The main reason small (and large) builders go under

Few lessons are more powerful and apparent than real life experiences. A couple of weeks ago I received the email below from a local builder in response to an article titled ‘the 12 biggest bookkeeping mistakes builders make’. I’m sharing his response with his permission after removing his persoanl details. Hands on experience can be expensive, learning from the experience of others is intelligent. Hopefully you get something from this.

Hi Kurt,

Just had a look through 12 bookeeping mistakes.

The main reason small [ and large ] builders go under has been missed again.

In fact I have never read or heard any one reveal the actual biggest problem

As a builder who has done 2 part 10s,and 1 bankruptcy it took me ages to learn what I was doing wrong.

Being in control of monies which were way in excess of what was actually mine, I consumed more than what I actually earnt.

Overcalculation of work in progress, and undercalculation of creditors [a great way to get an increase of your overdraft] equals a day of reckoning.

I have asked many builders what they would do if their personal finances were down and they had rates and school fees to pay ,what would happen if they received say a $25,000 progress payment what they would do. Invariably , all have said that they would pay the bills immediately.

I reply, but that ammount of money from the pp may not be yours and you may have spent someone elses money!

Not helping the situation … creditors wise, is that up to 30 days elapse before you even receive the account from your supplier.

In one instance, a builder I was mentoring purchased a new Nissan ute outright from his frame progress payment. I said to him ” Is all that money yours?” “What creditors have you got to pay from that?” He gave me a figure of what had been invoiced … it was near the end of the month, so I asked further… ” What is the value of your purchases on credit this month? “What ?” he said ” How would I know that? They havent been invoiced to me yet”

Every builder’s order supplied on credit should appear as a precosted order which is added to their creditors to be balanced against work in progress and debtors ….to know your real position.

When I was Estimator for ………….. they had a good system where the cost to finish a project at any one time was referred to as outstanding liability….which it certainly is…it would be good for builders to get their head around this concept.

That builder was before the BSA within 2 years of that, going for 1.6 million. The hole caught up with him on his day of reckoning as it had with me on 2 prior ocasions [ the bankruptcy was not building related but divorce and taxation related]

Since my last episode in 1996 I have stayed clean very carefully monitoring the disbursement of other peoples money which I control for only a short time. The behaviour of some builders is tantamount to a ponzi scheme, as it was, unwittingly with me.

Hope this sheds some light

Kind Regards


Remember to visit our new facebook page for your Free Builders Business