Working in construction certainly isn’t easy right now, but it’s not all doom and gloom. While external factors are impacting business, by putting the right actions in place at the right time, Rapsey Griffiths says it’s possible to thrive.
Turnaround and insolvency firm Rapsey Griffiths understands what tough times in business look like. Over the years, it has worked with many construction businesses facing financial struggles – but has also seen them come out the other side.
‘The construction industry can be tough,’ says Director Chad Rapsey. ‘It’s a high-risk business model that leaves you vulnerable beyond your control, and the current climate adds a complexity to this that couldn’t have been anticipated.’
1700 CASES of insolvency in the construction industry nationwide on average every year*
20-25% of all insolvencies in Australia are in the construction industry*
Understand your position and responsibility
With the COVID-19 pandemic causing issues down the supply chain, delaying projects and increasing the cost of building materials, solvency issues are on the increase.
Over the past couple of years, the federal government has introduced legislative measures that are helping to ease some of the strain that some businesses are currently facing.
One measure, known as the ‘ipso facto’ clause came into effect on 1 July 2018. Most construction contracts include an ‘ipso facto’ clause which allows a party to terminate the contract due to the bankruptcy, insolvency or the financial condition of the other party. This right to terminate can have a significant impact on the underlying viability of the company’s business and cash flow, limiting any opportunity to improve their financial position and/or undertake a restructure.
If a company’s key contracts are terminated then the chances of restructuring or re-negotiating are in essence, taken away. The 2018 changes prevent a party from exercising this right under a contract that arises solely out of insolvency-related events. This includes the right to terminate, suspend or have an external party (i.e. an administrator or liquidator) ‘step in’ to carry out the contract allowing the business some ‘breathing space’ to (hopefully) turn things around.
Another measure is the safe harbour law that commenced on 19 September 2017. It provides opportunities for directors to turn around their financially distressed company without risking personal liability under Australia’s insolvent trading laws. Safe harbour is only available where a genuine turnaround attempt is being made and when your company meets the eligibility criteria referred to as the ‘better outcome test’. The criteria also include staying informed about the company’s financial position, taking steps to prevent misconduct, keeping proper records, ensuring employee entitlements and superannuation are paid, and your ATO returns are lodged on time.
Business turnaround in practice for construction businesses
For businesses currently facing solvency issues, the good news is, it is possible to turn things around. “The key in any turnaround is to take action early, now more than ever,” says Director Mitch Griffiths, the other name behind the firm. “The businesses that adapt quickly to the current environment will come out on top.”
To do this, first you need to determine what financial position your business is in. If your business is viable, you’ll then need to carry out a detailed assessment of your financial strengths and weaknesses, and develop and implement a turnaround plan.
This plan might involve actions such as making redundancies, changing your management team and structure, selling non-core assets, focusing on cash flow, eliminating unnecessary spending and communicating this plan of action to your employees, creditors, suppliers and financiers.
Top 5 tips for turnaround
When it comes to turnaround, having a proactive, positive attitude and seeking appropriate help and advice is a smart move. Here are some tips for managing it successfully.
1. Seek financial advice
In order to be sustainable long-term, especially through uncertain market conditions, small businesses need to have a firm understanding of their finances.
Besides drilling down into your cash flow and margins, a professional can help you conduct gap analyses to determine where you’re falling short on targets and how to plan to address these.
They should also have a good grasp on current financial support schemes available to small businesses and how to go about applying.
2. Be open to doing things differently
Whether we like it or not, things have changed dramatically and rapidly. The construction industry – like all industries right now – has been forced to pivot, and this means how you were working previously may not be enough to keep you in business.
This doesn’t mean what you were doing previously was wrong. It simply means that the foundations of the market have shifted and you must adapt to survive.
3. Don’t stick your head in the sand
When things are looking financially sticky, it can be tempting to ignore the problem and hope things will resolve themselves on their own. Unfortunately, this is rarely the case. By putting appropriate plans in place before things get out of control, the better chance you have of turning things around and staying in business.
4. See the strength in asking for help
Often business owners in financial trouble attempt to deal with the situation alone, taking on the stress and enduring sleepless nights.
However, asking for help isn’t a sign of weakness; it’s actually a sign of strength and foresight. Focus on what you do best and let the insolvency specialists do the same.
5. Seek a fresh perspective
As a tradie business owner, you work ‘in’ your business not necessarily ‘on’ it. This means you’re likely caught up in the day-to-day operations of your business, such as quoting, delivering trades and managing staff.
Seeking an external perspective, such as a business coach or firm that specialises in corporate turnaround and recovery, allows you to step outside of your business and see your current situation more objectively. They can offer advice you may not have thought of and also tap into learnings from other businesses which have been in a similar situation.
Rapsey Griffiths knows that approaching turnaround early and in the right way can make a huge difference to the outcome of a business.
Rapsey Griffiths is available for a free, confidential consultation to talk through your options. Call 02 4926 8800 or email email@example.com.
Click here to download the free ebook: ‘Getting your construction business back on track’
Article contributed by the Housing Industry Association.
*Department of Jobs and Small Business ‘Review of Security of Payment Laws’