prevent you from working with an entity that is unlikely to pay you.
3. Contracts
You should be entering into signed, lawyer prepared (or at least reviewed by your lawyer) contracts. Much work is undertaken through a handshake, but when the proverbial hits the fan, it is not what you know but what you can prove that is vital.
4 . Terms
Your terms and conditions should be complete, robust and (again) prepared by a lawyer. How many days have you given them to pay the invoice you have issued? Is there interest payable on late payments? If the debt is referred to a debt collector, are the debt collector’s fees above and beyond your original invoice and payable by the customer?
5. Diverse clients
You should have many clients and not one client which makes up a large (such as more than 20%) of your revenue. If your largest customer goes out of business and doesn’t pay you what is owed, would you be insolvent (not be able to meet your debts as and when they fall due)? If the answer is yes, you need to reconsider and adjust your client mix.
6 . Diverse industries
Like ensuring you have diverse clients; you should also consider being in diverse industries. Such as short haul and longer haul or government and private or mining and construction. For micro businesses, this would be challenging, but for larger businesses, this is a must.
7. Personal Property Securities Register
If you must leave equipment on a site while you are not there, it is worthwhile for you to investigate lodging a PPSR interest over that property. This will make life much easier for you if the customer does go into administration or liquidation and the site is locked up.
8. Accountant
It is vital to have an excellent accountant and bookkeeper when running a business. Managing your cashflow, keeping accounts, chasing people who owe you, liaising with our friends at the tax office. All the ‘fun’ things you put off and usually never get around to completing.
9. Working capital
Given these tough times, it is important that your business is not running on the smell of an oily rag. Keep some funds available in the business to keep you going in case a few builders are late in paying as their facing financial challenges.
10. Debt collection
You need to have robust debt collection procedures. In an ideal world, getting paid prior to completing the work would be preferred (or at least a deposit). If this is not possible, you need to monitor when invoices are due and action if they are not paid on time. Accounting software can automatically send out reminder emails if amounts remain unpaid. You need to consider paying your overdue debts before working on current projects.
It is up to you to be proactive to manage (or to engage an external party to manage) the above to protect your financial interests when your customers are facing financial challenges.
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Source – Greg Mawer