In the news lately, there have been some very well-published cases of insolvency events in the construction space. There has been Privium and BA Murphy to name a few, that have ended up in administration. Why is this occurring? What can you do to prevent this from happening in your business? We have laid out a few of the issues we see in the trade business that lead to insolvency events.
5 Reasons your trade business might not be performing
1. Incorrect job costing
Job costing will enable you to understand your business margins. You need to track materials and labour on an individual job level. You also need to take some consideration into your overhead allocations. This means if your margins drop below an estimated percentage you can take action on the job to improve the margin.
We’ve written a guide that can help you to reduce job costing errors and also brush off on the things you might still be doing wrong.
2. Reporting on margins
Once you are job tracking successfully, you need to implement a reporting process for your margins. This means the supervisor of the jobs should be able to see the estimated margin and the current margin. The only way he can improve the profitability on the job is if he has visibility over the performance.
We also have a resource that can help you to check the financial health of your trade business. You’ll find handy ratios that we also use for our clients at Tradies Accountant.
3. Uncontrolled debt
As a company grows it may need to use leverage to fund the growth. This needs to be managed correctly otherwise the commitments can become onerous.
Another challenge with debt in a high inflationary environment is rising interest rates. As interest rates go up the repayments on the debt will become higher as well. This needs to be considered when making financial decisions.
4. Systems are not being used effectively
Keeping up with the progress of each project is difficult if systems aren’t being used effectively. Job management systems like Nexvia, are essential, especially in the construction industry where multiple projects have to be handled at the same time. If systems are used ineffectively, you’ll miss the true costs of inventory, invoices, labour and how long a job takes. This leads to inconsistencies between jobs and the specifics on the ground.
5. Increased costs on jobs
The current trade shortages have pushed prices up and made it difficult for trades such as builders to finish jobs. The pressures around the supply and cost of materials are not looking like it is getting better and a growing number of builders are left to adjust their contracts.
Also, on the note of contracts, Bryn and Rojas (from Rostron Carlyle Rojas Lawyers) had an insightful conversation on the Right Tools for the Job campaign. They went in-depth to discuss what to do when you receive a contract. That way you’ll know how to handle contract pressures before they begin, or at least be prepared for them.Looking for advice on what to do next if your trade business is going into liquidation? Please contact us at Tradies Accountant