The construction industry is operating amidst an abundance of higher credit risk factors, including ongoing supply chain and materials delays, as well as higher costs for materials. When a construction business takes on a project in the current environment, it’s likely exposing itself to some degree of risk. Thankfully, this can be mitigated through effective debt collection processes, as well as credit risk management tools.
Reducing bad debt: why construction companies must mitigate credit risk
The construction sector is currently exposed to a multitude of volatile trading environmental factors. Access to supplies, including construction materials, is still significantly delayed due to the impacts of the pandemic on movement restrictions, and factory shutdowns. Even when materials are sourced, they are eye-wateringly expensive – particularly materials such as timber, which were significantly reduced by the 2019-20 New South Wales bushfires.
For an industry that relies on a healthy supply chain for the completion of projects – often multiple at once – these ongoing issues impacting global and domestic supply chains are threatening the survival of many businesses. The run-on effect is that your team may see budgets blow out, or struggle to meet project deadlines, which could impact customer satisfaction and trust, as well as hurt cash flow.
Recently, residential construction company Oracle Homes announced it was going into liquidation, with $14 million outstanding, and close to 300 homes still left incomplete. This was just the latest in a growing number of construction businesses struggling financially due to these unprecedented trading conditions. Given that the industry has the highest rate of subcontracting in Australia, with 80-85 per cent of its work outsourced, if one entity within your supply chain, or a partner’s supply chain, fails, it adversely affects everyone involved.
The outcome of late payments for invoices, or delays to projects, is that you are left juggling the additional time, effort, and resources required to chase up debtors for payment. Not only can this eat away at productivity, but the internal handling of debt collection carries the additional risk of hurting business relationships – especially when relying on a few key contracts for a majority of revenue.
It’s not all doom and gloom though, as there are some easy and practical steps any business in the construction sector can consider making today to help reduce bad debt. There is always some level of risk involved when a business outlays materials required for a project, but this can be minimised by employing effective debt collection processes, in the event any problems were to arise.
Reduce bad debt with these strategies
Address debt escalations swiftly and professionally by establishing effective strategies for your debt collection process. Consider your options for the automation of managing debt collection through applying helpful and comprehensive debt management tools, offered by CreditorWatch, to your collection strategies, including:
Identify and avoid high-risk businesses – Before you ever engage with a new client, trading partner, or supplier, it is worth doing your due diligence on their financial history, by performing a company credit check to access the entity’s credit history. CreditorWatch offers powerful credit reports for construction sector businesses. With a deeper knowledge of the creditworthiness of any company, including information on credit enquiries, defaults registered against the company, court actions, and cross directorships, you can make more informed and empowered decisions around who to work with. Identify red flags ahead of time and eliminate the likelihood of facing bad debt from a risky client, before it can ever occur.
Monitor and review clients – Your financial due diligence does not stop once you’ve performed an initial credit report. It’s also crucial for a business in the construction sector to carefully monitor client payment behaviour on an ongoing basis. CreditorWatch can easily conduct ongoing monitoring of your customers and notify you immediately if anything changes, through the use of its 24/7 monitoring and alerts program.
Keeping an eye on your client’s payment behaviour is a cumbersome task that can be easily automated. CreditorWatch will inform you of any changes or risk factors that indicate a business is facing financial problems – before it can pass this bad debt on to you. Through live updates regarding adverse events and deteriorating payment behaviour, you can make effective decisions around which entities to speed up collection processes with.
Be proactive about your trading partners – In the current environment, it may be worthwhile to conduct a more comprehensive, in-depth analysis of your trading partner’s financial health. You may be more likely to avoid bad debt by assessing contractors and suppliers during the tendering and procurement process. A Financial Risk Assessment, offered by CreditorWatch, can provide a comprehensive look into the financial viability of an entity along your supply chain during this phase of the project. Ensure the business carefully monitors the direction, allocation and usage of its financial resources, particularly when larger funds are outlaid for materials for major projects.
Using company financials, ASIC records, and CreditorWatch’s exclusive trade payment data, you will gain high-level reliable assessment from a Chartered Accountant or a Certified Practicing Accountant. This includes discovering if an entity is likely to pay you on time or honour its contacts. If the construction business is working with critical supplier contracts or significant tenders, a Financial Risk Assessment can be the difference between the business thriving with smooth cash flow, or crumbling due to bad debt and loss of revenue.
Use the right debt collection tools – If things do escalate, and you must begin the collections process, businesses within the construction industry must ensure they’re utilising the right tools for managing debt collection. Improving the likelihood of the payment of bad debts is made easier when you automate the debt recovery process through a third-party professional such as CreditorWatch.
You’ll also gain the added benefit of avoiding awkward conversations and keeping customer relationships happy and healthy through our professional communication templates. Our debt collection tools help you to strengthen your debt recovery processes, allowing you access to our branded templates, which have been proven to increase the likelihood of payment by 53%. This includes welcome letters with strict payment terms, payment overdue notices, final notices, letters of demand, as well as 30, 60 and 90-day reminder notices.
CreditorWatch also integrates seamlessly with Xero and MYOB, allowing our analytical software to identify risky debtors in your accounting dashboard. Eliminate the need to manually follow up on late payments or register defaults against overdue invoices, through these debt collection tools.
To find out more about how you can reduce bad debt for an organisation in the construction sector, book a free demonstration of CreditorWatch’s debt collection tools today.
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