Managing finances through tough times

The stars are aligning, and not in the way we want them to from a Trade business perspective. There are well documented economic and industry factors that are placing severe scrutiny on what it means to be a tradie in business. Stories of severe product shortages, staff absenteeism and cost inflation are endless.

For some businesses this will be the first time they have had to navigate particularly challenging financial times. A number of respected economists are now talking about the ‘near certainty’ of recessionary type conditions for the near term.

If nothing else, remember this: “Cash is King”. As we see several high-profile construction and trade Companies in Australia report liquidation, almost all point to the lack of cash when required as the key reason for collapse.

So, whether this is your first time facing these conditions or you have been through it before, there are some practical things that you can be doing now to ensure you are best placed to ride through the next period:

1. Get close to your numbers

Firstly, if you are not close to your figures you need to be. And quickly. Depending on your scale, this could mean knowing the detail of every staff member or it could mean a higher view of staff and projects. No matter what your scale, there are things you need to know on a daily, weekly and monthly basis to ensure you are on track.

As a starting point, here is the bare minimum of what you need to make decisions based on: • Daily: staff movements and project progress • Weekly: productivity, project status and spend with major suppliers • Monthly: actual vs budget performance and cashflow. The important thing is then what you do with this information. It needs to inform decision making and gives you a chance to see challenges coming before it is too late.

2. Ask yourself “What does good look like?”

This starts with understanding the ‘capacity’ of the business. Almost all trade businesses are selling labour and materials. You need to know what the capacity of the business is if things are going well. All too often we see businesses who don’t know the answer to this question, which makes it almost impossible to make informed decisions about performance.

3. Manage margins

Never forget the orchardist who saw others selling apples for $0.90c and decided to sell his for $0.80c. He found it so easy to sell them that he decided to sell his whole crop for this price. He then worked out that it cost him $1.00 to grow each apple. In times of inflationary pressure and project risk uncertainty, any small errors or omissions in pricing can quickly blow out to large issues. Old ‘rules of thumb’ risk being out of date, and cost inflation in both direct costs (labour and materials) and delays is where a number can come unstuck. Some tips to avoid these traps: • Communicate with your clients early so they understand the landscape, and the risk of increases as the project progresses • Ensure any prices you are relying on are valid and locked down • Ensure your quote timeframes are realistic and match to your inputs • Review any ‘rules of thumb’ or previous pricing techniques as they risk being out of date • Back cost jobs regularly to ensure your assumptions hold true.

4. Protect for inflation

The cost of building materials today is likely around 15–20% higher than what it was 12 months ago. If you priced a job in June 2021 and are still working on this for the same price now, then it is likely you are making little or no profit. As project delays to both get projects consented and progressed continue, the risks of inflationary pressure come on all jobs. As always, ensure your quotes/margin allow for this factor and communicate with your clients early if you see variations or costly delays coming. Likewise ensure your supply of product is locked in at ‘today’s prices’ as much as you can through your supplier relationships.

5. Squeeze the cash cycle

As mentioned up front, Cash really is King. Accordingly, the longer period it is in your bank account and not tied up with stock, suppliers, or customers the better. Of course, be careful with this as sometimes a shortened cash cycle can paper over bigger profitability issues. However, we would encourage you to look at your entire cycle and ensure it works for the current conditions.

In particular: • Take deposits. Not only is this good practice, but it ‘weeds out’ potential issues before you start bigger jobs • Make payment easy. If you are completing high volume of residential jobs then ensure that you can accept payment immediately, or as soon as possible. Also look at 7-day terms, particularly for residential clients

• Look at your supplier relationships and understand the options.

There is no better time than now to ensure you have a good payment structure and discount/rebate deal • Consider your stock management carefully. Although supply issues make this a challenge, there are several ways to ensure you are not the one funding redundant stock.

6. Be risk adverse

The failure of a particular project or collapse of a customer unable to pay their bills is the number one cause quoted by Construction Companies when they fail. Consider carefully who you are exposed to most and what your relationship is like.

Deposits, terms of trade, customer relationship management and communication are all key. If you see any signs of concern act swiftly and directly. If someone is not paying you money and you don’t know why, you need to get straight to the source and quickly. Don’t accept being brushed off or barriers being put in your way. If you can’t ‘sit down’ with the bill payer and understand their circumstances in a way that you are comfortable with, then be very cautious.

The other textbook risk aversion technique of ‘spreading your risk’ also holds true. Consider your client/work mix – are you exposed to one customer, sector, or group? If so, consider what you can do to spread this risk over time. 7. Check your safety net

How often do you hear about the computer back-up that was in place, but wasn’t backing anything up? The same applies for finance. Consider the ‘what ifs’ and ensure your safety net is there. This maybe in the form of temporary overdraft, loan or cash injection from elsewhere through equity or asset sale. No matter how good you are in business, there will be ‘unexpected’ events and times you may get caught out. What you don’t want is for one of these to occur at a tough time and the safety net you thought was available is not there as you thought.

8. Get support in your corner

The final thing you need to ask yourself is ‘who do you have in your corner’. There may be parts of the summary above that you are unsure about or need help. The best business owners identify these weaknesses and find the best people to help them through. As we all know, businesses operate in cycles, and this one will also pass. Get people around you that you trust and share the load.

Take care out there.

Shaun McNamara, Partner – Accounting & Business Advisory, Findex. Findex is one of Australasia’s leading provider of integrated financial advisory and accounting services. Providing services that include Business Advisory, Accounting, Tax, Insurance and Payroll, the Findex team have the local knowledge and global expertise to help you meet your personal and professional goals. To find out more visit www.findex.co.nz.