My husband and I are directors of our own construction company. We have reached a point where we are out of out depth with how to measure our progress and be able to see if our business is viable and our debts measureable and managable. We are lost as to what we should do next to get our debts under control. Should we seek advice from a financial planner?..and can't our bank manager help us with this planning?
You should speak to a business coach or an accountant that actually cares about your business and understand how to run a business. I know some very good coaches and accountants if you're after one. Your bank manager is not helpful at all generally in these kind of problems...beside calling you when you're late on repayments.....
Hi Clare, thank you for your question.
I am based over in Robina and I specialise in Business and commercial finance. The only way that this question can be answered accurately is to sit down for a chat or over the phone if you prefer and lay all of the cards on table to see if we can find a way to relieve some of the stress. It may mean that you need to speak with an accountant or financial planner but, I am happy to initially have a look and let you know my thoughts, no charge.
You are not alone and sometimes, things have to be outsourced so that you can concentrate on what you do best.
Kind regards Paul
Hi Clare, I'm in NSW so probably better that you speak with someone local. My advice would be to speak with an accountant that is proficient with business operations so could provide you an expert detailed analysis of your business and propose some workable solutions.
Yes. We have an accountant but we don't really get any business related specific advice. A lot of direction comes from our own ideas & it always seems like we are gambling instead of having a plan that has measurable outcomes. It would be great if we could focus on the construction & not be distracted by a sense of losing control. I'm hoping that if our analytics are all drawn up that things aren't as dire as they seem to be. Outsourcing is where we are at. Thanks for your advice & I'll discuss this with my partner who is hestitant to seek advice as he does not understand the benefits & can only see another expense.
I'm sorry to hear that you have yourselves in an uncomfortable situation but the sooner both you and your partner face these issues, the better off you will be.
If you are struggling to pay the bills, you either have an earning problem or a spending problem. It is a simple money in/ money out calculation. I would expect that a successful construction company with two partners needs to be earning around $200,000 in operating profit, with a margin of 40% this means you are billing around $500,000 per year if you are achieving that you have a spending problem and you need to look at your personal spending which includes your cars and entertainment.
I agree that a business coach who has experience in construction would be a great investment just don't wait until it's too late.
Good luck with the changes, you can do it!
Hi Clare, dependant upon the experience of your Banker, they may be able to provide guidance, but in the meantime, there are various easy to check measures you can use to check viability and debt capacity, including:-
- How many times your EBIT (NPBT + interest) can cover your interest cost. You should be targeting at least 1.5 - 2x. As an example, if your NPBT was $100 & your interest cost was $25, your EBIT would be $125 ($100 + $25) & your interest cover would be 5x ($125 / $25).
- The multiple of debt to your EBITD, which is EBIT + depreciation. It's a different target for different industries, but if you worked on say no greater than say 3x your EBITD, that's reasonable. Example is if EBITD is $250 you'd want your debt to be no greater than $750.
- Balance sheet equity should be at least 25%. That's simply net assets / total assets.
Over-riding all of this is watch your cash & in particular your debtors & make sure they pay when they are supposed to, as there have been plenty of good/profitable/growing businesses go broke because they've run out of cash.
Keep in mind that Net Profit is just a number on a page, tells you nothing about cash & if your debtors for example are growing, that's using up cash. Simple way of thinking of it is:-
- growth in assets uses cash
- reduction in assets generates cash
- growth in liabilities generates cash
- reduction in liabilities uses cash
Outside of all of this, I'd suggest if you are starting to face cashflow issues, you also talk to both your bank & creditors early. In cases like that, you can't communicate enough........
Good luck - hope it all works out for you..........
Thanks for your question, and hopefully the feedback so far is helping.
We very often see with business owners that it is a real challenge when they are trying to juggle many different roles – set the direction and strategy of the business, take care of the day to day running, and also look after the financial side. If you are like many business owners I work with, I’m sure having to wear so many hats can be a little overwhelming and you would prefer to just be focusing on what you’re passionate about - the actual construction side of the business.
I would certainly suggest seeking some professional advice, and we often see when people sit down with an advisor or accountant that the challenge is actually manageable and not as overwhelming as they first thought – but would certainly suggest getting on the front foot sooner rather than later.
I would be happy to have a chat and see if we can help, I work in Financial Planning and also work side by side with an accountant who specialises in the Business Advisory space.
At the very least, I’m sure we will be able to point you in the right direction.
Feel free to contact me on 07 3144 3100 or firstname.lastname@example.org.
T: 07 3144 3100