BUSINESS HELPDESK HELP DESK
DON’T GET DRAGGED DOWN BY BAD DEBTS
Construction was one of the first sectors to recover after the initial shock of covid, but rampant price inflation could signal trouble ahead. Alan Tattler, Client Director of Specialist Risk Insurance Solutions, a BMF partner, has advice on managing risk.
IN THE AFTERMATH of covid, with government support via furlough payments and bounce-back loans to aid their cashflow, construction was quick to rebound. Total construction output increased by 12.7% in 2021 compared with 2020. The first half of 2022, however, is showing the first signs of slowdown as the effect of price inflation begins to bite. While the Office of National statistics showed construction output growth in the first half of the year, with both Q1 (+3.8% ) and Q2 (+2.3%), up on the previous quarters, Q2 also saw a drop of 10.4% in total construction new orders compared to Q1. In a sector known for narrow profit margins, the current inflationary pressures are presenting a serious problem, with SMEs and micro-businesses especially at risk. The cost rises they are facing must be passed on to customers to remain solvent, but with their domestic customers also impacted by the cost-of- living crisis, these businesses are being squeezed at both ends. So much so that some commentators believe that increased insolvency could rival inflation as the main threat to the UK construction industry.
The latest government figures show construction had the highest number of insolvencies of any sector in the 12 months ending Q2 2022, and a 101% increase over the previous 12-month period. The 3,665 construction insolvencies represent almost one fifth of all insolvencies in the year to June 30, 2022.
As the BMF’s strategic partner for the provision of business
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We all know that bad debts hit the bottom line. According to the CBI/Pearson report published in February 2020 – Infrastructure and Energy, fine margins, delivering financial sustainability in UK construction – the UK average for profitability across all industries is 17.9%, but average margins in construction are much lower, possibly as low as 2.6%. Yet a £5,000 bad debt at an assumed margin of 7.5% requires £67,000 of subsequent sales just to stand still.
insurance, we specialise in providing innovative risk management advice to builders’ merchants and suppliers. More than ever, merchants need to take precautionary action by employing a proactive credit management strategy and protection against non-payment as insolvencies rise.
Critical factors
The Office of National Statistics cites the annual rate of
construction output price growth as 9.6% in the 12 months to June 2022, the strongest annual rate of growth since records began in 2014.
Shortages of building materials and increased shipping costs have had an adverse effect, with energy another significant contributor to the rampant cost inflation we are experiencing. With escalating input costs across fuel, energy, raw materials, and wages set to continue, and other cost factors including the removal of the red diesel rebate
“Managing cash flow is a high priority for every business, so a key question is how do you manage credit risk at a time of increasing insolvencies?”
still to come, price inflation is set to continue into 2023.
These factors are likely to lead to an increase in late payments and pressure on cash flow. With project delays it is expected that developers and main contractors will push payment terms and look for cost savings from their sub-contractors and suppliers. This will in turn impact on the cashflow and creditworthiness of businesses forming part of the merchant customer base.
Managing risk Managing cash flow is a high priority for every business, so a key question is how do you manage credit risk at a time of increasing insolvencies? Trade Credit Insurance is a valuable protection to have in place and can assist in several ways. First, by giving access to detailed underwriting data that is more sophisticated than a simple credit check. This underwriter feedback will help merchants determine the credit worthiness of their customers when granting credit.
If they proceed with cover on a whole turnover basis, they will be able to trade with comfort knowing that their debtor book is insured for up to 90%. Many credit insurers include collection services for doubtful debts, resulting either in the money being collected on the insured’s behalf or their claim being paid. To find out more about Credit Insurance and other protection for builders’ merchants and BMF Members contact Alan Tattler at
srisenquiries@specialistrisk.com or on 07867 369939 BMJ
www.buildersmerchantsjournal.net October 2022
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