American Express Financial Foundations recently conducted a research article that found one-in-three businesses struggled to access capital and worried about cash flow.
Amongst the findings it was found that more than a third of Australian building and construction businesses are worried about being able to access new capital ahead of an uncertain financial year for the sector.
According to the report, which will be launched later this year, it was found 34% of industry leaders would struggle to find cash for business growth this year, despite the need for more capital becoming increasingly frequent. Some 43% of construction industry leaders said they needed to access capital monthly, with 11% looking for new funding options every week.
American Express says the stark findings were part of a mixed financial outlook for the building and construction industry but interestingly the report found 86% of sector businesses had an optimistic outlook for the coming year, while on the flip side concerns about financial controls and curbed spending suggested a less optimistic picture.
In an exclusive interview with Inside Construction, head of corporate finance and loyalty solutions, American Express, Sascha Braun says the report clearly shows there is a positive sentiment when it comes to the future and it also shows there is a constraint in having access to funds.
“It could mean many things like ending up in a situation where you have superior service or a superior product and you don’t have any more cash to fund your build or pay your salaries. It could be a situation where there’s a delay and you need to borrow money at an expensive interest rate in order to keep the business running. Sometimes we speak to people in the morning and they are expecting that 2017 will look worse and then you speak to someone in the afternoon and its happy days,” said Braun.
One of the key findings in the Financial Foundations report was that many construction business owners said they struggled to get paid on time. Whilst a quarter of sector respondents said paying suppliers on time was an operational priority, while only 34% had procedures in place to ensure this would happen.
Braun says that one of the reasons they did a research paper was because nobody can predict what the future is going to look like but if the right people were spoken to then there would be a clear understanding of the concerns for the sector.
“There were no big surprises in the report. It’s more about confirming the assumptions and understanding the conversations. The smaller you are the more difficult it is to access money as apposed to the bigger you are the easier it is,” he said.
“43% struggle to find cash. What we think is very specific to the construction sector is you have one-man shops or businesses with two or three people. They might be good at what they do but they might ignore the fact that you need a structure when it comes to finances.”
Braun says that non-payment and delayed payment between contractors and suppliers remain some of the construction industry’s biggest challenges and according to industry data, the construction industry accounts for 22% to 24% of all Australian company insolvencies every year.
“If 22% are worried or concerned then what can the other 78% be doing to make sure they are not coming into this situation like the 22% who have?”
“There is more dominance in areas where there is more demand because it’s like a chain. One supplier goes from one to the other and if one of those links is not on time, it has a domino affect. We should not ignore the fact that even thoug there is a term of 60 days for payment it doesn’t necessarily mean it will get paid in 60 days, it may get paid after 80 days, which creates another problem to the existing problem. It’s about cash flow and its not that those businesses are not creating enough money, but there needs to be tweaking where people like builders and contractors are not coming to this situation where they need to take a second overdraft or where they might not have access to funds at all,” said Braun.
However, the report found that despite these potential challenges construction businesses are bullish about the country’s economic outlook, with some 55% expecting positive economic conditions in the coming year, compared to 50% of businesses across all sectors.
“There is always a risk involved but its serious and the right assessment has to be made if this was the way a builder goes. People that go into administration or insolvency don’t have a bad business. It just means that the financial foundation is not there. It hurts because it could be a healthy company but doesn’t have the right focus on the cash and working capital.”