“Like all industries, building and construction experiences economic peaks and troughs, so businesses should take steps now to prepare for more difficult times – as the saying goes, you can’t insure a burning house, so put the cover in place before the worst happens”
Steady business climate doesn’t mean we should get too comfortable – By Martin Jones
We often forget the potential risks of doing business when we’re enjoying a steady economic climate. It’s important for business leaders in the building and construction industry to prepare in advance for potential future downturns.
When times are good, we get complacent, forgetting that things can change in an instant. This may be the case during the current boom for the building and construction industry in New Zealand, with the housing market particularly in Auckland and the rebuild in Christchurch continuing to drive momentum.
Paradoxically, this means that good times can often be the most dangerous. A recent study from BIS Oxford Economics shows that the total value of building authorised in New Zealand was expected to peak in the financial year ending March 2017. A slight decline in 2017/18 is expected, which would be the first year of negative growth in the sector for five years. Dwelling construction is forecast to continue to grow until 2019/20.
We know from recent history that recessions go in cycles of around seven or eight years, and those cycles are only getting shorter. Like all industries, building and construction experiences economic peaks and troughs, so businesses should take steps now to prepare for more difficult times. As the saying goes, you can’t insure a burning house, so put the cover in place before the worst happens.
Avoiding cashflow troublesDespite the property boom, the construction industry still remains susceptible to cashflow troubles and insolvency. There are various reasons for this trend. Some ways that building and construction businesses can manage cashflow more effectively include the following.
Know your customers
It may seem simple, but building and construction businesses, especially those builders working for themselves, must ensure the organisations they are doing business with have a solid credit history, can make payments on time, and are trustworthy.
If you don’t perform credit checks on your customers, you may begin projects for businesses with a high risk of default payments. A major customer going into insolvency could paralyse a construction business, unless there is credit insurance to cover for the unexpected losses. A credit insurance provider can also help mitigate the risk of unreliable customers by providing valuable insights and knowledge about customers.
Don’t accept late paymentsLate payments are a primary culprit of cashflow problems, so it’s essential to know when payments are due and be prepared to chase up late payments. Building and construction businesses are particularly vulnerable to cashflow issues stemming from late payments because operations are cost-intensive, with material, labour costs and other overhead payments all depending on regular cashflow.
This risk gets even worse if you’re a smaller business working for one or two clients at a time. Unlike large construction firms who operate across several clients at once, or more established clients, smaller builders face serious cashflow problems if a client doesn’t pay for a project on due date.
Issue invoices promptlyIssuing invoices promptly goes hand in hand with chasing up late payments. A business has no credibility when demanding payment on time if it can’t issue its invoices in a timely fashion. It’s crucial to not let this administrative task slip down the list of priorities. Invoices should be issued at the first possible opportunity with a clear pay-by date.
Increase lines of creditIncreasing lines of credit with lenders or suppliers can be a quick and easy way of keeping cashflow healthy, but only if your underlying finances make it safe to do so. If your finances don’t support extending credit, it can expose you to greater potential risk, so this measure should be used circumspectly.
Protect your businessYou can protect yourself from late payments using good trade agreements or contracts, and having trade credit insurance. Trade credit insurance protects the company against risks that could send it into a financial tailspin.
It’s important to safeguard cashflow from bad debt, which can damage profitability and business-supplier relationships. Credit insurers follow up bad debts on your behalf and can also provide loss recovery services. Organisations in Asia Pacific can lose up to 50% of the total value of their trade receivables that aren’t paid within 90 days of the due date. Credit insurers can often collect bad debts that would otherwise be written off.
Credit insurers can also help to strengthen cashflow in a business so it can keep trading. Insurers can provide early warning of potential payment difficulties. They do this by providing access to buyer credit rating information to enable a policyholder to better evaluate the risks of working with new customers.
A good trade credit insurer will have a thorough understanding of the construction industry, and act as the business’s eyes and ears on the ground. It can add value to businesses of all sizes, checking that prospective contractors are stable, creditworthy and have a reputation that meets the required standards. Credit insurance providers have access to live data on millions of businesses which better informs their customers to make strategic trading decisions.
Credit insurance policies cover both goods sold and delivered, and services rendered. They can be tailored to cover other risks such as work in progress and binding contracts. This means businesses get fit-for-purpose cover.
In short, credit insurers provide flexible cover options that let organisations match the policy to the business requirements. The cost of this cover is usually very affordable and forms the basis of a sound, long-term financial plan.
Although credit management cannot completely prevent bad debts, credit insurance enhances and strengthens credit management processes to give cashflow that extra protection.