Protect Your Business from Insolvency Risks

The Australian construction industry is facing a financial crisis, with insolvencies reaching a 10-year high. In the 12 months leading up to June 2024, almost 3,000 construction businesses entered external administration — the highest number in a decade.

The main culprits contributing to this crisis include rising material costs, delayed payments, labour shortages, and the ongoing impact of high interest rates. Many businesses are struggling with declining profit margins, cash flow, and overreliance on external funding. 

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As businesses across the country struggle with economic challenges, these insolvency figures highlight the critical need for businesses to recognise early warning signs, strengthen their financial resilience, and use risk mitigation strategies to get their business through to the other side. 

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We offer five tips Australian businesses can use to remain financially solid. 

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1. Strengthen Financial Management

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Poor cash flow is a big contributor when it comes to keeping a business running. With delayed payments and high interest rates creating additional pressure, getting your finances in order is a must.

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• Track financial metrics: Monitor your debtor days (the time it takes for invoices to be paid), break-even points, and budget-to-actual results. Identifying trends and discrepancies early allows for corrective action. 
• Streamline payment processes: Ensure your invoicing system is efficient and accurate, and follow up promptly on overdue payments. If you notice your debtor days increasing, there are tips to follow to help your customers pay on time. 
• Have a backup plan: For unexpected expenses or slower income periods, it’s a good idea to have a plan detailing how to deal with poor cash flow. If you’d like help determining this backup plan, please get in touch with us for a chat. Depending on your circumstances, cash flow management can look very different for businesses. For example, leveraging business finance might make sense for one business when another business might be better off maintaining cash reserves.

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You can handle economic challenges more effectively when you have a clear picture of your financial health and a plan to maintain positive cash flow.

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2. Review and Adjust Your Pricing Strategy

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Declining profit margins are one of the most significant impacts of rising costs. Unfortunately, many construction businesses continue to underprice their services to remain competitive, but this approach becomes a race to the bottom and is unsustainable in the current climate.

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• Factor inflation into your prices: With material and labour costs climbing, your pricing needs to reflect these increases. Review your markup on materials and labour costs to ensure you’re not operating at a loss.
• Reevaluate low-margin projects: Identify contracts or clients that drain resources without delivering adequate returns. Consider renegotiating terms or focusing on more profitable opportunities.
• Introduce gradual price increases: Small, incremental adjustments communicated early can prevent pushback from customers while maintaining your margins.

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Now is the time to ensure your pricing strategy aligns with economic realities, enabling you to protect your cash flow and profits. For more detailed information on monitoring and improving your profit margins, check out Understanding and Improving Profit Margins. 

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3. Prioritise Exceptional Customer Service

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In a competitive and uncertain market, delivering outstanding customer service can go a long way. A positive client experience builds trust, strengthens relationships, and sets you apart from competitors, helping to secure repeat customers and generate valuable referrals.

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• Focus on communication: Keep clients informed at every stage of the project. Regular updates on timelines, progress, and potential challenges can ease concerns and build confidence in your services.
• Be responsive: Address client inquiries or issues promptly. A quick and empathetic response can turn a potentially negative experience into an opportunity to demonstrate your commitment to customer satisfaction.
• Exceed expectations: Aim to go above and beyond where possible — finishing a project early, finding cost-saving solutions, or offering a more personalised approach.

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A happy client is more likely to recommend your business to others, contributing to a stream of referrals. Word-of-mouth recommendations, driven by exceptional service, are cost-effective and powerful in attracting new customers.

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Prioritising customer service can help establish a loyal client base that will support your business through challenging times and beyond.

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4. Improve Operational Efficiency

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Rising costs and labour shortages highlight the need for greater efficiency in every aspect of your business. Even small improvements can lead to significant savings and productivity gains.

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• Optimise resource utilisation: Evaluate your procurement and material handling processes to minimise waste and reduce costs.
• Embrace technology: Project management software can help improve scheduling, budgeting, and communication across your teams.
• Upskill your workforce: Providing training to your team can help them adapt to new processes or technologies, ultimately boosting productivity. Investing in your team can increase their job satisfaction and help reduce staff turnover rates — this comes in handy when facing labour shortages.

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Streamlining operations can help offset rising costs and ensure projects are completed on time and within budget.

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5. Plan for Economic Recovery

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The high inflation and rising interest rates we’re experiencing won’t last forever. Businesses that can adapt and stay resilient now will be well-positioned to thrive when economic conditions improve. Taking proactive steps today can secure your future success.

While managing immediate challenges is crucial, don’t lose sight of your long-term goals. Keeping your vision clear ensures you’re always working toward sustainable growth.

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Navigating these uncertain times requires expert guidance, and that’s where we can help. We can help you make informed decisions, improve cash flow, identify growth opportunities, optimise taxation planning, and much more. Get in touch with us today to see how we can help set your business up for lasting success.

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