Five early warning signs your construction business needs urgent attention
Why early attention matters
A construction business can be busy with projects while running out of cash to pay bills. Jobs are coming in, the crew is working, but money is not there when suppliers, the tax office or employees need to be paid.
Financial difficulty does not necessarily mean a company is insolvent, but it is a sign that close attention and early action are needed if further problems emerge. The earlier you understand the company's financial position and take appropriate action, the more options you may have to stabilise the company and reduce the risk of more serious financial and legal consequences.
A company is insolvent when it cannot pay its debts when they are due. There are serious penalties for allowing a company to trade while insolvent.
Cash flow feels wrong even when you are busy
The most common pattern is that work is coming in and the crew is busy, but there is never quite enough money in the account when you need it. You are paying suppliers late, putting off quarterly tax reporting, or covering wages from your own pocket.
That pattern indicates a cash flow problem, and in construction it can deteriorate quickly.
Warning signs include poor cash flow, unpaid creditors outside usual trading terms, problems obtaining finance, regularly juggling which bills to pay first, and relying on director loans, personal funds or customer deposits to keep operating.
Overdue tax and superannuation liabilities
If the company is behind on business activity statements, pay-as-you-go tax or superannuation payments, the tax office will follow up. When they do, they have enforcement tools.
The director of a company who fails to meet a superannuation guarantee charge liability in full by the due date automatically becomes personally liable for a penalty equal to the unpaid amount. When a superannuation guarantee charge liability remains outstanding, a director penalty notice may be issued.
Directors also become personally liable for the company's unpaid amounts of pay as you go withholding and goods and services tax. The ATO can recover penalty amounts 21 days after issuing a director penalty notice.
Overdue taxes and superannuation liabilities are listed by ASIC as a warning sign of financial difficulty. Do not ignore them or assume the problem will resolve on its own.
Source: ATO: Director penalty regime
Debts are getting older and excuses keep changing
When invoices you are owed sit unpaid for 60, 90 or 120 days, that extended delay affects your own ability to pay bills. Clients keep promising payment is coming, but meanwhile your own bills do not wait.
If the money owed to your business stays unpaid for too long, it does not just hurt the bank balance. It can push a functioning business toward financial difficulty.
Similarly, if your company owes money and you are making excuses or delaying creditors, that is a sign your cash position has deteriorated. ASIC lists creditor demands or threats of legal action as a warning sign of financial difficulty.
Borrowing to cover operating costs or taking on unprofitable work
Using a credit card or line of credit just to make payroll or buy materials for the next job is a serious warning sign. Debt that covers basic operating costs is not strategic leverage; it is a sign that income is not meeting obligations.
Another warning sign is taking on work just to generate cash, not because the job is profitable. Pricing jobs thin or accepting clients you would not normally touch just to keep money moving can feel like survival, but it often worsens the position.
ASIC identifies maxed-out credit cards or overdrafts, taking on work the company may not be able to complete, and debts building up while waiting for future income as warning signs of financial difficulty.
What to check now
List what the company owes now and what is due in the next fortnight. Include supplier invoices, subcontractor payments, wages, superannuation, tax office liabilities and loan repayments. Then list the cash available and payments you can rely on receiving in time.
If the company cannot meet its current obligations without relying on hoped-for recoveries or further credit, that gap is a warning. Do not dismiss late payments to the tax office or delayed superannuation as temporary if the pattern is worsening.
Get professional accounting or legal advice as early as possible if you suspect the company is in financial difficulty. This increases the likelihood the company will survive. Do not take a head in the sand attitude, hoping that things will improve.
Arrange management accounts, an aged payables list and a realistic cash flow forecast. Explain any gaps or uncertainties to your adviser. Ask an appropriately qualified insolvency accountant, registered liquidator or lawyer about solvency and available options.