Two numbers from this year that don't sit comfortably together.
In the June quarter, New Zealand construction firms grew sales 11% on the same quarter a year earlier, one of the strongest results of any sector, according to Xero's small business data. In the twelve months to March, 768 construction companies went into liquidation, more than any other industry and the worst run in eleven years.
The tidy explanation is that these are two different populations: the firms winning work and the firms losing it. Plenty of it is exactly that. But some of the companies that went under this year weren't short of work at all. They were carrying more of it than they could fund.
Think about the order things happen in when you win a bigger job. Materials go on the account. Subbies invoice you. Wages go out weekly whether or not anyone has paid you, plant gets hired, and depending on the contract you might be six or eight weeks into the job before you're entitled to issue a claim, which is the moment most people think the waiting begins, when you've in fact been funding the thing since the first delivery docket turned up. Then the claim gets certified, which takes its own time.
Retentions sit behind all of that. The usual mechanism is 10% withheld from each progress claim until it caps out at 5% of the contract price, half released at practical completion and the balance after the defects period, which might be six months and might be twelve. Across a year's worth of jobs a $2.6m contractor could be carrying $50,000 to $80,000 of retention money at any one time. It's money you've earned and invoiced, and it's the slowest money in the business. The trust account rules that came in on 5 October 2023 make it safer than it used to be. They don't make it arrive any sooner.
Xero has New Zealand small businesses waiting 24.1 days on average to get paid, and being paid 4.7 days later than agreed. That's a decent result by international standards, and better than Australia, where small businesses run 6.0 days late.
But that clock starts the day you issue the invoice, and it's the number your accounting software shows you, so it's the number you watch. The gap that decides whether you survive a growth year runs from the first dollar you spend on a job to the day the payment clears. Add the weeks before you can claim and the days between claim and certification, and for most contractors it lands somewhere between 50 and 70 days. Retentions sit outside that entirely, on their own much slower clock.
Rough numbers on a $2m contracting business, at a 5% net margin, which is about right for the trade and a long way below what most people outside it assume.
Once you net off what your suppliers are funding for you, a business like that has around 15% of annual revenue tied up at any given moment in work-in-progress, unpaid invoices and retentions. Call it $300,000. Now it grows 30%, to $2.6m. At that revenue, the tied-up figure goes to roughly $390,000, so the growth has cost $90,000 in cash. It's a one-off step up rather than a recurring cost, and the business would get it back if it ever shrank again, which is not much use at the time.
The extra profit on the extra $600,000 of revenue, at 5%, is $30,000. After tax, call it $21,000.
So a good year needs $90,000 up front and hands back about $21,000 a year. Four years of the additional profit to pay for the year you grew.
There are two more claims on the money before then. GST is the immediate one: on the invoice basis you owe it on what you've billed, not what you've collected, so a growth year raises your GST bill in step with your invoicing and slightly ahead of your bank balance. Provisional tax works the other way and is sneakier for it. The standard option bases your instalments on last year's residual income tax plus 5%, so a big year lets you underpay all the way through it. The shortfall lands as terminal tax after the year is finished, at roughly the same time your provisional instalments step up to match the new higher income.
None of which means the business is badly run. It's more profitable and more valuable than it was twelve months ago. It is also closer to running out of money than it has ever been, and if it does go under, the liquidator's report will say cash flow, and everyone who reads it will assume the business wasn't making any.
Start by working out your real number: first dollar out to cleared payment, with retentions counted separately because they behave differently. Not debtor days. Most people find it's longer than they thought.
Once you know it you can price it, at least in principle. If a contract ties up $80,000 of your cash for two months, that has a cost and it belongs in the tender. On competitively priced work where the head contractor sets the terms this is easier to say than to do, and sometimes the honest conclusion is that the job isn't worth winning at that price. That's a legitimate answer, and it's one very few people give.
Ask for progress claims and deposits wherever the contract allows. Plenty of businesses assume they'll be turned down and never test it.
And decide how you'll fund a growth year before you take the work on, rather than in the week you can't make wages. A bank will want to see last year's accounts, which is a reasonable thing for a bank to want and exactly the wrong direction to be looking for this particular problem. By the time your financials prove you can handle the growth, you needed the money two quarters ago.
Take the big job. Just don't book the win and the payment as the same event, and know how you're covering the distance between them.
Fundtap provides on-demand invoice finance for businesses across New Zealand and Australia. Connect your accounting software, pick the invoices you want paid early, and the funds are in your account within hours. No long-term contract and no all-in facility, so you can use it on the jobs where the cash gap actually hurts. fundtap.co