The construction sector within Australia is notoriously high-risk. Any exposure to the adverse payment behaviour including credit scores, credit risk or directorial malpractice of a trading partner can threaten the viability of your operation. Failing to implement an appropriate debtor management strategy, or using incorrect data, may result in default or insolvency implications for your business. It’s essential that all creditors be managed effectively, with collections prioritised, in order to safeguard your cash flow.
Why you should get paid faster in the construction sector
Within a high-stakes trading environment across all Australian industries, construction remains one of the most volatile. Already classically a hotbed for adverse payment behaviour, cross directorships, and illegal phoenixing, it is now witnessing the additional pressures of rising international raw goods prices, and ballooning domestic inflation. It is a terrifying combination of factors, already manifesting the untimely demise of some significant players within the sector, such as major Queensland builder Oracle Platinum Homes in August ‘22.
The July ‘22 analysis of the Business Risk Index, by CreditorWatch, further endorses this risky market outlook: indicating that while the probability of default has steadied at 3.7%, it is a data set skewed by a number of huge, safe operators at the top end. As the size of a construction business reduces, the assessment suggests that this probability quickly rises. The key to sustainability in the face of these headwinds is cash flow. Establishing consistency in the inflow of revenue is an absolute must for your business when taking into consideration the swelling outgoings necessary to pay workers and maintain construction. Late payments and defaults from any creditor must be avoided at all costs.
If the trading environment alone isn’t enough to prioritise collections, the regular malpractice of businesses within the sector should be. The construction sector regularly witnesses instances of illegal phoenixing (where the operators of an insolvent business set up a new shop front to avoid debt obligations) and cross-directorships (individuals being directors at different companies concordantly, raising the probability of conflict-of-interest). It is a sector known to be rife with dodgy operators, and any cash-flow disruptions only elevate the risk exposure of your business.
Every outstanding invoice and creditor needs to be pursued efficiently for the good of your balance sheet, the relationship between the two companies, and the mental health of the team. Allowing outstanding credit to remain toxifies the dealings between the two businesses, and creates undue additional stress. Additionally, if they’re a significant credit risk then deprioritising collections may expose your outfit to the pitfalls of eventual default. Any instance of non-payment, especially from a high-value or volume trading partner, raises the potential risk of your insolvency considerably.
Tips and tools to help with debt collection
If you wait for too long it may ultimately be too late. Now is the moment to implement a proactive debtor management strategy in order to mitigate future risks. Collections can be prioritised in order to keep cash flow stable, and any adverse trends in payment behaviour can be quickly picked up by your team. Thankfully, you don’t have to come up with the whole system from scratch, as there are intuitive tools on offer to simplify and streamline the collections process.
At the forefront of debtor management software is DebtorLogic, by CreditorWatch. There are a number of useful features that allow your construction business to get on the front foot in terms of both collections and the early identification of credit risk, including:
An analysis of your entire Aged-Trial Balance (ATB) – Every creditor within your portfolio is uploaded into the user-friendly platform, and then assessed for creditworthiness and reliability utilising CreditorWatch’s extensive, exclusive categories of business, trade payment, and behavioural data. Key to this assessment is Payment Predictor, which translates the information gathered into a clear indication of adverse or deteriorating payment behaviour. This insight takes the guesswork out of pinpointing entities that may threaten your cash flow, versus those that will be stable and reliable.
When you identify those operations that pose a more significant credit risk, you can adjust your payment terms through the platform in order to reduce your exposure accordingly before these bad debts become an issue. The more uncertainty there is concerning a partner’s prospects; the shorter the payment terms should be This may be vital to the survival of your business, depending on the gross risk profile of all entities you’re trading with.
Debt collection tools that get to the point – When implementing the best debtor management strategy, you need the toolbelt to ensure that any late payment is followed up expeditiously, and in a uniform way. DebtorLogic identifies late payments as soon as they pass the deadline, and offers simple, effective communication options to follow up with the creditor without endangering the relationship. That cash flow is essential to your operations, and standardising this process allows you to effectively reduce Days Sales Outstanding (DSO), without any of the adjacent awkwardness that can come with chasing up trading partners.
24/7 Monitoring and Alerts – Within such a high-risk sector, the health of trading partners can deteriorate rapidly. What once was a trusted supplier might quickly transform into a bad debt trap within the volatility of the current environment. As this information changes, the earlier you know, the faster you can act. DebtorLogic ensures that you are notified as soon as possible, through 24/7 monitoring and real-time alerts sent straight to you. The ability to act decisively in such situations is imperative, and this platform ensures that you’re never left in the dark as the creditworthiness of trading partners changes.
Construction is a high-risk industry, however, with the right tools and debtor management strategy it can also be high reward. The key is in being proactive. Take steps to reduce your risk and get paid faster – contact CreditorWatch for a free trial.
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