Construction remains one of the most financially pressured sectors of the Australian economy.

But the problem is not always a lack of work.

Many construction businesses remain busy, with strong pipelines and significant revenue. What matters, however, is the quality of that revenue and the cash required to deliver it.

In construction, turnover can provide a false sense of security. A full order book means little if projects are underpriced, variations are disputed, costs rise or payments arrive later than expected.

A business can be profitable on paper and still run out of cash.

Where the pressure builds

Construction businesses operate with relatively little room for error.

Labour, materials and subcontractors often need to be funded before progress claims are received. A delayed payment, cost overrun or poorly priced project can therefore have consequences well beyond that particular job.

The warning signs are usually familiar:

• margins falling below tender expectations;
• cost overruns becoming more frequent;
• progress claims taking longer to be paid;
• ATO liabilities accumulating;
• suppliers being stretched; and
• directors increasingly funding shortfalls themselves.

None of these, in isolation, necessarily means a business is in serious financial difficulty.

The risk is when they become normal.

That is often how financial stress develops: gradually at first, and then very quickly.

More work is not always the answer 

When cash flow becomes tight, the natural response is often to chase more revenue.

But growth does not fix poor economics.

If projects are producing insufficient margins or consuming too much working capital, winning additional work can compound the problem rather than solve it.

This is where directors need to look beyond the pipeline and ask harder questions:

• Are our projects profitable?
• How much cash is required to deliver the existing order book?
• Are we generating enough cash to meet both current obligations and legacy debt?

Good businesses should be able to withstand things going wrong. If there is no margin for error, the balance sheet may be carrying more risk than the order book suggests.

Our view

Financial pressure does not necessarily mean the underlying business is broken.

A viable construction business may have options to improve working capital, refinance, renegotiate obligations, restructure operations or deal with legacy debt through a formal restructuring process.

But those options generally become narrower as liquidity deteriorates.

Strong businesses are not businesses where nothing goes wrong. They are businesses with enough margin, liquidity and discipline to absorb problems when they arise.

When margins are tightening and cash flow is under pressure, addressing the problem early is usually far easier than addressing it when the cash runs out.

How can Charles & Co. help you?

With over 50 years of combined experience, our team assists businesses and directors facing financial and operational distress. We encourage anyone experiencing financial or operational distress to contact us to discuss your options.