Construction business is booming, so why the busts?

Kirsten Hawke

The New Zealand construction industry is going gangbusters. With a growing population, Kiwibuild and mega infrastructure projects coming out of our ears, you would think construction companies would be making record profits.

Construction business is booming, so why the busts?

So, it comes as a shock to hear of construction companies, such as Ebert Construction and Accent On Group, going under.

Here, BUSINESS buddy explains why construction companies get into financial bother and how to keep your business bringing in the moolah.

Insufficient planning

Most builders would admit that while they may be experts in their trade, daily admin and paper work often get left on the back burner.

Many construction companies do not a have a business plan, which is a vital tool for managing and growing your business.

A good business plan lays out a vision of growth and the steps needed to get there.

It can also be used as a tool to attract financing for your business and your commercial banker will want to know how well you adhere to your plan.

The lack of a business plan can see your business going down the gurgler.

No marketing system

Lots of construction companies complete one job before looking for the next.

This is a risky strategy as delays locking in the next job, which will can impact cash flow.

It is essential to have a robust marketing system to maintain and grow your company’s sales.

Having a consistent flow of leads increases the likelihood you’ll have jobs in the pipeline

Poor leadership

Although it is possible to find a builder with experienced management skills, many construction companies lack good leadership.

Underperforming management due to poor record-keeping and lack of people management skills all contribute to disengaged staff, lower productivity and ultimately a less profitable business.

Cash flow

Cash flow is king.

Insufficient working capital is the most common cause of business failure and every business should have a cash flow forecast.

An estimate of the amount of money you expect to flow in and out of your business can be done on a month-to-month basis or for the whole year.

Forecasting is important because if your business runs out of cash and can’t obtain new finance, it will become insolvent.

Low profit margins

Winning a job is easy if you cut your margin down to the bare bones but with razor thin margins comes increased risk.

The cost of construction is high, and it will remain high because skillsets are limited.

Some construction companies have become unstuck due to under-quoting jobs and as the cost of materials and labour has increased, the cost of the contract overruns.

It is vital to track the profitability of each job and ensure your invoicing is done on time to keep the cash rolling in.

Bad debts

Bad debts stink and chasing them up can be a real headache.

Asking for payment up front or taking a significant deposit at the start of a job, all help reduce risk.

Aim to have numerous different clients on the books.

By not putting all your eggs in one basket, you reduce the risk of getting stung if a business goes under.

If bad debts are affecting your business, we recommend using Debtor Daddy to help you get your invoices paid.

For further information on creating a business plan, cash flow forecast or if you have any other questions, call BUSINESS buddy on 0800 283 399.

Make sure your construction business continues to thrive during the boom.


 

Kirsten Hawke