Eddie Senatore

Survive to Thrive – A journey to business success

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Embracing Change for Business Success

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embracing change in business

Embracing Change and Thriving Amidst Transformation

In the dynamic realm of business, change is a constant. This ever-shifting landscape is both exhilarating and devoid of monotony. Yet, to thrive amidst volatility, understanding the variables that shape success is essential. This essay delves into effective change management and the art of refining business strategies. Through the lens of Disney’s transformation, we’ll uncover the potency of iteration in fueling growth and achievement.

The Significance of Managing Change

Change is inherent in business, necessitating not only identifying influential variables but also making necessary adaptations. Here’s a distilled view of the five-step iterative process: diagnose, adjust, implement, evaluate, iterate.

Diagnose: Recognise areas for improvement.

Adjust: Make necessary changes to enhance effectiveness.

Implement: Put changes into action.

Evaluate: Measure the impact of changes.

Iterate: Continuously refine based on evaluation.

This iterative cycle facilitates ongoing enhancements across time frames – short, medium, or long-term. This approach empowers organisations to steadily advance toward their desired goals, making effective change management pivotal for enduring success.

The Disney Example

oswald-the-lucky-rabbitDisney’s story stands as a testament to adept change management. The journey from Oswald, the Lucky Rabbit, to the iconic Mickey Mouse underscores the essence of adaptation and iteration.

Due to intellectual property disputes, Disney relinquished Oswald. Rather than a prolonged legal dispute, Disney seized this setback, birthing Mickey Mouse.  mikey-mouseThe resemblance between Oswald and Mickey is evident. The lesson: Embrace change, iterate, and thrive through rebranding.

The Power of Iteration

Disney’s journey reaffirms iteration’s supremacy in business. Change signifies perpetual enhancement and pursuit of excellence. Through iteration, businesses pinpoint inefficiencies, fortify effectiveness, and approach their aspirations methodically.

By evaluating operations and exploring refinement, organisations set the stage for growth and prosperity. Iteration isn’t confined by time; a commitment to refining processes yields remarkable progress over time.

The Importance of Organisation

Effective change management demands a structured foundation. Organisational structure and efficiency are the cornerstones of this approach. Streamlined processes, transparent communication, and a culture of accountability foster an environment primed for success.

Conclusion

Businesses navigating the ever-evolving landscape must grasp the importance of change management and adaptation. Success hinges on recognising improvement, refining business strategies, and embracing iteration. Disney’s transformation echoes the potential of constant adaptation and refining through iteration. As businesses adopt continuous improvement as a mindset, they pave the path for long-term success.

In conclusion, businesses embracing change, honing strategies, and maintaining organisation are positioned to thrive. By unlocking the potential of continuous improvement, they can stride confidently through the ever-changing business realm.

Is Profit the Key Driving Force Behind Every Business?

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Unveiling the Key Driving Force

key driving force

If you lack organisation, running a business can become challenging, but the process of getting organised is actually quite straightforward. In my previous blog post, I discussed the importance of taking your business to the market and shaping your desired future state. While there may be other motivations for starting a business, the primary reason for most individuals is to generate profit.

Undoubtedly, there are additional factors to consider. You may aspire to be your own boss, have the freedom to do things your way, provide valuable services to others, or enjoy the flexibility of selecting your clients and working hours. However, irrespective of the specific reasons, it remains an undeniable fact that profitability is the ultimate goal. Without the potential for profit, what purpose does the business serve? Therefore, making profitable choices is crucial, and fortunately, these decisions are relatively straightforward.

Let's delve into the key choices you need to make. First, consider how much profit you aim to achieve. Dedicate some time to reflecting on this aspect. Second, determine the means by which you will attain this profit. This entails identifying the areas where you will focus your efforts. Third, define the specific actions you will undertake in order to generate profit. This involves developing a clear understanding of how you will operate your business. Finally, establish the target customers you wish to attract. In essence, you must have a precise and unwavering focus on your market and the value you offer, while also ensuring exceptional efficiency in your operations.

As you progress and make these choices, each decision serves as a stepping stone to the next. Consider the following example: Begin with the question of how much profit you desire. Suppose you set your target at a million dollars. That choice is entirely yours. Next, determine the means through which you will achieve this profit. Let's say you decide to become a builder.

With this choice made, you can move on to selecting the specific services you will offer to reach your profit goal. Will you specialise in building decks, conducting renovations, constructing new homes, or focusing on second-story additions? Once this decision is made, it sets the stage for subsequent choices and so forth, ultimately leading to the pivotal question of which customers you want to attract. This progression brings your vision to life, highlighting the significance of organisation in navigating the complexities of business.

Fortunately, the process of getting organised is not arduous. The first step is simply jotting down your aspiration to become a builder who generates an annual profit of one million dollars by specialising in second-story construction. This exercise alone can bring clarity to your mind and solidify your future goals.

The second step is referred to as the "engage stage." It involves actively engaging with your business and breaking it down into manageable components.

Now, the next steps of this process will be explored more in detail in the next blog post. Watch out for our upcoming blogs and we’ll provide you with valuable insights and guidance to take your business to the next level.

Best Strategies for Effective Financial Management

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financial

Effective Financial Management: Key to Overcoming Builder Bankruptcy Challenges

Financial management is crucial for the success of any business, and it’s especially important for those in the construction industry. Construction is known for its large projects, lucrative contracts, high overhead costs and high-risk opportunities, all of which can create many financial challenges for a business like yours. 

1. Problem: Management skills

You do what you do, and you do it well.  One of the obstacles to overcome when you grow as a business owner is developing skills that are not your core skills.  It’s hard work keeping on top of the administration stuff, all the paperwork, paying the bills, collecting bills and working out which subbie has sent their bill in yet and what invoices you haven’t sent yet.  No doubt you have a helping hand.

Management skills, more importantly financial management skills is the next level.  Most builders I know leave this stuff for their accountant and if you are big enough the internal accountant.  But if you are growing you are not likely to have an inhouse accountant.  A bookkeeper perhaps.

Management or more precisely financial management is what happens in between paying the bills and seeing your accountant.  Accountants typically tell you a story about your history.  This is your revenue, your margin, and expenses and what profit is left and by the way here is the tax bill.

What I am talking about here is your cash flow management, your budgeting or tracking, managing suppliers, getting the quote right and managing the project so it delivers on time and on budget.

Solution:

One solution is to get the right help.  Get in administration help and hire yourself a decent bookkeeping.  Get the boring or mundane out of your head.  Spend time on the key management activities – it will reward you.  Don’t forget to get some help on the management activities.  It will reward you also.

Australian business owners are facing a staggering $50 billion in unpaid corporation taxes – an unprecedented amount that has forced many businesses to close their doors. This tax is a problem.  It creeps up on you before you know it.  Easily managed.  A good cash flow tool lets you know how much of the tax is building up over time.  Also setting aside the tax burden as it accumulates into a separate bank account is a smart move.  When the tax is due you have the money to pay it.  Setting aside the money doesn’t mean you can’t use it to your advantage while it sits there.  Linking this account to an offset account helps reduce any interest accruing on loans.  A double benefit. 

2. Problem: High use of cash

The majority of insolvency cases occurring are small businesses and contractors are among these. The firms typically have assets valued at less than $10,000 and represent a significant portion of corporate insolvencies compared to those with greater financial resources. The impact of these insolvencies is often felt more harshly due to the limited scope of their operations and their inability to weather economic downturns or other challenges as easily as larger firms. 

For a variety of reasons, we still like the feel of cash.  The folding.  The brown paper bag.  The trouble with this is that it is hard to control.  Cash slips through your fingers easily.  This makes managing difficult.  How do you know how much you have made and what you have paid for?  You don’t know, well, not exactly at least unless of course you are keeping a little black book on the side.  What’s the point of that I say.   

Solution:

This will help you to identify any areas of overspending. The right system will provide you with a greater general oversight of your finances, in turn helping you create opportunities to reduce costs and add value. A budgeting and forecasting system will identify trends in your company’s financial performance such as fluctuations in revenue or costs. This data can then be used to make informed decisions about where to allocate resources and how to adjust your operations to improve the business bottom line. You can enhance this process through the use of automated financial tools to create budgets, manage and analyse data.

3. Problem: Overtrading  

You remember the time when you first started in business and your biggest challenge was getting enough revenue.  Where was the next client coming from?  If you didn’t have enough in the pipe, then you were likely to go broke.   

Let me tell you about this other killer.  Overtrading.  If unchecked, more of something will kill you.  The difference with closing your business when you are under selling is the damage is minimal.  With overtrading the damage is huge.   

Overtrading basically means you are doing too much.  In doing so, your resources get tied up and you simply run out of cash.  Any good builder knows going from building 6 houses a year to 26 will tie you up in knots, especially if you don’t have the systems in place to manage this growth.  You will also need to invest in cash to simply keep the wheels moving.   

Solution:

Set realistic goals and only take on projects that you know you can handle, both in terms of volume and complexity. It’s also important to have a system in place for monitoring your cash flow, so that you can identify potential problems early on.  Start every new growth phase as if you are restarting your business.  A good business adviser will help you through this.

4. Problem: Trading losses 

Another common and frustrating occurrence in the construction industry.  Running a business at a loss can only happen for so long.  At some point you will have to put more money into the business or shut shop.  Now trading losses can occur for a variety of reasons: 

  • Buying a job, hoping variations will cover you 
  • Delay in supplies 
  • Rising labour and material costs 
  • Errors in estimating  
  • Poor project management 
  • Something out of left field, outside your control such as a non-paying client

Solution:

 The trick to trading losses is staying ahead of the game.  Too many business owners look at lagging indicators.  That’s too late!  Identify leading indicators and manage them.  Have a detailed quote monitor, purchase order system (preferably) as invoices, come in.  Manage key phases of the build.

There are a multitude of project management tools on the market that can help with all this. Using a tool to anticipate unexpected costs and build contingencies into your work will allow you to stay ahead of the game, and offset any decrease in the project margin resulting from an increase in material costs or other unexpected expenses. Not only will this minimise trading losses, but you’ll also have the peace of mind knowing that you have a plan in place to tackle any unforeseen challenges that come your way. 

3 Practical Steps for Success 

  1. Track your cash flow: Tracking your cash flow is essential, this means having a thorough understanding of your income and expenditure. How much cash is coming into your business and what is going out on expenses.  When you know and understand the comings and goings you can measure and manage it.
  2. Set financial goals: Setting financial goals can help you to focus your efforts on specific objectives that will improve your financial management practices over time.
    For instance, setting goals such as reducing your overall debt by 20% within the next 6 months or increasing profits by a certain percentage or increasing revenue by a certain percentage or perhaps it is targeting marketing statistics to evaluate the performance of your marketing spend.
  3. Accumulate and allocate funds: Having a reliable source of saved funds can help cover any costs.  I spoke about tax earlier.  The same can apply to you.  Setting aside for your personal use will then separate business and personal use of business funds. 

Conclusion 

Effective financial management is crucial for the success of any construction company. By implementing the above strategies, such as setting realistic goals, monitoring your cash flow, and investing in training and development, you can mitigate any industry-specific risks to your business and build it to be both sustainable and profitable.  

The key to survival is to be proactive.  Get and stay on top. 

Unlock Business Success with this Game-Changing Strategy

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Unlock Business Success

Unlock Business Success with this Game-Changing Strategy

Not happy with where your business currently sits? 

Do you believe there is more you can achieve? Well, chances are, you’re absolutely right. You deserve better, and you can do better. That’s why I’ve developed a five-step process to help you transform your current situation into the desired future state for both you personally and your business.

Before we delve into the process, let me share an important idea with you. 

It’s simple: being organised is the key to overcoming business challenges. 

Don’t just take my word for it; let me prove it to you. Business failures are alarmingly high, particularly in the building and construction industry. I’ve gathered some compelling statistics on this topic.

According to the Statistical Brain, the number one reason for business failure, accounting for 50% of cases, is incompetence. This lack of competence in management and planning has been identified by reputable sources such as the Harvard Business Review Research School. These statistics, gathered from various countries including Australia, the USA, and Singapore, clearly highlight the significance of organisation in running a successful business.

Lack of organisation is the primary cause of failure in the building and construction industry. This evidence, backed by multiple sets of statistics and renowned researchers, underscores the importance of being organised. Failure becomes a likely outcome if you neglect this crucial aspect of your business.

But let’s shift the perspective and reframe it positively. If you are organised, you actually double your chances of succeeding in business. 

Now, it’s crystal clear, isn’t it? 

This idea forms the basis of my approach. Here’s the theory: You take your business and enter the market to thrive. The market is where you interact with your bank, suppliers, tax office, staff, and customers, among others.

Additionally, there’s you – the skills you possess, your resources, your cash flow, your assets, and the support from your family and friends. You bring all these elements together and strive to be the best version of yourself. The first step in my five-step process is simple: 

Recognise your current position.

Builders often experience high levels of stress because they take on multiple roles in the business.

You work on job sites, manage people, sell to clients, and handle client management. Essentially, you handle every aspect of the business. Builders are constantly in need of more cash, more customers, and reliable staff. 

Take out a piece of paper and start writing down your pain points.

Here are some examples of pain points that you might be experiencing: lack of time, insufficient cash flow, loss of control, and so on. Consider how you manage your people, suppliers, finances, yourself, and your family. Building a comprehensive list of your current situation will provide a sense of relief once you transfer these thoughts from your mind onto paper. Managing your identified pain points is crucial.

Next, let’s shift our focus to the prize – the desired future state you aim to achieve. 

Imagine what awaits you when you become organised. To clarify this, let’s create a story about your business. Start envisioning your desired state. For instance, you could aim to regain your freedom, spend more quality time with your family, build a valuable business, work with the right people in the right positions, and choose your ideal customers.

Moreover, consider having a healthy cash reserve in the bank. Writing down your desired future state provides clarity, relief, and motivation. This simple step sets you on the path to turning your business around. I recommend checking out my video on winning and how to craft an aspirational statement for your business, which will further enhance your motivation.

By taking these two simple steps – recognising your current position and setting your desired future state – you will begin to sense and experience the benefits of getting organised. 

Remember the core idea: being organised makes business easier. And the good news is, getting organised is within your reach.

The Importance of Effective Office Administration

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effective office administration

Streamline Your Success with Effective Office Administration

An often overlooked yet critical aspect of business management is office administration, it’s the backbone of any successful business. However, this can be a challenging area to manage effectively, particularly for smaller businesses – with less infrastructure, resources and standard operating procedures than larger firms, it’s no wonder that employers often overlook the topic. 

Poor record-keeping, fraud, non-compliance with corporate legislation and low profit margins all threaten the stability of these businesses and can lead to financial losses and ultimately total business failure if not managed properly.  

Paperwork, paperwork.. and more paperwork! 

When it comes to organising your paperwork, accurate record-keeping is essential for any business. Local authorities may need access to certain documents at short notice and it’s critical for compliance that you have easy access to everything that you need. It also creates an audit trail for internal and external auditors. Ineffective administration can cause serious problems within your business, stemming from any one or more of the following: 

  1. Loss of opportunities in terms of time spent on paperwork instead of other tasks. 
  2. Internal errors or lost documents. 
  3. Difficulty finding relevant documents for internal and external audits. 
  4. Higher overhead expenses from manual processes that could be automated. 
  5. Decreased oversight of project finances, budgets and overall business performance. 
  6. Late payment schedules. If you’re a primary contractor this means your subcontractor relationships will suffer and your late payments will have a knock-on effect for their business. For subcontractors this means payment for your materials could become overdue, affecting your ability to access credit in the future. Not to mention damaging relationships between you and your suppliers. 
  7. Miscommunication among team members leading to internal errors or missed deadlines. 
  8. Compliance issues with government regulations. 
  9. Fines and other penalties due to improper documentation management. 

By contrast the benefits of effective paperwork management include:  

  1. Effective cost management due to accurate tracking of finances and materials. 
  2. Increased efficiency with streamlined processes and automated systems. 
  3. Improved accuracy for better customer service. 
  4. Enhanced profitability with decreased overhead expenses. 
  5. Greater financial visibility into current projects, budgets and overall business performance. 
  6. Streamlined workflow for faster completion of tasks.   
  7. Easier compliance with government regulations. 

As you can see, the benefits of employing effective document management processes far outweigh the efforts required to put relevant procedures in place.  

The real question however is, why are you doing this?  Why are you investing time at this level?  There are many opportunities to manage this work.  Hire an admin officer or borrow a virtual one.  Go a step further, take advantage of free online project management and automation tools. You’d be surprised at how many of your manual processes can now be automated, sometimes even with free and open-source tools, all available online. 

The problem with low margins and earnings through volume 

Low margin projects can have a major effect on a business’s profitability. If you price your work too low, you may attract more buyers, and you may be more competitive but it can sometimes make it difficult to cover just your operating costs and even your ability to generate adequate personal earnings. 

What you are doing here is competing.  But competing against who and for what purpose?  There are two places where you want to be playing.  It is either at the low margin end or the high margin.  Whichever you choose you need to reframe from competing to winning.  More about this later. 

At the low margin end you have plenty to think about.  If you don’t have time to invest in supplies, you run a risk on any last minute needs to complete a project.  Low margins can create cash flow problems for smaller businesses if you don’t have sufficient volume.   

Low margin is a volume game.  How do you know you are winning here?  Here’s a clue, it’s not doing more than your competitor. Winning is about getting your unfair share of the volume in the marketplace.  There are many tools you can employ to help you work out what that special number is.  Do the work and find out what turnover at what margin gets you the profit you want.  That is set by you.  For example, you have worked out that $20m in revenue at 15% margin, gives you the profit you want.  Now you go to market and make that happen.  That’s how you know you are winning or not.   

Here’s another tip.  A high margin play is doing the exact same process.  Can you see the math?  $20 million in sales at 15% is the same as $15 million in sales at a margin of 20%.  You might say you won’t win any work at that margin because you will be too costly, but the beauty is you don’t need more sales, you need better customers, and less of them.  Go find them. 

Why you should raise your prices 

Being cheaper than your competitors can be useful for attracting buyers and this is more often the case when the market is tight.  More often than not this strategy is counter productive.  The trouble when you compete is you don’t know what you’re competing against.  Dodgy builders for example, they are cheap and quality is a problem.  Are you competing against that? 

Selling and pricing is an interesting area of psychology.  Lower prices will signal a different message to different buyers.  High prices signal something else.  Remember people buy on emotion and justify their decision on logic.  Price is pitch to the audience you want to target.  Get that target right. 

Criminal & Civil Non-Compliance 

As much as I dislike discussing this topic, it is an area of failure and must be understood because it’s the only way you stay away from these problems.   

Civil 

  • Misrepresentation by a director or another officer of the company. Including providing false information to investors. This may be in relation to the financial statements of the organisation, or other matters such as directors’ salaries or business plans.  
  • Failure to exercise due care and diligence when managing or carrying out the duties associated with their role. The law says that directors must take reasonable steps to ensure that they make informed choices, and that these decisions will not cause harm to the company in any way. 
  • Breaches of directors’ duties under Corporations Law, such as: failure to act honestly or in good faith for the benefit of all shareholders, failure to declare conflicts of interest, or trading while insolvent. 
  • Breach of fiduciary duties by a director or officer, meaning they fail in their duty to act in the best interests of the company rather than for themselves personally.  
  • Breach of disclosure requirements, such as insider trading laws where a director gains an advantage by using confidential information about a company which is privileged or otherwise not generally available to others. 

Criminal 

Business fraud is a serious, ongoing issue for businesses across the globe and research through the years has consistently shown that fraud is one of the most commonly cited reasons for total business failure, bankruptcies and insolvencies of small businesses within the construction industry.  

Effective office administration is critical in ensuring compliance with regulations and reducing the risk of fraud from within the business. Internal control systems, audit reports, and accurate financial record-keeping can all be used to monitor business capital. All of the above will provide you with greater oversight and improved control. Implement internal control systems to adequately and reasonably monitor employee activities with the intention of detecting irregularities, and preventing any abuse of company resources.  

Internal control methods 

  • Yearly risk assessments to identify and mitigate risks related to business fraud 
  • Separation of duties between staff members 
  • Provision of adequate employee supervision (I’m not talking micromanagement but your employees should have access to an immediate line manager who provides adequate supervision) 
  • Yearly external audits to help identify any potential fraudulent activity 

Other forms of criminal non-compliance with corporate law include: 

  • Insider trading: The use of confidential information belonging to another person or organisation to gain an unfair advantage in trading, resulting in personal gain through investment related activities. Insider trading can result in severe consequences for both businesses and individuals. 
  • Bribery: When money or other non-financial favours or other incentives are provided with intent to influence a person’s decisions relating either directly or indirectly with the company’s business activities. Bribery is prominent in the construction industry due to the nature of the industry’s operation and the lucrative contracts involved. 
  • Tax evasion: Deliberate non-payment or underpayment of taxes, in this context, the taxes of your business. Tax evasion can take various forms such as failing to report all income or claiming false deductions or credits. It’s a serious crime that can result in fines, penalties, and even imprisonment. It is important to note that tax evasion is different from tax avoidance, which is the legal use of deductions, credits, and other tax strategies to reduce tax liabilities. 

Effective office administration is just one aspect of a larger framework for maximising your business’s potential, but it’s a crucial one.  

There are, of course additional moral and ethical reasons for financial compliance in addition to the reasons mentioned above, and it’s worth remembering that the activities of your business, including what it does (or fails to do) can have a significant impact on your business partners, suppliers and your clients.  

It’s important for you to be aware of how to effectively manage office administration so that you can apply it to your own business and reap the benefits that it can bring. Not only will the advice and information above help you to avoid fines and penalties, but it’ll also ensure that you’re conducting your business ethically and with the utmost integrity.

The Cost of Poor Management

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two cartoon men in a sinking ship

Exploring the Cost of Poor Management in Construction

The construction industry is a complex and dynamic sector that requires skill and expertise in order to successfully navigate. Management experience can be gained at various levels through formal/non formal education or over time through innate organisational learning and on the job experience. However, poor organisational management is still one of the leading causes of business failure in the industry.  

Business can completely fail based solely on deficient management processes. The problem with this is many businesses (especially in Construction) rely on additional employees to provide their goods and services. If you’re reading this, the chances are you’re already an active employer or are considering employing staff in the near future, and thus it’s not just the business owner that’s affected by the closing or overall failure of a business, but the employees of those businesses and potentially their families as well. 

What will it take to ensure your business thrives? It’s important to take an initial step back and understand the bigger picture. By identifying potential risks and taking action to mitigate them, you can end cyclical pattern of business failures. Some issues are common and can be easily prevented with the right approach. If you take the information in this post away with you, consider, and apply it, together we can help to disrupt the industry’s cyclical nature of business failures. Many management issues are common and can be easily prevented.  

Significant Factors and Determinants

1. Inability to manage the scope of projects

The big one – an inability to manage the scope of projects. This occurs when you take on a project that’s too large for its current resources and capabilities or when you underestimate the complexity of a project. Either way, the result is often a project that goes over budget, runs behind schedule, and is usually of poor quality. This not only harms the company’s reputation, but will lead to a cash crunch.

  1. Have a clear understanding of the project scope and objectives by carefully reviewing project plans, specifications, and contracts in addition to understanding your own capabilities and identifying any areas that may need improvement in order to fulfil projects before these are taken on.
  2. Implement a project management system that allows for better control and oversight of project scope. This can be managed in house or outsourced to competent third-party project managers.
  3. Invest in effective training and development for your management teams and other employees to ensure they have the necessary knowledge and skills to effectively manage projects.

2. Lack of requisite expertise for a particular project

Another issue sitting under poor management is a lack of requisite expertise for a specific project or projects of a particular nature. This can happen when you take on a project that is outside of your area of expertise, or when you lack the necessary knowledge and skills to oversee the project. This can lead to costly mistakes, delays, non-compliance with finance and safety regulations and fines or other financial losses.  

The Millennium Dome in London was a well-documented example of a project that was managed by people beyond their expertise for the project. The project was plagued with management issues from the beginning, with a lack of clear direction and poor communication between the various stakeholders. It became apparent that although the project’s management team were experienced, they lacked the necessary expertise and experience to oversee a project of this scale and complexity. As a result, the project was plagued with delays, cost overruns and ultimately a lack of public interest ensued. The project was considered by the press to be a failure. This example serves as a cautionary tale for the construction industry, highlighting the importance of proper management and expertise in ensuring the success of projects. 

It is important to understand that business failure isn’t solely dependent on a single project, although there are plenty of stories I can recount where it was only one project, but rather the result of multiple projects and the problems that may have occurred within them. This can be seen as a pattern of poor management practices and decision-making that ultimately leads to the downfall of the company. It is essential you review past projects and identify any areas of concern, thus improving the service you provide to future clients. 

3. Poor financial management skills

Poor financial management skills is another area that can lead to business failure. This can include issues such as inadequate cash flow management, poor budgeting, and a lack of financial oversight. These issues can quickly spiral out of control, leaving a company in a precarious financial position. 

  • Inadequate cash flow management can lead to a lack of funds to cover operational expenses, resulting in the company being unable to pay its bills and meet its financial obligations. This can also cause delays in project completion as well as penalties and fines. 
  • Poor budgeting can lead to a lack of financial predictability and an inability to identify areas where cost-cutting measures need to be taken. This can result in a company overspending and becoming financially overextended. 
  • Lack of financial oversight can result in a company taking on too much debt or investing in projects that are not financially viable. 

Imagine for a moment, you’ve just landed a big contract to construct a bespoke luxury housing development. Excited by the opportunity, you jump in head-first and start making all the necessary arrangements to begin construction. But as the project progresses, you start to realise that you didn’t fully understand the scope of the project, or complexity of the work and the resources that would be required to complete it. Despite your best efforts, you find yourself struggling to keep up with the project’s demands, and before you know it, you’re running out of capital. The bills are piling up, and you’re unable to pay your suppliers and subcontractors on time. Contractors are refusing to work, you’re behind schedule and your high-profile client isn’t happy. As word gets out that you aren’t handling business, your reputation begins to suffer.  

Similar real-life scenarios are common in the industry, and many small home builders find themselves in financial difficulty, I want you to be consciously aware of how poor financial management can quickly spiral out of control and lead to failures across the board. With proper planning, budgeting, and financial oversight, the above scenario could have been avoided. As always, the key is to take a step back and take a look at the bigger picture, then take appropriate action to mitigate any risks to your business.

4. Poor operational management

This is the silent killer.  It can be attributed to the fact that many construction operators are owned and run by individuals who have limited experience in the industry. These individuals may lack the necessary knowledge and skills to effectively manage and run a business once this grows beyond a certain point, ultimately leading to poor decision making, lack of strategic planning, and inability to manage industry and economic challenges. 

Operational management failures aren’t limited to this area though and poor supply chain management, inadequate staffing, along with poor communication are all determinants to poor operational management and can really hurt your business. 

Poor strategic management can include issues such as a lack of clear and defined goals, poor market research, and a lack of strategic planning. 

As you can probably tell by now, investing in training and development programs for employees, managers, and decision-makers is crucial. By building their knowledge and skills, you can help them grow along with your company. Additionally, consider hiring experienced professionals with a proven track record in the industry to lead your company. This might mean bringing in an advisor or consultant to provide support and guidance to your business leaders. By acquiring the necessary expertise and experience, your company can not only perform well, but also outshine competitors and exceed client expectations. This combination of strategies will lead to growth and success, as the data clearly shows. 

Remember, you can buy, build or borrow.

To conclude, and to address the question of what is ‘The Cost of Poor Management in the Construction Industry’? Potentially the difference between the growth and success or decline and failure of your business and possibly the jobs and livelihoods of many. 

Business failures in the construction industry can be attributed to a combination of internal and external factors. Internal factors, such as poor financial management skills and inadequate operational management, can be controlled and prevented through proper planning and the implementation of sound policies and processes. External factors, such as changes in market conditions and economic downturns, are typically out of a company’s control. However, by understanding the potential risks and implementing strategies to mitigate them, you can increase your chances of success in this highly lucrative industry and minimise your likelihood of failure. 

How much is your company worth? How to value your Australian company

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How much is your company worth?When you’re considering selling, you’ll need to work out how much your company is worth, which can be challenging. 

A subjective judgement, in other words, what you’d like it to be worth, or hope it will be worth, is insufficient. There are many different recognised ways to value your company objectively, but there’s also a lot of confusing and conflicting information on the internet about how to do it!

That’s why I’ve put together this article that discusses what a company’s valuation means, the factors that influence a valuation, and some of the more common methods of company valuation to help you get a better understanding of how to arrive at the right figure.

Let’s get stuck in…

What is a Company Valuation?

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A company valuation is an objective assessment of the market worth of your business. It can be used when you are considering selling your company, merging with another company or seeking further investment in your business to help buyers, investors, and other stakeholders make informed decisions about your current situation and future prospects.

Factors That Influence a Company’s Value

As I mentioned, there are many ways to value a company and many factors that affect a valuation. Here are some of the most common factors affecting valuation:

1. Description of the company’s financial health (profits, cash flow, revenues)

A company’s valuation depends on how well the company is currently doing, as well as its future performance. A potential buyer or investor will want to understand the company’s history and how key performance indicators have been trending over time. Revenue, profit and cash flow are the most important vital signs for the health of a business, and these should all be moving in a positive direction if you are hoping to sell your business for maximum return.

2. Company’s assets and liabilities

To fully assess your company’s value, you need to work out the net assets, as this will factor in some of the valuation methods explained later on. Net assets include all your fixed and current assets, such as property, vehicles, equipment, trade debtors and cash at the bank. 

Liabilities include long-term loans, short-term loans and credit cards, as well as your trade creditors and any bank overdrafts. To calculate your net assets, deduct your total liabilities from your total assets. Your net asset number is a snapshot taken at a chosen date of the net worth of your company.

3. Market conditions and the economy

The current prevailing conditions in the global, national and even local markets can affect your company’s valuation. When the economy is doing poorly, for example, in periods of very low growth or recession, there may be reduced demand for buying and selling or investing in businesses, especially those that are higher-risk, such as early-stage start-ups. This will drop the company’s valuation lower. When markets are buoyant, company valuations may be higher or even overpriced.

4. The company’s reputation and customer base

Your company’s valuation will be affected by how you are viewed in the market. Does your brand have a strong reputation and loyal customer base? A loyal and recurring customer base suggests predictable and consistent income flows, which will result in a higher valuation.

5. Potential for future growth and profitability

Investors and purchasers are attracted to companies where there is a high potential for growth and profitability. A plan for future growth coupled with evidence of high historical growth will push your company valuation up.

6. Market size and competitors

The larger the market size, the bigger the potential for your company and consequently, this can push up a valuation. If you operate in a highly competitive market, this is likely to adversely impact your valuation. However, if you are in a large market with fewer competitors, your valuation will likely be higher than a comparable company in a smaller market with more competitors.

7. People

Your company’s valuation is likely to be affected by the management structure and the talent you have in place. Companies with a strong management team and motivated staff will contribute to a higher valuation than if you are a sole owner with limited resources and no one to delegate to. 

Methods of Company Valuation

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Company valuations can be tricky because there are multiple ways to do it. This can make it difficult to make comparisons between different opportunities. These are some of the more common ways you could value your company.

Book Value

The Book Value, sometimes also known as Net Book Value, or Asset-Based Valuation of a company is calculated as the total assets less the total liabilities. It is sometimes expressed as Book Value Per Share (BVPS), which can help potential investors or buyers to make comparisons with other companies of different sizes. This calculation can be complicated if there are significant intangible assets to value.

Entry cost

This valuation method reflects the cost of setting up the business from scratch. It includes all the costs of purchasing assets, staff recruitment and training, building a customer base, product development etc., to arrive at a starting valuation.

Times Revenue Method

This method of valuation applies a multiple to the current revenue to arrive at a valuation. The multiple is determined by industry and economic factors. Typically the multiple is between 1-2, though it could be as high as 3-4. Sometimes the multiple is lower than 1.

Liquidation Value

The Liquidation Value is the amount that could be generated by selling off all the company’s assets. This is sometimes used as the lowest value that a business might be worth to determine the floor in a range of possible valuations.

Discounted Cash Flow

This method of valuation takes into account the time value of money, in other words, it incorporates the impact of devaluation of currency due to price inflation. Discounted cash flow (DCF) estimates the value of an investment using its expected future cash flows discounted to their current value. If the DCF is higher than the current cost of the investment, this may be a good opportunity. If DCF is lower, this may not be a good opportunity or it may be that more analysis is required to make an informed decision.

Capitalisation of Cash Flow

The Capitalisation of Cash Flow method of valuation values a company based on expected cash flows capitalised using a risk-adjusted rate of return. This is a more complex valuation method requiring a few steps:

  1. Determine the average post-tax net income, also known as Free Cash Flow (FCF), for the next 12 months
  2. Divide this by the capitalisation rate (which can be calculated as Weighted Average Cost of Capital – the sustainable growth rate per annum)

Price/Earnings Ratio

The price-to-earnings ratio (P/E) is the relationship between a company’s stock price and its earnings per share. Earnings per share are usually calculated as earnings for the past 12 months divided by the weighted average number of shares. Companies that aren’t listed on a stock exchange will often have a P/E ratio around 50% lower than a comparable quoted company, as these are seen as riskier investments.

Challenges and Pitfalls in Company Valuation

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As you can see, there are many ways to calculate the value of a company. Using incorrect data or an inappropriate valuation method can lead to issues with decision-making, resulting in expensive mistakes.

Common mistakes made in company valuation

There are a few mistakes that it’s all too easy to make when valuing a company if you aren’t careful with the data you are using.

Simple maths errors

Check all calculations for any mathematical errors as this sort of problem is more common than you might imagine.

Not using the correct multiple

When using the Revenue times method, the correct multiple will be determined by reviewing comparable sales of similar businesses in your industry. However, the data should be analysed to ensure that there are no outliers such as businesses sold for abnormally high or low multiples, businesses sold more cheaply, for example to family members or other anomalies that could skew the data.

Not using the right earnings

There are different ways to calculate earnings – EBITDA, SDE, Net Income, Cash flow etc.). The most commonly used is EBITDA, but this can overvalue a small company, so choosing the correct earnings calculation is important when valuing a company. 

A good rule of thumb is to use EBITDA for a company with earnings over AUD $2m, use SDE for a company with earnings below AUD$1.5m and for those companies with earnings between AUD$1.5-$2m, use SDE for an individual buyer and EBITDA for a strategic buyer or private equity investor.

Using the wrong valuation approach for the company size

Some of the valuation methods, such as Asset-based valuation or DCF may be unsuitable for smaller companies because they can result in undervaluation. 

Basing the valuation on future performance rather than historical performance

Many business owners will want to value their business based on potential earnings rather than past results, especially if high growth is expected. However, buyers tend to want a valuation based on the average results from the past 2-3 years.

Using cash basis accounting statements rather than accruals basis

When calculating a company valuation, it’s vital to use statements made up using accruals basis accounting which include amounts committed as well as amounts received and paid out in the period in question.

Implications of inaccurate valuations

If your business valuation is incorrect, this could lead to problems with investors or buyers. If your valuation is too low, this could attract the wrong kinds of investors or could impact your ability to raise future funds. 

If your valuation is too high, it may be harder to find a buyer or investors and could send the wrong signals about your long-term business strategy. 

Getting the right valuation is, therefore, vitally important for securing the right buyer or investor for your business, and this is where you’ll benefit from professional support and experience in the art and science of business valuations. Contact me at 0448 000 010, message me on LinkedIn or email me at eddie@eddiesentore.com

Why not take the ‘business health check’? – a FREE 12-question business assessment to give you insight into your company’s current strengths and weaknesses.

 

Top Reasons for Builder Bankruptcy

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reasons for builder bankruptcy

Navigating the Reasons for Builder Bankruptcy: Expert Guidance

The construction industry is a vital and dynamic field that plays a critical role in shaping the built environment as we know and appreciate it today. From towering skyscrapers to cozy, contemporary homes, the construction industry is responsible for designing, building, and maintaining the infrastructure and buildings that support our daily lives. It’s an industry that requires a combination of creativity, technical expertise, and robust business acumen to navigate successfully. The industry offers almost endless opportunities for growth, innovation, and success, but it also comes with its fair share of challenges. 

Competition in the industry is fierce, especially between older generations of business and newer firms. Construction companies like yours need to constantly strive to stay ahead of the competition. But it’s not just the competition that builders have to worry about; market volatility, pandemics, changes to the economy, regulations, and technology can all disrupt your operations and supply chains, leading to financial difficulties later down the line. The question is, why are builders going bankrupt? And more importantly, how can you avoid making the same mistakes? Read on. 

Old vs New 

The competition in the construction industry is fierce, especially between older generations of business and newer firms. While newer companies often have a technological edge, older generations tend to have the experience, industry knowledge, and contacts needed to secure the meaty contracts. As a result, bankruptcy is a common reality for many builders and smaller construction firms. Smaller companies often have less capital and fewer resources to fall back on than their larger competitors, making them more susceptible to backlogged invoices and general financial struggles. It’s a steep, slippery slope that can lead to bankruptcy if not managed correctly. So, what can smaller builders do to ensure that their company doesn’t see the same fate as countless others before it? The answer lies in understanding the challenges and being proactive in finding solutions. 

  • Diversify your portfolio by taking on a variety of projects, rather than relying too heavily on one or two. This can help minimise the impact of a single project on your overall business. 
  • Include contingencies in your pricing for going over budget on projects. These contingencies should account for unexpected costs and delays, and help ensure that your projects stay on target. 
  • Adopt effective time management and scheduling to keep your projects on track and avoid delays. 
  • Carry out work for construction companies that are bigger than yours, you can leverage the success of your competitors and potentially minimise the risk of the primary contractor going bankrupt as these companies tend to have greater financial stability. 
  • Put contingencies in place to access emergency cash through partner agreements, lenders and suppliers, so you’re prepared for any unexpected financial difficulties. 

Partner/supplier bankruptcies 

Your suppliers are the lifeblood of your business, providing you with the materials and equipment and sometimes labour you need to complete your projects to spec and on time. But when one of your suppliers goes bankrupt, it can have a devastating impact on your operations and potentially your finances. 

Imagine this scenario… 

You’ve just landed a huge contract and are preparing to start work on the project.  You’ve spoken to the client, met them, surveyed, quoted, ordered and paid  for all the materials you need from your suppliers, and everything is set to go. But then, out of the blue, one of your largest suppliers, a well established firm goes bankrupt. Suddenly, you’re left without the materials you need to complete the project and you don’t even know if you’ll be able to get the money paid for the materials back let alone if you’ll have the cashflow to repurchase the materials you just bought. What an absolute nightmare. You’re forced to scramble to find new suppliers at the last minute,  causing unanticipated delays, increasing costs and hurting your previously stellar reputation. This is a new client and they’re not happy. 

The project’s cancelled. If you’re unable to pay your own bills, it could lead to a chain of bankruptcies, affecting your subcontractors and other businesses within your supply chain. 

The key to avoiding this type of scenario is to be proactive in managing your relationships with suppliers. Ensure you’re regularly reviewing their financial health and credit ratings, and have backup suppliers in place in case of emergencies. Additionally, it’s important to have a robust risk management plan in place, so you can anticipate and mitigate the potential impact of supplier bankruptcies on your business. By taking these steps, you can reduce the risk of supplier bankruptcies and protect your business from the devastating effects of supplier failure. 

  • Build strong relationships with your suppliers: Develop a good rapport with your suppliers and build a sense of trust and loyalty. This can help you get the best prices, better lead times, and more flexibility when things go wrong. 
  • Be prepared for emergencies: No one can predict when a supplier will go bankrupt, but by being prepared for emergencies like these, you can minimise the impact of a potential supplier failure on your business. Have a list of backup suppliers, store a cash reserve, and ensure a robust risk management plan is in place. 
  • Keep an eye on your suppliers: Regularly monitoring your suppliers’ financial performance, credit rating, and payment history can help you identify potential problems. 

Running out of cash 

One of the biggest challenges that small construction companies face is cash flow problems and a lack of working capital. Cash flow and working capital are critical to the financial health of any business, but they can be especially challenging for smaller construction firms, margins can be small in the industry and expenses tend to be high. 

The problem is that small construction companies often have limited cash reserves and rely heavily on payments from clients to cover expenses. Before you know it, the cash flow dries up, and you’re left scrambling to pay bills and keep your business afloat. 

But it’s not just about cash flow, working capital is also a key factor. Working capital is the amount of cash a business has available to cover short-term expenses, and it’s critical for small construction companies to maintain an adequate level of working capital. Without it, you may find yourself unable to cover unexpected costs, meet your obligations, and take on new opportunities. 

  • Stay on top of your cash flow: Regularly monitor your cash flow, and identify potential problems early on. This way you can take action before it’s too late. 
  • Diversify your revenue streams: Don’t put all your eggs in one basket, diversifying your revenue streams will help protect your business from the impact of a single client or project. 
  • Hire a business or finance advisor: A business or finance advisor can provide you with valuable advice and guidance on managing your cash flow and working capital. They can help you create a budget and financial plan, identify potential problems, and provide you with strategies for addressing any identified issues. 
  • Maintain positive relationships: With your bank, vendors and suppliers, this can help you to access credit in the event of an emergency, get better terms on payments and negotiate more favourable conditions. 

Beware of over-leveraging 

Imagine a small construction company local to you, “Builder Inc” specialises in building luxury homes. The company’s had a record-breaking few years and they decide to expand their operations by scaling up operations and taking on more projects and borrowing more money on top of existing debt in order to finance them. They take on several large projects at once, thinking they can handle it all. But as the projects progress, they realise that they’ve bitten off more than they can chew. 

The projects start to run over budget, and the company struggles to keep up with the demands. They find themselves constantly chasing payments from clients and struggling to pay their own bills. Their resources are stretched thin, and they can’t keep up with the quality control and safety standards they’ve set for their own operations. The company suffers from bad management and the company’s reputation suffers as a result. They start losing clients. 

The beginning of the end 

As projects continue to run behind schedule and over budget, the company’s cash flow starts to dry up. They can’t keep up with the payments on their loans, and they start defaulting on debts. Have you started to notice the trend? Bankruptcy doesn’t generally happen overnight, it’s usually a series of losses that traject the business into a downward spiral, and before they know it, they’re in financial difficulties and on the brink of bankruptcy. 

This is a perfect example of a company over-leveraging to try to grow and expand too quickly, without considering the potential consequences.  

By taking on too many projects and borrowing too much money, builders put themselves in a dangerous financial position, and ultimately, it led to their downfall. It’s a cautionary tale for savvy business owners like you who are looking to expand and grow their operations, that it’s important to take a measured approach, consider the potential risks, and be mindful of their debt-to-equity ratio in order to ensure and ultimately preserve the longevity and financial stability of your business. 

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