The building and construction industry within Australia is notoriously high-risk. It is quick to be adversely affected by any downturn in the nature of trading conditions, including supply chain delays, steep price hikes on imported goods and raw materials, and rising domestic inflation. The good news is that there are certain risks to a business within this sector that can be proactively mitigated. Cross-directorships are one such example. If left unchecked, they may expose your business to malpractice or conflicts of interest, However, with the right tools suspect operators can be identified and avoided.
Identifying cross directorships in the construction industry
The construction industry is already high-risk enough. The August 2022 Business Risk Index corroborates this – indicating that while the probability of default industry-data is steady at 3.76 per cent, this data is likely impacted by a few huge, safe players within the market. As construction businesses get smaller, your risk profile grows. With demand reducing due to rising interest rates and inflation, margins tighten and the viability of the business comes under threat.
The very last thing that you need within this context is exposure to the adverse risks of cross-directorships. As the name suggests, it refers to when one individual occupies the position of director in two or more companies. This, in and of itself, is not illegal within Australia. In theory, the individual should be willing and able to compartmentalise. They have a separate duty of care to each business, and must act in their best interests independently.
In practice, the potential for risk exposure to your business does rise – especially within construction. Cross-directorships are regularly cited in instances of malpractice or conflict-of-interest. For example, if an individual is director of both a bricklaying company and a carpentry company, they may attempt to hide this from a developer client. They want both businesses preferred and involved, not because they’ll necessarily do the best job for the best money, but because they have vested interest in their revenues – making them ‘two faced’ in their dealings.
The developer in this example is likely to not get the best tradespeople for their needs, nor pay the fairest price. They aren’t being dealt with in good faith. They are especially deceived within this scenario because the individual took steps to obscure their multiple directorships. This type of situation is, unfortunately, all too common within the building and construction industry. Without taking steps ahead of time to identify the risk profile of a director from a trading partner, you may be walking headlong into an insolvency trap. If the hidden entity is at risk of default or adverse payment behaviour, then you could be jeopardising your cash flow without even knowing it.
How to spot cross directorships and mitigate risk
There are a number of mitigation strategies that can be used to address cross-directorships, as well as the credit risk profile of any trading partners:
Due Diligence and Credit Reporting – The name of the game is director due diligence, and the credit reporting platform, from CreditorWatch, provides the assurances that your construction or building business requires. The Australian Securities and Investments Commission (ASIC) now requires every company director to obtain a unique Director Identification Number (DIN) as part of their regulatory compliance. No matter which companies they become director of, the DIN remains permanently the same.
The credit reporting platform provides ample tools to search any individuals according to their DIN, identify other associated entities, and recognise the potential for conflict, malpractice or adverse behavioural patterns. Associated with this is a market-leading, data-driven analysis of the credit risk, and payment tendencies, of all businesses implicated – utilising the machine-learning capabilities of RiskScore. This is crucial information, as a director with one payment default is five times more likely to experience another one. Identifying this information as early as possible empowers your decision making. Perhaps those trading partners are to be avoided for the best of the company.
Clean Maintenance of Data – The only way that you can correctly identify those that pose a risk to your business, is if you have the right information pertaining to them in the first place. Inaccurate date leads to inaccurate decision-making. Further, it’s a waste of time and resources constantly following up on mistakes made through manual data entry, or information that has become out-of-date since being logged. A Portfolio Health Check is the database cleanout that empowers the business with the most relevant and contemporary customer and trading partner information. Through a four-stage process – data-matching, validation, reconstruction, standardisation – you’ll emerge with an accessible dataset that captures all of the most vital details. Without clean data, you can’t hope to see the full picture.
In-Depth Knowledge of High-Value Partners – If there is one individual business, say a developer or builder, whose trading occupies a significant percentage of your time or revenue – you must ensure that you know their operations more intimately. Cross-directorships within the context of this scenario can be devastating. Your viability is dependent on the regular and punctual flow of cash from that one operator, especially if you’re in a growth phase without a large base of cash or owned assets behind you.
A full Financial Risk Assessment, from CreditorWatch, allows for this peace of mind. It is a comprehensive deep-dive into two to three years of company financials, inclusive of income statements, cashflow, and balance sheets. With accompanying analysis from a qualified Chartered Accountant (CA), or Certified Professional Accountant (CPA), there is little room for adverse cross-directorships to hide. Further, you get a crystal clear picture as to that business’s credit risk profile, payment behaviour, and operational red-flags. Mitigating these risks early could save a lot of time, money and stress.
While instances such as these can pose a tangible threat, with the right tools and risk mitigation strategies you can take steps to safeguard the cash flow and operations of your business. Find out how to pinpoint cross directorships, so you can understand exactly who you’re doing business with.
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