Canterbury’s “bloody problem”? No, not a major car crash, nor the Crusaders’ reflection on their Super Rugby campaign, rather a reference to the massive growth in the number of liquidations of building firms in Canterbury.
In the above article, reference is made to the 160-odd building companies that have failed since January 2015 – 60 of these in the current calendar year alone – leaving creditors more than $40 million out of pocket.
And there is no sign of the avalanche abating.
Sure, there are a lot more building companies out there now, in the wake of the biggest building boom New Zealand – and particularly Canterbury and Auckland – has probably ever seen.
Indeed the number of building firm liquidations that EY liquidator Rhys Cain is quoted in the above article as dealing with were “running at a higher percentage than usual”.
Nevertheless this doesn’t take away from the fact that more than $40 million has been lost to (mainly) suppliers and sub-contractors as a result, and there is inevitably more pain to come.
Logically, the Auckland market will be next to feel the growing pains associated with rapid growth in the building sector. And, while most people believe the building game is the only game in town to be in, many suppliers, contractors and subbies will find in due course that such blind faith will result in tears unless precautions are taken.
EY’s Cain, who spoke at a CreditWorks Christchurch function on the issue earlier this year, referred to some of the reasons why so many Canterbury companies had failed.
In the Stuff.co.nz article, Cain highlights “poor cash flow management, very tight margins, lack of experience in managing a business, and difficulties in obtaining and retaining quality staff.”
“Until suppliers are prepared to oversee payment profiles – and be prepared to address irregularities in credit behaviour before they get out of hand – I see little likelihood of a trend reversal in the escalating number of liquidations”
While some thought Christchurch’s post-quake building boom meant that, by just turning up you’d be rolling in gold, he states the obvious, that: “it’s not quite like that. You’ve got to have a good business brain.”
My observation is that these explanations are nothing new, and will continue to plague the industry – unless more attention is paid to the signs, and the symptoms are recognised at an early stage.
Time and again in previous articles, I have referred to the need for suppliers, contractors and others to maintain vigilance about the credit behaviour of their clients – not just “qualifying” them at the outset when initial supplies of product and services are being contemplated, but during the course of the relationship.
Things change. People’s credit behaviour changes, because of all the reasons outlined above – so you need to be one of the first to know when this occurs, and be ready to get to the negotiating table with the client before total failure occurs. Once the liquidators step in, the likelihood of you getting payment reduces to almost zero.
Clearly, the best indicator you can have on a business’s viability and stability is whether or not it is paying the bills on time.
And not just your bills – as often they will look after one supplier over another, depending on future needs – but on how others in the marketplace are getting paid.
With over 320 major New Zealand companies supplying CreditWorks with current debtor data – often provided on a daily basis – and representing over $1.7 billion of aged debt exposure, our CRISworks database provides the most comprehensive and transparent view in New Zealand not just of how these commercial enterprises are performing but also the odds on their future prosperity or survival.
Without wanting to keep beating the same drum, until suppliers of goods or services are prepared to oversee and take cognisance of payment profiles – and be prepared to address irregularities in credit behaviour before they get out of hand – I see little likelihood of a trend reversal in the escalating number of liquidations and debt losses prevailing in the industry.
The credit industry is full of clichés and, in parting, a couple spring to mind as being very pertinent in these situations: “Knowledge is power” and “Today’s loss is the smallest”.
Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at firstname.lastname@example.org or call him on 09 520 8133 to find out more.