Wednesday, 9 March 2016
Cash flow is like blood flowing through our body – when it stops, so too does everything else. After having been great customers for over 25 years, we have unfortunately seen some established and historically well run businesses go into Administration or Receivership recently because they have been caught out doing work for another company that then failed to pay on time or at all. Of course businesses should reduce this risk by limiting the portion of your business that relies on one customer, but in practice this is easier said than done.
Interestingly, the issue of companies bringing down others must be significant, because the Federal Government has just completed an inquiry. The Federal Senate report estimated that the construction industry is the largest single contributor in Australia to insolvency statistics – a very worrying and shameful 24% accounting for a total loss in our sector of a whopping $2 billion per year. The inquiry recognised that it is mainly small players that are at the mercy of the unconscionable conduct of larger ones further up the chain who delay payment. With a proposed start date of 1st of July 2016, the main recommendation from the Inquiry is a two year trial of Project Bank Accounts for any Commonwealth project exceeding $10 million, which would be used to pay smaller contractors.
Riding on the back of the recommendations of that inquiry the Qld State Government has opened a Security of Payment Discussion Paper for public comment (click here). Submissions close 31st of March, 2016, so as it affects you and your business, I encourage you to put forward your thoughts through your Industry body or directly yourselves. The issues being looked at are reducing the impact of insolvencies flowing on down the supplier chain; stopping retention money from being used by contractors further up the chain as cash flow; delays in the payment process; and a lack of financial managements skills in the industry. Discussion areas are:
- Project Bank Accounts – an arms’ length payment system keeping the project cash separate to the normal business account through a separate bank account
- Retention Trust scheme – basically that retention monies are retained by a separate institution (bank), not a company in the supply chain
- Insurance schemes, sort of replacing Retention money, to cover defects etc
- Federally changing the Corporations laws
- Improved Financial Education within the Industry
Clearly, something needs to be done to stop the collateral damage when one company goes down so it doesn’t destroy everything around it. I’m not sure that the suggested approaches are the way to go. In typical Government thinking, the proposals are that more legislation is the answer. We are in a cost sensitive industry where a lot of projects don’t go ahead because they are becoming unaffordable. All the above options appear to increase costs to all industry participants more than they give back in benefits (we need a cost benefit assessment to make a better call). And the solutions involve more administration etc that will impact on all players in the industry, that is, most businesses do the right thing and will wear the burden, whilst it still doesn’t clear out the few rogues that ruin it for everyone else.
So, what can be done? Whilst not all encompassing nor a perfect solution, some suggestions include:
- For starters, our regulators can apply the laws that are already in place. When was the last time you heard of someone being charged for insolvent trading? Or illegal phoenix activity (where Assets from an indebted company are transferred to a new entity to avoid paying creditors etc)?
- Mandate Payment time frames. End of Month 30 days should be acceptable to most businesses. One of the biggest delays on many projects is the merry-go-round of sign-offs higher up the chain. If there aren’t legitimate reasons for non-payment identified and actioned within this time frame, in most cases they’d be questionable reasons anyway. But this must be enforceable through stiff penalties. As the trials are going to be on Government projects, perhaps penalise the delaying party 10% of the delayed payment amount per month or part thereof as a deterrent, and for continued breaches Government should pay the subcontractors directly.
- Retention Monies are many times about the same as the profit in the whole job. With a properly functioning industry and dispute process, Retention money would be superfluous anyway. Look at how disputes can be resolved faster (i.e. simplify the requirements).
- Business Management – I agree that Management skills should be a pre-requisite for running a business (it isn’t, and basic financial skills aren’t even a part of the school curriculum). Out of self-preservation, you’d think most people would call in experts to assist when required, but often by the time they consider doing so, they are too deep in the mess already. The problem though is that there are too many rules and laws that people running businesses have to stay on top of, over 80,000 pages of business legislation in Qld alone (add in Federal laws like Fair Work, Tax law, environmental health and safety etc). Trying to collect money already consumes more than its share of hours in a week. Whilst the current buzz word is “Innovation”, the real strangling noose around upcoming businesses is all the non-productive and value depleting compliance requirements. So remove the paper pile generation, and focus on outcomes instead.
In any case, payment delays can have devastating consequences for your business. Please share your experiences and suggestions by responding to the discussion paper.
A woman who worked at a café was sent across the road by her employer to buy margarine. She was allegedly struck by a car, and has sued her employer for $413,000 because they “failed to recognise the inherent danger”. SERIOUSLY?!?!
If this case wins and an employer needs procedures and risk assessments for asking an employee to cross the road, then you wonder what our education system has achieved. In fact, it seems like businesses are now being forced into managing more and more of society’s problems and responsibilities. Isn’t education, healthcare and all things like that Governments role and what we pay taxes for?
As always, onwards and upwards!