There can be a fine line between creating a flourishing, successful construction company and keeping your company from a path slowly creeping toward insolvency, and eventually even bankruptcy. Despite an expanding industry, providing more work than most companies can keep up with, many construction companies across the country are running into cash flow issues and are failing, despite being profitable. The dividing line between bankruptcy and success lies within a few key components of your business’ operations and management.
Cash Flow Management
A good cash flow management system is imperative for any construction company to be successful. Proper cash flow management should monitor, analyze and optimize the WIP (Work in Progress) of your business while balancing this against your expenses. While a positive cash flow means your business is operating smoothly, marketing services negative cash flow is a sign of trouble and must be handled immediately. Accurate reporting is the most important aspect of cash flow management. Company owners and management must know immediately when there is a cash flow deficit, allowing for adjustments to prevent a profitable construction company from steering toward insolvency.
Construction companies must be able to operate with large swings in cash flow when executing a project. Materials, employees, machinery and other G&A costs can typically require sizable cash flow just to complete the project. For example, on a $1.2 million-dollar project you may collect $100,000 a month while you are spending $130,000 a month just to keep the project moving. Without regular reporting, you wouldn’t be aware of this $30,000 a month cash flow deficit until it is too late to correct it. In order to manage a deficit and correct it in a timely manner, you must know in advance if it is occurring.
Therefore, it is important that your company’s cash flow is regularly monitored and properly managed. Experts in the industry state this revolves 100% around reporting. Industry expert and financial specialist Robert Patin from Patin & Associates says “Throughout the years I have worked with Contractors, it is astounding the frequency in which these companies have struggled through project completion without proper Cash Flow reporting.
When working with my clients we have been able to gain significant cash reserves through proper cash flow management allowing them to reduce their financing costs significantly.” Regular reporting can make or break a construction company’s success, even an already profitable one.
If regular reporting depicts your company with a negative cash flow you can turn this around by cutting costs, cashing in on assets to keep you afloat during trying financial times, staying on top of invoicing and monies owed, attaining financing, working out vendor term negotiation, or getting creative with your operational materials, such as leasing large equipment rather than buying it. But again, when dealing with large swings in cash flow and large budget projects, it is crucial to know even before it happens when you are heading into such a deficit. Only then can you act fast enough to be able to fix it, otherwise a profitable construction company can essentially sleepwalk towards danger.
Project Budget Management
Assigning tasks and managing a project may seem like an easy task, but successfully managing a project budget requires both education and expertise. Netflix Construction companies with projects that do not stay within budget risk their reputation and often take large monetary losses for these mistakes. Regular reporting is an integral component of staying within your project budget.
A lot of construction companies do not utilize reporting. Regular reporting is necessary to understand completion estimates along the way and to alert you of budget problems with enough notice to do a course correction. In some instances, a change order may be necessary, requiring a budget increase from the client; spotting this is only possible with regular reporting. Recognizing and catching budget issues before they go wrong is essential to walking the fine line between success and bankruptcy.
Some straight-forward ways to manage your project budgets are to ensure you create a detailed project plan from the very start, regularly check in on the budget and analyze points of savings or points of excess spending, closely track the project’s progress, and be pro-active with any problems along the way.
Most projects will experience bumps along the way, however, most construction companies can’t afford to go over budget without damaging the company’s bottom line. Therefore, proper project budget management goes a long way in ensuring you keep your construction company successful and profitable. As Robert Patin explains “it is vital that at every level of project management there is understanding of budget variance on projects, and this at a minimum must be understood by the Project or Construction Manager.
The comparison of project completion to budget expense will allow for immediate action to be taken to assure project profitability; without this a construction company operates blindly.”
Automation and Keeping a Lean Business Model
Running a lean business and utilizing automation results in satisfied customers at the lowest possible cost to the business owner. Business process automation can make every day processes error-proof, more cost-effective, and can help lower your G&A. Efficiency, both in the office and in the field, goes a long way towards creating a profitable business; using automated processes can save your company time while increasing operational efficiency.
Most construction companies operate with a 5-10% profit margin so any opportunity to lower operating costs must be seized. Mr. Paten goes on to say “many of my clients have been able to increase their profitability immensely with efficiency and automation initiatives. Often business executives struggle to see the value beyond the implementation Nike costs of such systems. Often reductions in administration, labor and other areas can lead to significant returns on investment over time.”
Spanning anywhere from material purchasing, accounts payable or project management, there are many options for construction companies to incorporate automation into their everyday processes, and those possibilities continue to expand every year.
Even for a profitable construction company, there is a fine line between success and failure, and one or the other is often only a project or two away. Proper reporting, management, and oversight of your operations and financial performance Amazon are imperative to maintaining solvency and success.
Given the likely cost savings and financial insight gains that regular reporting and proper cash flow management can deliver, the question is less “can we afford quality financial strategists, operational investments and so forth” and more “can we afford not to?
Interesting related article: “What is cash flow?“