Naturally, we would all welcome increased workloads and profitability, but the challenge of managing growth is something that the building industry has not risen well to in the past.
Too many building companies have fallen at this critical point in the economic cycle, often due to repeating avoidable common mistakes.
As companies grow, they become exposed to a raft of risks and challenges. Over-enthusiasm in forward prospects can leave previously well-managed systems, discipline and productivity in tatters.
Firms can become so busy procuring and starting new work that they fail to pay attention to the basics, such as monthly accounting, employing appropriately, managing cashflow and dealing with outstanding issues and disputes.
So how do you plan for expected growth? Spending time with your accountant setting up monthly accounting report systems is absolutely critical. Leaving it until the end of the financial year, or six monthly reporting, both with time lags to prepare accounts, is simply too late.
Construction industry accounting is seriously complicated and fraught with challenges. It is a tough industry in which to get a good snapshot of exactly how a business is performing.
Profits can vary wildly, with milestones hard to gauge and accruals and work in progress difficult to calculate. Positive cash flow can quickly turn to negative.
However, there are now good modern accounting software packages that can provide monthly reporting. By working with your accountant to set annual business plans, budgets and goals, you can at least understand how you are tracking, and read dangerous situations early.
During times of rampant growth, builders can simply be blinded by progress and mistake cash in the bank for profit. Instead of leaving capital in the business, personal spending increases and, inevitably, the taxman always cometh!
History shows us some common problems rampant growth causes:
• Longer completion times for projects slow down cashflow, but fixed cost overheads continue or even increase.
• The subcontract and supply chain get stretched and rates increase.
• Disputes and issues aren’t settled promptly.
• Over-investment in land, staff, equipment and vehicles.
• Loss of productivity and connectivity to staff.
The choice of remaining comfortably where you are or growing to the next level is a decision that should be based on having adequate capital, steady continuous improvement and meticulous planning with a sound appreciation of risk.
In keeping with this article, our annual conference theme this year is Keep Calm and Carry On — aimed specifically at ensuring that our members maintain good business practices while experiencing potential upturns in business.
I suggest you make a point of attending. I look forward to seeing you there in Dunedin in July. Register now at www.masterbuilder.org.nz.