Weathering the storm

Working in construction certainly isn’t easy right now, but it’s not all doom and gloom. While external factors and legislative changes are impacting business, by putting the right actions in place at the right time, Rapsey Griffiths says it’s possible to thrive.

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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.’

Understand your position and responsibility

With the COVID-19 pandemic causing issues down the supply chain, delaying projects, weakening consumer confidence and making it harder to secure funding and investment, solvency issues are increasingly being seen.

Over the past couple of years, the federal government had 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’ changes 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 renegotiating 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 targeted at supporting businesses weather financial hardships and specifically introduced to respond to the impacts of COVID-19, is a new defence to trading while insolvent. A company is insolvent when it cannot pay its debts when they are due and there are serious penalties for allowing your company to trade while insolvent.

As of 25 March 2020, a new, temporary COVID-safe harbour defence can be used by businesses to protect themselves from insolvent trading liability during the pandemic – provided the debts were incurred between 25 March and 25 September and are being used to enable the business to continue.

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Getting your construction business back on track

A turnaround and insolvency prevention guide for directors of building and construction companies.

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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 with 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. If you don’t already outsource this to a professional, now is a good time to enlist the services of an accountant or financial advisor.

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. One example for accepting change is to conduct client facing business meetings virtually, reduce your reliance on physical infrastructure by empowering staff to work remotely or to engage specialised freelance assistance when needed.

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 – or as the market improves. Unfortunately, this is rarely the case.

Despite how hard it may be to admit you are experiencing difficulties and deal with it, 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. They take on the stress and endure sleepless nights to keep things going for family and employees – rather than ask for help.

However, asking for help isn’t a sign of weakness; it’s actually a sign of strength and foresight. You wouldn’t expect an electrician to fix a toilet, so don’t expect to be a turnaround expert. 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 – and can miss the bigger picture.

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 know that approaching turnaround early and in the right way can make a huge difference to the outcome of a business. It can get you through tough times today – and in the future.

For more information about business turnaround and insolvency prevention for the construction industry: download the ebook

Not an HIA member yet? By joining Australia’s largest national association for the residential building industry, you’ll get access to a range of member benefits, as well as industry products and business services designed to help you manage, operate and grow.

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