This publication has been prepared by the Building Services Authority (BSA) based on advice from Des Knight.

Helping Queenslanders Build Better

HOW TO SURVIVE IT IN CHALLENGING TIMES

THE BUILDING GAME

CONGRATULATIONS! By attending today’s seminar, you’ve taken the first step to surviving these challenging times.

Many players in the building game have only ever known good times. With the whole world facing challenging times, it is timely to look at a new game plan. We’ve appointed a coaching panel to help you prepare winning strategies that’ll allow you to take full advantage when playing conditions improve.

INTROdUCING The COAChING PANeL.

BILL FLeTCheR. As a partner in Bentleys Corporate & Advisory Services group, Bill provides expert advice in the areas of strategic planning, turnaround strategies, financial analysis, business investigations and insolvency administration. Bill has had great success assisting small to medium-sized companies to turnaround from near bankruptcy to profitable businesses.

deS KNIGhT. With 45 years experience in the Financial Services and Accountancy fields and a vast knowledge of the building game, Des Knight is eminently qualified to take on a coaching role. For the past 13 years, Des has advised on the financial status of contractors, gaining a unique insight into the most common financial management mistakes made by players in the building industry.

JOhN PARK. John is a leading specialist in Business Restructuring, Corporate Recovery and Turnaround Consulting. John has extensive experience in the Corporate Recovery Market and Operational Management in a vast variety of industries. This industry focus has been primarily in building, construction, manufacturing, hospitality, and property development.

MORGAN LANe. Morgan is a Partner of Worrells Solvency & Forensic Accountants. He has a wealth of experience in advising businesses in troubled times and has worked on all sorts of projects both company and personal, mainly in the Small to Medium Enterprise market. Prior to Worrells, Morgan was an Investigator with the then Queensland Corporate Affairs Commission (now ASIC).

PeTeR LUCAS. Peter is Director of Kestrel Solutions and has worked with businesses of all sizes for over 25 years. Peter works in a collaborative manner with clients, seeking to understand key issues affecting their business. Utilising a range of best practice tools and expertise, he leads a team with considerable experience, mentoring business owners and managers to achieve their goals.

TIM MIChAeL . Tim is a Chartered Accountant with more than 18 years experience in Australia and the UK conducting insolvency and turnaround restructuring. Tim’s work has largely consisted of hands on restructuring work to restore or improve productivity/viability, risk review work to establish options available for stakeholders and the implementation of strategy.

MATTheW JOINeR. Matthew is a partner of PKF’s Corporate Recovery division. He has extensive experience in providing advice to business owners in the building, construction and property development industries. Matthew advises business owners and operators on managing business risk and assists with formulating and managing informal and formal workouts and restructures.

How to manage your business during the current challenging financial times should be at the forefront of all contractors’ minds. Making conservative and sensible decisions over the next 12 months will greatly increase your ability to emerge from this difficult period in good shape to take advantage of an inevitable future economic upturn and the improved playing conditions it will bring.

Why dO I Need TO ChANGe?

In business as in sport, when financial conditions change, good coaches recommend strategies to address the new circumstances and to ensure businesses continue to trade profitably. These strategies may involve quite drastic measures, requiring a review of the type and amount of work undertaken, changes to the number or type of team members (eg greater or lesser reliance upon sub-contract labour) and at times even withdrawing from sections of the current competition and playing in a different league until financial conditions improve.

WhAT ARe TheSe ‘ChALLeNGING TIMeS’ ANd JUST hOW hAve The GOAL POSTS MOved?

The major change over the past 6 months has been the global tightening of monetary policy or as it is more commonly known, the credit squeeze. Whereas credit was previously relatively easy to obtain, recently banks and investors have become much more frugal with their lending. This in turn has resulted in less available funds for business, home owners and investors and has resulted in a fall in

demand for products and services including home building. Less demand for products and services subsequently leads to higher unemployment and even lower demand for products and services.

WhAT STRATeGIeS CAN I IMPLeMeNT TO eNSURe I CONTINUe TO AChIeve My PROFITABILITy GOALS?

In challenging and rapidly changing times, those who achieve their goals are those who implement a game plan to actively monitor and manage their business. This includes implementing winning strategies that;

n Maximise free cash flown Actively manage working capital and debtorsn Manage performancen Keep an eye on the bottom line

WINNING STRATeGy No.1Maximise Free Cash Flow

Free cash flow is cash that is not committed to paying creditors or repayments but is available to pay dividends, finance expansion or even more importantly in difficult times, as a ready reserve to meet costs associated with unexpected events. In challenging times all sorts of unexpected events are possible including having to absorb losses from bad debts, litigation expenses and even costs associated with downsizing - such as paying out leave entitlements and redundancies.

It is not possible to anticipate or plan for every future event so it is essential to have spare cash or additional borrowing capacity to meet costs associated with these unexpected or unplanned occurrences.

If you run out of cash or lose the ability to borrow, you allow potential control of your business to pass to creditors and you then risk being taken out of the game.

Obviously predicting the future is inherently uncertain but that ought not prevent you from making a sensible game plan based on your experience of what is likely to occur. Such planning gives you time to find resources, to allocate those resources in the most profitable manner and to anticipate future business needs. You may need cash or access to cash to meet these future business needs.

It is essential that you routinely work on your cash flow forecast to look at least 6 months into the future. Forecasts should be done on a weekly basis for the immediate 2 future months and on a monthly basis for the following 4 months. As each week passes add another week so there is always a weekly plan for 8 weeks (2 months) ahead. Similarly, as each month passes add another month so in total you are always looking forward for the next 6 months.

It is important to recognise that your cash flow forecast is not set in stone and that new information or changing circumstances may require you to make immediate and ongoing strategy changes.

There are two obvious strategies for increasing available cash, the first is to inject additional capital into the business through, for example, additional borrowing. The second and more contentious strategy is to downsize.

dOWNSIzING

Underestimating the effects of an economic slow down on your business and failing to make sufficient reductions in expenditure are the most common mistakes made by businesses. It is important to make your initial reduction in expenditure sufficiently extensive so you do not have to make future compensating adjustments.

Be prepared. Downsizing a business is a difficult process requiring tough choices and decisions but, if you want to stay in the game, you have no alternative.

It requires you to confront uncomfortable issues and own up to mistakes you and your business team may have made in the past. Nothing should be exempted. However, it may be difficult to reduce some items such as existing leases that still have time to run - and personal guarantees that must be honoured. It is never a nice thing to consider, but you may have to review your teams performance to ensure that all team members are performing productively.Far too often the biggest mistake is to underestimate both the severity and duration of the slow down and to waste scarce resources on assets which are not contributing to profitability of the business. One strategy for prioritising the importance of assets is to categorise them as either;

n Category 1 - Essential to operation of the business

n Category 2 - Desirable to hold but not essential to operation of the business

n Category 3 - Not required for the business or need to be held for too long before they can contribute (eg luxury vehicles, expensive toys, land banks)

The logic is easy to comprehend but the reality in practice is quite different because Category 1 Assets are the most attractive to buyers and therefore by far the easiest to sell. Yet to sell all or most of them can mean the business is doomed to failure as its future profitability has been sold.

Category 2 assets often need to be sold to generate cash for operations and to retire debt if the business is over committed. Reasonable sale prices are often an issue for this category. Realise you do not have a choice, bite the bullet and sell to keep yourself in the game.

Category 3 assets are a real problem. These assets are too poor in quality or too futuristic to make a contribution now - and too expensive to hold. Worse still, they are often difficult to sell at a reasonable price so a loss is imminent.

BORROWING AddITIONAL CASh

Banks do not like to be confronted with an application for funding when the need is desperate or urgent. Urgent applications for funds will be met with suspicion about your forward planning ability and your ability to accurately estimate the likely duration and degree of difficulty in correcting any underlying problems.

Just like an umpire or referee, banks will make their own objective assessment of the situation and will not be swayed by subjective or emotive arguments. They will assess the risk and amount of security you can offer and will form their own objective view of your situation and of the amount of funding your business needs to overcome the identified issues. It is therefore important that you talk over your plans and issues with someone whose judgement you trust, prior to lodging your application. Ask for an objective and frank view of your situation. A comprehensive and objective application will raise the bank’s confidence in your ability to overcome any current difficulties.

Identifying any underlying cause that may be reducing cash flow is essential to remaining profitable. For example if cash is tight too many building contractors will arrange to lease plant they previously owned - injecting the cash earned into the business to buy time to continue trading.

If the underlying cause is insufficient margins, these building contractors will inevitably fail unless the issue is addressed and fixed. Leasing formerly owned assets buys a little time, but it also increases the break even point so more losses will be incurred unless the underlying causes are identified and fixed. If you can demonstrate that your business routinely produces “free” cash flow from trading operations, your banker will be much more relaxed about lending you additional funds.

The old saying “I am doing this at a loss or for cash flow because I need to keep the team together” is a fatal mistake. You keep the team together by generating free cash flow and running a tight ship with sensible cost controls.Always be on the lookout for new directions to take the business but assess any opportunity thoroughly before you do so since new directions often have associated unidentified issues that will need cash to address.

WINNING STRATeGy No.2Actively Manage Working Capital and Debtors

Working capital management is one of the most important drivers for control and profit making in your business, yet many players in the building game do not devote enough of their time to enhance this aspect of their management.Management of working capital is known as managing the cash cycle and includes;

n Expenditure on materials, direct labour, sub- contractors and other direct costs,

n Carrying out the work to achieve particular payment stages,

n Claiming payments when they fall due and

n Receiving payment. In order to undertake work, expenditure on materials, labour etc is unavoidable. However, in challenging times it is essential that such expenditure is closely monitored and controlled. Particular attention should be paid to the key issues of productivity and wastage. The quicker you complete work that meets the requirements of the contract, the sooner you can claim payment and the sooner you can get paid.

It is also essential that you properly complete and lodge any documentation required by the contract to receive payment. In challenging times certain clients will use any available excuse to delay payment to you.Should the payment claim fail to be paid within the contracted period, relentless follow up of the

outstanding money is required. Do not allow a debtor to delay payment beyond normal trading terms. Some debtors may claim they have insufficient funds to make payment and request additional time to pay. Do not become an investor in their business. They are probably also asking others for time to pay and history tells us that most slow payers ultimately fail.As team leader you must accept that you have to be hard for the sake of your own business. Realise that you can only do profitable business with successful people. If necessary commence action to recover any outstanding and overdue debts by lodging a claim under the Building and Construction Industry Payments Act (BCIPA), the court system or a debt collection agency.

Information on the BCIPA adjudication system for prompt payment can be obtained from their website at www.bcipa.qld.gov.au. or by telephoning the Building and Construction Industry Payments Agency on 1300 272 272. For contractors and other applicants to be eligible to use BICPA’s prompt payment adjudication system, all invoices must include the wording:

“This is a payment claim made under the Building and Construction Industry Payments Act 2004 (QLd)”

The BCIPA adjudication system is a quick and inexpensive defence against losses for you and your team.

As part of your game plan, and to supplement your cash flow forecasting, you will also need to develop a regular weekly or fortnightly Working Capital Position Statement. A sample of such a statement is produced below;

Working Capital Position Statement

Opening reconciled bank balance $

Add Invoices/Progress Claims $ (where work is done but payment not processed)

Add Trade debtors $ (Outstanding payments due and payable to you)

Less Orders incurred $ (invoices not yet received or processed)

Less Trade creditors $ (Money you owe)

CLOSING RECONCILED BANK BALANCE $

It may also be wise to make a contingency or provision for doubtful debts in your budget and cashflow. In the difficult financial times ahead it is almost certain that a portion of your clients will fall on hard times and that means some debtors will pay late or not at all. You need to consider the cash flow effect on your business if this occurs and implementing a provision for doubtful debts will help manage your cashflow through difficult times.

WINNING STRATeGy No.3Actively Manage Performance

In the building game and particularly in challenging times, it is very important that the productivity and quality of work being produced, as well as financial viability is closely monitored.

Work Quality

It is essential that you closely monitor the quality of work being produced on site to limit instances of defective work. Defective work and rework is a killer of profits because it is work done a second time. This not only means more costs, more time and more delays in payments, but also affects your ability to win future work because it damages your reputation by labelling you as a poorly performing team.

Productivity

Downsizing and increasing financial stress on your work force often causes loss of productivity. As financial stress increases so does the need for vigilant monitoring of productivity. Regularly review your team’s normal productivity measures such as time

between successive pours of floors on a multi-storey building, time to reach normal progress payment stages etc to enable early detection of any decline in productivity.

Estimating

It is essential to optimum team performance to have good business systems. This should not be difficult with the number of excellent business and estimating software programs available these days.

As costs and overheads change it is critical that you adjust your prices and margins to accommodate them. Fail to do this and you will be bearing the cost of these increases as losses. How long can that continue to happen before these losses claim your business and relegate you from the competition?

You must check regularly that actual results of each contract match your estimating. You do this by comparing your estimate with actual results so that any discrepancies in anticipated contract profits are identified and fixed.

Credit Control

Every coach will insist that you do your homework! Before carrying out work for a person or business it is wise to check their credit history and capacity to pay. Check with past business associates and credit control agencies. Determine if your potential client has a reputation for fair dealing, whether or not he is a professional litigant or has a reputation as a slow payer.

If he is a contractor check that he holds the appropriate licence and check his licence history for judgement debts or instances of defective work. Be aware that if he is not appropriately licensed he may not be entitled to payment and you in turn may not get paid. If he has a history of doing defective work both he and you may have difficulty getting payment.

If you have any concerns or even ‘bad gut feelings’ in relation to a potential client do not do business with him. It is better to be out of work than to be expending resources and carrying out work and not getting paid.

WINNING STRATeGy No. 4Keep an Eye on the Bottom Line

There is a close association between the regularity of compilation of financial statements and business failure. It is not good enough to only prepare financial statements once a year. You have to hope it all works out well and that nothing changes throughout the year rather than being in control of your business every day of the year through management planning.

Every six months is also insufficient for effective management. Depending on the size of your business, financial statements should be compiled monthly or at least quarterly if you are to operate effectively and prudently. Financial Statements assist in the early identification of issues for attention. In order to keep an eye on the bottom line it is recommended businesses involved in the building game develop a number of Key Performance Indicators (KPIs). These measures enable you to simply and

quickly measure the performance of your business and every member of your team.

So what are some of these KPIs?

The effectiveness of your business can be measured by many means including time taken to convert work in progress to trade debtors, to measure how many days it takes, on average, to collect those debts, to measure how long it takes to pay your trade creditors, to calculate break - even point, to measure contract margins and profitability and generally to assess your ability to operate a profitable business.

Lets take a closer look at how some of these KPIs work.

Gross Margin

Your actual gross margin as opposed to your expected gross margin is one of the Key Performance Indicators (KPIs) you should use to monitor your teams performance. Gross margin is the gross profit you expect or plan to make as a percentage of the total cost of a project. Actual gross margin is the actual profit you made as a percentage of the actual cost of a project.

So, if the total cost of a project is $500,000 and the actual profit you made on the job was $25,000 the actual gross margin is calculated as $25,000/$500,000 x 100 = 5%

It is essential that business’ continually measure their actual gross margin and compare it with their normal

or historical gross margins in their periodic trading account. This comparison tells a business a lot about how it is travelling.

There are plenty of stories of business failure due to gross contract margins being insufficient but where the manager and accountant never compared those mark ups with the average gross margin achieved in the trading account. There is no more basic check for your business than this and it takes seconds to calculate. Growth is fine but unprofitable growth is senseless for it has only one outcome.

You will find cases where costing or estimates are wrong so you need regular checks to monitor this aspect of operations. Sometimes the discrepancies are even the result of misappropriation of materials and/ or cash.

Know your margins, so you know what can be shaved in a tight market but never, never, never, do a job for cost or at a loss because you need free cash flow to stay in the game.

Liquidity

Your liquidity or the relationship between your current assets and current liabilities is one of the indicators used to determine suitability to meet the financial requirements to hold a licence in Queensland. You

should always have a surplus of current assets in relation to current liabilities. So the ratio of current assets /current liabilities should always be greater than 1.Current assets include assets which in the ordinary course of business would be realised within 12 months after the end of the trading period or are held primarily for trading purposes. They include such things as cash, shares in publicly listed companies, plant, inventory, motor vehicles, tools of trade and real estate.

Current assets only include related entity loans and debtors if they are collectible and convertible to cash within 12 months and do not include such things as intellectual property, furniture, shares in companies that are not publicly listed and trade or barter dollars.

Current liabilities include liabilities which in the ordinary course of business are expected to be settled within 12 months after the end of the reporting period.

Debt to Equity

The ratio of debt to equity is a useful tool that measures the level of debt against the shareholders or owner’s capital. Generally 70% equity is a safe margin. Should your equity be lower than this it is an indicator that some action is required to raise your equity levels. Fail to do this and you run the risk of control of the business passing to your creditors – and that could take you out of the game.

Break-even Point

Break-even point analysis is a simple calculation that all businesses can undertake to determine how their business is travelling. The process requires you to take certain figures from your quarterly or annual financial statement and is best explained by an example.

Total contract receipts - $20.0M(Figure taken directly from financial statements)

Less cost of producing work - $18.0M(Figure taken directly from financial statements or calculated by adding the opening value of workin progress to the cost of materials, labour and sub-contractors associated with the work then deducting the closing value of work in progress)

Gross profit from trading - $2.0M

Less overheads and other costs not associated directly with projects $1.0M (Figure taken from financial statements)

Net operating profit - $1.0M

The gross profit and net profit are usually expressed as a percentage of sales or contract receipts. In this instance gross operating profit would be $2M/$20M x 100 = 10% and net profit would be $1M/$20M x 100 = 5%.Break-even point on the other hand is the point at which you are making no profit or 0%.

Before you get to this stage however you should be undertaking the above analysis on a quarterly basis and monitoring your net profit. If net profit is trending down, prompt action is required before it gets close to break even point. This may include increasing contract receipts, reducing the cost of producing the work or reducing overhead costs.

WheRe CAN I GeT heLP IF My BUSINeSS IS NOT TRAveLLING WeLL?

Business operators must urgently get advice from their accountant or financial advisor if they have any concerns about how their business is travelling. It has been proven over and over again that the sooner you get professional advice the greater the likelihood of business survival.

Be flexible in your thinking and keep the business flexible. Actively and diligently manage your business. Small savings in material and labour, small reductions in time to be paid by debtors and small savings in overhead costs all add up; and in challenging times can mean the difference between survival and being removed from the game.

TAKE TIME OUT AND MAKE SURE YOUR BUSINESS SURVIVES.

...you choose to do nothing about it while your business indebtedness increases...

...you choose to do nothing about it while your business cannot pay subcontractors and suppliers on time...

...you choose to do nothing about it, but still ask your creditors to “support” you by continuing to work or supply goods....

... you choose to do nothing about adopting and implementing a building game survival plan devised by an expert...

You are possibly operating a building business that may fail. If it does, it could cause serious financial and personal damage not only to yourself and your family but to your mates, their employees and their families.

IF YOU KNOW YOUR BUILDING BUSINESS IS UNDER FINANCIAL STRESS BUT...