How to thrive in a tough industry

We work with business clients from all over Australia – predominantly in service industries. In our client journey blog series, we offer some practical tips for businesses based on our experiences. So far we have looked at expertise-driven businesses, as well as some of the special disadvantages that small businesses have against big ones.  In this piece, we look at those working in tough industries and what they can do to ensure continued business success. 

In article:

What are the tough industries?

Every industry in Australia is not the same when it comes to financial vulnerability and economic challenges — financial distress and insolvency hit certain industries harder than others. The Australian Securities & Investments Commission (ASIC) regularly releases statistics showing that the construction and transport industries are two of the hardest hit. Recent data would add the retail and hospitality sector to that mix.  

Summarising Australia’s tough industries and what can make working in them a challenge: 

• Construction — the construction industry is prone to project delays, cost overruns, and tight profit margins. Fluctuations in material prices, labour shortages, and regulatory compliance changes can also all have a substantial impact on profitability
• Hospitality — this includes restaurants, cafes, and bars. These can be financially challenging due to high overhead and staffing costs, tight profit margins, and seasonal revenue fluctuations
• Manufacturing — this industry is heavily affected by global competition, rising energy costs, and a high Australian dollar. Manufacturers must contend with offshore competitors with lower labour and production costs
• Transport —  trucking companies are substantially affected by rising fuel prices, the cost of equipment, and high competition which puts constant downward pressure on contract prices. 

What makes some industries tougher than others?

How might we summarise the pain points across those industries? 

• Supply chain vulnerability — whether it is fuel (transport), materials (construction and manufacturing) or food (hospitality), it is clear that supply chain interruptions can seriously hurt those operating in Australia’s toughest industries
• Over-trading — in tough industries the pressure is on to take up ever more work. So much so that the business can find itself quickly operating beyond its own capacity. This phenomenon is known as ‘over-trading’. One of the biggest direct impacts here is on available cash: The delay between the work itself, and accounts receivable coming due, can mean that the company has to spend before the earned cash comes in, in turn putting pressure on cashflow
• Excessive competition. Some of these industries (especially hospitality) are perceived as having a low barrier to entry. This in turn leads to added competitiveness putting downward pressure on prices. 
• Disparity of bargaining power (and thus lop-sided contracts). For example, in the construction industry it is the principal contractor who will negotiate with developers on the price of the job. After that, the price will simply ‘flow down’ to the sub-contractors with little opportunity for them to push back. It can feel like a ‘dog eat dog’ scenario — the construction company is caught in the middle between developers, subcontractors, trade unions and so forth. Furthermore, there is little margin for error as payroll and subcontractor invoices are due every month. 
• Poor capacity to obtain finance. Banks and other potential financiers are aware of how tough these industries are and, in turn, are often reluctant to lend to those in the industry. 

What do those toughing it out need?

While these industries are tough, they are also the mainstay of the Australian economy and most operators have the ability to do well, if they can get the right support. This means: 

• An honest assessment of their prospects in the industry. Can they afford to beat their competitors? What ‘special sauce’ do they have to be able to undercut their competition, whether through pricing, product or something else?
• The right processes and support to manage cash and business assets. Business owners in tough industries need to work smarter — not harder. This means getting away from the day-to-day and focusing on the strategic. Putting in place the right software and processes can go a long way to managing this. 
• Financial support. Maintaining profitability requires investing in technology, efficient supply chain management, and constantly improving productivity.
• An overview of their financial position – real time financial information is required. It is no good waiting until tax time and discovering that debtors is massively overdue and there isn’t enough in the bank to pay taxes. 

Who can help?

You may not be able to carry out all these steps on your own, but there is no shame in asking for help. The crucial support that might help your business includes: 

• Experienced businesspeople — you may be surprised how often businesspeople in completely different industries have gone through similar struggles and can offer valuable advice or your industry. In recent years there has been a growth in business coaches. Experienced businesspeople who personally support entrepreneurs on a regular basis. 
• Accountants. Accountants can help on a range of levels, from setting up KPIs and budget, to tax accounting, to cost accounting to ensure that individual product lines are profitable and worthwhile. 
• Specialist business advisors. These experts can help with strategy and ensure that you structure the business appropriately. For example, they may be able to advise whether equipment is best owned or leased in that industry, or whether a trading trust should be set up to own business assets. 

The journey forward in a tough industry 

Tough industries are the lifeblood of the Australian economy. With sensible business processes in place, there is no reason why any business can’t thrive in one of these industries. To prosper in these kinds of business, we suggest: 

• Ensure you have sufficient funding from day one
• Have ‘set and forget’ accounting software in place to alert you to any problems as they arise 
• Seek professional advice and support as soon as difficulties emerge.