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Consumer confidence is plummeting, there are record levels of insolvencies and half finished homes are littering the country...
And with interest rates at their highest levels in 20 years, it's not looking good for building companies that have been using new cash inflows to pay old creditors.
It’s clear for everyone to see that the construction industry is broken.
However, the majority of problems experienced by builders over the past 2-3 years are not new, with the exception of the supply chain issues and lockdowns, the risks to a building company's profitability have always been there, they’ve just been amplified due to the ‘COVID Boom’ which generated unprecedented demand in a flawed system.
It was a recipe for disaster and a situation that the big building companies with their large, highly incentivised sales teams willingly walked into.
In time, the situation will normalise, and everyone will carry on doing the same thing, while desperately praying to avoid a similar result.
But it will keep occurring, maybe not on the scale we have seen over the past 18 months, but building companies will continue to fail and liquidators will expect us to believe the losses all occurred in the last 12 months of a building company's life.
Why?
It’s because to say otherwise would open up a can of worms as to why these companies were allowed to trade for so long when they were clearly trading insolvent which is illegal and carries serious consequences for the directors of the company.
Why Builders Are Failing...
Which is why the charade continues and we are all expected to believe that these failures could not have been predicted or even prevented one, two or even three years earlier.
However, the truth is that a lot more could have been done by the licensing authorities, the accountants that compile the financial statements at year end, and the builders themselves.
Business is all about getting rewarded for delivering value along with pricing risk.
So if a residential building company is unable to generate a 10% net profit margin which typically requires a 33% gross markup on new construction, it’s because they are not demonstrating enough value.
In other words, their business model is failing, their marketing is failing and their sales process is failing.
Therefore, rather than complaining that ‘the consumer always chooses the lowest price’, which is nothing more than a victim mentality, they need to dedicate time to work on their business and fix their weaknesses.
A building company that is not generating retained net profit each year cannot grow safely and securely. So if they do expand without increasing their reserves, they are far more exposed to the economic cycles that wipe out the industry every 8-15 years.
Contrary to popular belief, it's very easy to grow a building company quickly. That is because positive cash flow can mask a lack of profitability for years.
The tricky part is growing a building company profitably, which requires TRUE net profit to be generated and retained year on year.
What's The Difference Between Net Profit And True Net Profit?
Net profit is something 95% of building companies believe they have made each year, but then realise they don’t have the cash to pay the tax due on that profit.
TRUE net profit is the amount of profit a building company has made once they factor in all of their liabilities including the TRUE cost to complete the contracts they have signed and the ‘Income in advance’ they have received from their current projects under construction.
Once these numbers have been factored in a building company's financial statements look very different.
So different in fact, around 50% of them would be able to get their building licenses renewed which is what should have happened to a lot of large building companies two years ago.
Once the forecast cost to complete the outstanding building contracts was factored in then it would have been very clear to the licensing authorities that these building companies were no longer viable.
However, by allowing them to continue taking consumers' money for deposits on future builds, they allowed numerous construction Ponzi schemes to be created and operate in plain sight all under the legitimacy of being ‘licensed builders’.
Construction Ponzi Schemes
This isn't anything new, construction Ponzi schemes have been operating for decades. However, just like Bernie Madoff’s notorious financial Ponzi scheme, they only come to light when cash inflows decline at which point there is not enough money in the pot to cover the outflows so the whole house of cards comes crashing down…
And then the liquidators tell us “The company was trading profitably until around nine months ago…”
However, in the vast majority of cases, the builders themselves are unaware that they are operating a construction Ponzi scheme.
This is because neither they nor their accountants have a good understanding of how construction financials work which leads to their accountant declaring large profits that have never been made and builders entering into payment plans with the tax office in order to pay tax on profits that were never made.
To gain a full understanding of how construction financials work, the margins you need to be operating on and the strategies that will enable you to charge more while delivering a better building experience to your clients, you need to read Professional Builders' Secrets.
Click on the link below to find out how you can get it for free.
