Late last year, directors of one Perth-based civil construction contracting firm were given what appeared to be great news.
Project summary reports indicated that many of the company’s projects were going swimmingly and the firm was on track to rake it in. This was particularly important as the company was undertaking rapid expansion which would see average monthly revenue rise from $600,000 over the 12 months to August 2017 to $1.5 million on a YTD basis over the 12 months to August 2018.
At that time, the directors were not provided with management accounts. No matter. Business was booming. Subcontractors were being paid. All was well.
By the end of February, the company was in voluntary administration. Unsecured creditors, including suppliers and subcontractors, were owed $4.26 million.
For starters, the financial controller who had provided the project summary reports resigned on December 22 after just seven months’ employment. A subsequent review of trading operations and preparation of year-to-date financial accounts revealed a dire financial situation.
Moreover, according to the administrator’s report published in May, the company’s failure was caused by several factors.
First, the lack of management accounts meant the company incurred significant trading losses as it expanded without management oversight in respect to those losses.
Those rosy project reports, meanwhile, had failed to account for all direct project costs and had thus overstated profitability.
Finally, a headline focus on project summary reports led to overhead costs totalling $1.2 billion (YTD 2018) not being adequately monitored.
This is not the first case of a building firm to strike trouble. Throughout 2016/17, 1,509 construction firms entered external administration according to ASIC data.
Moreover, according to one commentator, similar experiences are common.
In a recent interview, Phillip Cadusch, sales director – Australia and New Zealand at construction software provider Viewpoint, said having different systems for project management and accounting is common among smaller firms. Partly, he says, this can reflect principals lacking skills in business management.
He says this can create a disconnect whereby reports from one system differ with those from others. Instead, he says project and financial systems should be integrated and there should be a single point of truth for all project and financial information.
“Small companies have generally grown organically with guys in charge of businesses who are not business managers,” Cadusch said.
“What happens invariably with that organic growth is that you end up with two technology systems – one for your accountants and one for your operations. That can be MYOB and Excel or zero and Excel but it can easily be MYOB and some other disconnected system.
“So the guys who have grown the business and know construction and project management sit over in one system. It is often Excel. Some have incredible systems.
“But no matter how good it is, if it talks poorly or not at all to other systems, you leave yourself making decisions according to one system where the source of truth in the other system is different or lagging in time.”
To illustrate the importance of integration, Cadusch draws the analogy of the human body. Whilst healthy eating is beneficial, he says this needs to be coupled with suitable and appropriate exercise if the body is to be healthy.
In business, he says builders whose systems are connected can see their business more clearly and can make better decisions based on a sound understanding of what is driving costs, profits and cash flow. Where this is not the case, he said, principals are compromised in their ability to operate according to a clear vision of the future.
On a related note, Cadusch stresses the need for a single point of truth which covers both project and financial systems. This, he says, should be based on a central database from which information destined for both systems flows.
Take, for example, an invoice from a subcontractor. Cadusch says there should be a single database record from which information flows through into profit and loss reports, trade creditor reports and cash flow reports. Information from that same database entry, however, should be available to operational staff, who should understand that it is a subcontractor invoice, that it has retention attached to it, when it was paid, how much retention was held and when this is going to be released.
Where the invoice is sitting there as a singular entry in a database, both financial and operational staff can view information relevant to this and have confidence that the information is coming from a singular and correct source.
Where this does not happen, principals and others do not know which system (if either) is correct.
When it comes to integration, Cadusch cautions against simply having systems which claim to integrate with others. Where there are two systems, he says there will still be two different sources of truth.
As an example he points to one case of software which claimed to plug into MYOB. At one stage, the operational software altered the format of its date field. When this happened, for a time, data was being pushed between the operational and accounting systems but none of the date and time data was making the trip across.
The solution, he says, involves specific software which handles both operational and financial functions.
Without adequate financial control, Cadusch says principals do not have control over their businesses.
“There are businesses flying by the seat of their pants hoping they are profitable,” he said.
“Sometimes they are, sometimes they aren’t. It’s a bit of luck.
“Successful businesses don’t grow and thrive on luck. They thrive and grow on rigour, visibility and confidence that the data they are looking at is helping them to make great decisions. Who wants to spend their life running a business year in-year-out going ‘I hope I am going to make money’?
“Why would you not go ‘show me how much money I am making. Show me how much money I can make. Then if that doesn’t look good, I can make decisions to help me make money.’
“Don’t get to the end of anything and go, ‘how did it go?’ You should always know how it is going to go.
“A specific financial system will do that. Disconnected systems which are not designed for construction probably won’t do that.”