There are a number of causes of company failure to watch out for. Do you know what steps you can take to protect yourself against being exposed to companies that may be on the brink of failure?
It is important to know the signs of company failure and how to take steps to protect yourself as a credit provider.
Some of the key causes of company failure include:
- Growing too quickly too soon: Working capital at a time of growth is critical. When workloads increase a builder or contractor will usually need to carry more debt. As their debt grows, so does your uncertainty around their ability to re-pay you. Unless the builder or contractor has cash reserves, a single event resulting in them not being paid can bring every thing tumbling down.
- Poor pricing: Pricing is key for a builder or contractor. Failure to review costs and margins on past jobs or clearly identify margin shortfalls can spell disaster.
- Poor financial management: Some builders and contractors don’t understand the difference between cash flow and profit, and so they don’t hold funds in the business to cover growth, and unforeseeable events such as one their customers not paying them. They also don’t always make allowance for the impact Provisional Tax has on cash flow at this time of year. Growth of the business means a further drain on cash reserves, as tax bills increase.
There are a number of ways you can take steps to better protect yourself against building and construction companies that get into financial strife:
- Register on the Personal Property Security Register (PPSR): http://www.ppsr.govt.nz/cms . The PPSR has more protection and recovery options than just repossession of goods supplied. Take the time to understand how the PPSR can help you. Protection against voidable transaction claims alone justifies the cost of registering.
- Obtain a personal guarantee: In many cases as a creditor you could potentially be the biggest single investor in a business. Get the business owner to share the risk with you by giving you a personal guarantee.
- Ensure your customers use the Construction Contracts Act (CCA): It has been suggested that if contractors and sub-contractors had enforced their rights under the CCA, the debt levels resulting from the Mainzeal collape would have been significantly lower. This Act was bought in, in 2002, to protect contractors from the very situation a number of them find them selves in now. If applied correctly, the CCA may well have saved them many thousands of dollars.
TIP: Use the monitoring tools in CRISworks to watch for signs of trouble before it is too late. We see the indicators of company failure every day. Give us a call on 09 520 0626 or 0508 CREDITWORKS to see which of the CRISworks monitoring tools will help to give you the heads up on customers that are heading towards trouble. This way you can do something about it before it is too late and you are left with a bad debt to recover.
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