The Australian construction industry is facing unprecedented challenges, with a significant surge in business failures and insolvencies.

According to data released by the Australian Securities and Investments Commission (ASIC), the nine-month period from 1 July 2023 to 31 March 2024 saw over 7,700 companies enter external administration.

This represents a staggering 36.2 percent increase compared to the same period the previous year.

The construction sector is the hardest hit, with 2,142 companies going into external administration, accounting for 27.7 percent of all insolvencies.

Industry experts predict that this wave of insolvencies will rise to 10,782 by the end of the financial year, surpassing the peak of 10,757 in 2012, which was seen in the aftermath of the Global Financial Crisis (GFC).

The Impact on Construction Material Suppliers:

For construction material suppliers, the increase in insolvencies within the construction industry is alarming.

When construction companies fail, suppliers are often left with unpaid invoices, leading to significant cash flow problems.

The risk of bad debts increases, and suppliers may find themselves struggling to sustain their operations.

Suppliers are now faced with the dilemma of whether to continue extending credit to construction companies, many of which are on shaky financial ground.

The uncertainty in the industry necessitates a robust strategy to manage receivables and mitigate the risks associated with extending credit.

Additional Pressures Facing the Industry:

Recent data from CreditorWatch highlights additional pressures exacerbating the crisis.

Businesses are collapsing under the weight of cost pressures, rising interest rates, inflation, wage demands, and labor shortages.

These factors have contributed to a record number of payment defaults in recent months, with an increase of about 50% in the past year.

CreditorWatch’s CEO, Patrick Coghlan, warns that the combination of rising payment defaults and lower invoice values is depleting cash reserves and squeezing profit margins.

He notes that

“less cash coming in means businesses are having trouble paying suppliers, orders are smaller, inventories are running down, enough business can’t be done to meet payroll costs, and unemployment increases.”

The situation is dire, with research showing that almost a quarter of businesses will become insolvent within 12 months of their first default.

This risk increases to 42% if there is a second default. The deteriorating conditions are expected to persist, and it may take up to four cuts in the cash rate before consumers regain confidence in making discretionary purchases, which is unlikely before early next year.

How PencilPay Can Help During These Challenging Times:

In such turbulent times, tools and technologies that can streamline operations and secure payments become invaluable.

PencilPay offers a suite of solutions designed to help suppliers manage their accounts receivables efficiently and reduce debtor days. 

1. Onboard Customers with Online Credit Applications

Proper onboarding is crucial to minimizing payment hassles. PencilPay provides digital credit application forms that use company data to verify customers.

These forms also allow suppliers to store a payment method on file, offering security over the stock provided.

By ensuring that all new customers are properly contracted and have a verified payment method, suppliers can significantly reduce the risk of bad debts.

2. Automated Account Receivables Management

Manual processes are time-consuming and prone to errors. PencilPay automates the accounts receivable process, including sending payment reminders and processing payments.

This automation ensures that invoices are paid on time, reducing the burden on administrative staff and improving overall efficiency.

3. Custom Payment Plans for Struggling Customers

During tough economic times, some customers may struggle to make timely payments.

PencilPay allows suppliers to set up custom payment plans, bundling overdue invoices or setting up payment schedules that align with the customer’s cash flow.

This flexibility helps maintain customer relationships while ensuring that payments are eventually collected.

Conclusion

The construction industry in Australia is facing a significant crisis, with rising insolvencies creating a ripple effect that impacts suppliers.

For construction material suppliers, managing receivables and securing payments is more critical than ever.

PencilPay offers the tools needed to navigate these challenging times, providing robust solutions for onboarding, payment tracking, automation, and flexible payment plans.

By leveraging PencilPay’s capabilities, suppliers can protect their cash flow, reduce the risk of bad debts, and improve their financial stability even in the face of industry-wide uncertainties.

As businesses grapple with cost pressures, interest rates, inflation, and labor shortages, having a reliable accounts receivable solution like PencilPay can make all the difference in sustaining operations and ensuring long-term success.