Challenges facing an at-risk sector
There’s no question that Australian small businesses are under significant financial pressure, with ASIC reporting that more than 11,000 companies across various sectors entered external administration during the 2023-2024 financial year. Further, construction continues to be the hardest-hit sector, accounting for 27% of total insolvencies.
The concerning number of company failures within construction highlights the severe pressures on businesses in the post-pandemic world; with rising material costs, ongoing labour shortages and higher interest rates heavily impacting profitability. As a consequence, this makes it particularly difficult for SMBs in the sector to fulfil obligations under fixed-price contracts.
Lessons from Preferred Homes
The issues surrounding Gold Coast building company Preferred Homes serves as a stark reminder of the critical areas that require attention in today’s challenging economic climate. The company, which is reported to owe almost $800,000 to creditors, faced considerable financial problems that were exacerbated by regulatory compliance issues, leading to a suspension of their licence.
The impact on subcontractors – who tend to bear the brunt of collapsing builders due to outstanding invoices on work performed – in addition to materials costs, was also severe. With delays in payments and poor communication creating significant hardships for these small businesses, this story is an unfortunately common example of the ripple effects caused by business failures in this at-risk sector.
The challenges faced by Preferred Homes highlights the need for proactive management and strategic planning in the construction industry, especially when dealing with compliance and licensing requirements.
Emphasising financial oversight, adhering to regulatory requirements, creating flexible contract terms, as well as maintaining open communication with stakeholders (with professional guidance), can significantly reduce risks. The experience of Preferred Homes also highlights the critical importance of seeking advice early from small business experts with specialisations in building and construction compliance.
To avoid problems from snowballing out of control, taking prompt strategic action cannot be overemphasised. At AVA Advisory, we always encourage business owners to seek professional advice before the early warning signs of financial or operational distress start to show.
Addressing the need for effective financial management
To create a sustainable business in a sector like construction, effective financial management is crucial – regular external audits and accurate record keeping, for example, are non-negotiables for keeping a business on track. Monitoring cash flow, budgeting accurately, as well as forecasting future financials can prevent the build-up of unmanageable debt.
- Regular audits: Have an external accountant regularly conduct audits, such as each quarter, to track the financial health of your business. Doing so will help identify potential issues early, allowing for timely intervention and correction.
- Transparent planning and communication: Keep detailed records and implement robust financial forecasting and management practices to avoid accumulating debt. Transparency helps build trust with stakeholders, including clients, subcontractors and regulatory bodies, and further, can open the door to negotiation on debts or compliance obligations
Ensuring regulatory compliance
Meeting regulatory requirements is essential to maintain continuous operations. Seeking advice from compliance experts, who can engage with regulatory bodies on your behalf, can also go a long way in helping businesses mitigate compliance risks and stay ahead of the curve.
- • Routine compliance reviews: Have a compliance expert assess whether all regulatory requirements have been met to avoid penalties and licensing problems. This involves keeping up-to-date with changes in regulations and ensuring all aspects of the business comply with the latest standards.
- • Proactive engagement: Stay in regular contact with regulatory bodies (either through a compliance professional, authorised debt management company, or a lawyer), to address compliance issues before they escalate. By fostering a proactive relationship with regulators, businesses can receive guidance and support in meeting compliance obligations without incurring further penalties or licence conditions.
Building resilience in construction
To help small business owners and sub-contractors in building and construction strengthen their resilience, here are our 5 top tips:
- Engage an experienced accountant to conduct regular financial audits.
- Maintain detailed and transparent financial records.
- Proactively seek professional advice on meeting all regulatory requirements from a compliance professional.
- Negotiate contract terms to manage cash flow risks through an ASIC-licensed debt management company.
- Consult small business advisors with specialisations in building and construction to strengthen financial strategies and safeguard stability.
How AVA Advisory can help
As small business debt experts, we have a deep understanding of the challenges faced by Australian business owners in at-risk sectors like construction.
From developing effective budgeting strategies, optimising cash flow management, creating contingency plans for unforeseen expenses, safeguarding regulatory compliance to maintaining effective communication with creditors, we help businesses build a foundation for long-term success.
Running a business can be challenging but managing your finances doesn’t have to be. Our team of debt restructuring specialists and corporate advisors can provide valuable insights and strategies tailored to the unique needs of businesses in this sector.
Contact AVA Advisory at 1300 181 220 for a private, commitment-free discussion, or book a convenient time slot via our online platform.
