For construction businesses, financial management is notoriously complex. Contractors have to deal with the ebbs and flows of their respective markets, project-based pricing and collections, rising operating costs and various other factors — not the least of which is bad weather!
Yet effective financial management is essential for a company to thrive. Here are some ways an owner can better manage their money.
Follow Strong Billing Procedures
Healthy cash flow — one of the most important aspects of financial management — depends on a business’s ability to both meet contractual obligations and receive timely payments. To this end, establishing a standard billing schedule for every job will make managing accounts less complicated and help keep track of monthly revenue.
When drafting contracts, clearly include payment amounts and when they’re due — and document penalties for late payments. Equally important is the need to clearly outline a process for change order approvals and invoicing that allows billing for additional work as soon as possible. Diligently follow the billing schedule as projects or project phases are completed.
To help ensure prompt payment, business owners should also make sure invoices are well-designed, detailed and include any necessary proof-of-work documentation. In this day and age, it is also essential for a business to offer electronic payment options to make paying quicker and easier. Last, be sure to set up automated reminders to regularly follow up on unpaid invoices.
Excel at Materials Management
Effective financial management also depends largely on how cost-efficiently business owners procure, store and use construction materials. Implement strategies to optimize all three of these actions while minimizing waste.
Begin by taking a hard look at how materials-related data is captured, organized and shared across projects. Does the business have a centralized system for doing so? Has the owner set up processes for tracking losses and proactively addressing how to prevent theft, mistakes and mismanagement? With the right system in place and technology supporting it, owners can minimize excessive and unnecessary spending on materials.
From there, be sure to address the timely delivery of materials. Supply chain slowdowns or disruptions aren’t in the news as much anymore, but they’re still a challenge for many contractors.
Some construction companies maintain inventories of critical and long-lead items to ensure they’ll have the necessary materials as jobs come up. But doing so entails paying for storage facilities and investing time and resources into inventory management. Another strategy is to diversify the business’ supplier base and include alternative local suppliers who can deliver materials of similar type and quality.
Keep a Close Eye on Labor
Nearly all businesses need to confront the tricky issue of “rightsizing” their workforces and paying employees competitively. Construction companies have the added challenge of doing all this in the midst of a seemingly never-ending skilled labor shortage.
One thing that can help is quantifying the business’ labor needs as precisely as possible. Determine how many workers are needed to complete each typical job task or how many are needed to work on each phase of the types of projects the business usually performs. Obviously, the owner will need historical data to make such determinations and set up a system for capturing this information on an ongoing basis.
Compensation, benefits and taxes are also major factors. Indeed, knowing a business’ true labor costs — often referred to as labor burden rate — is a mission-critical financial-management activity for construction businesses.
Embrace Technology
Using up-to-date and secure financial management software and mobile devices tailored to the construction industry can help streamline financial activities related to estimating, job costing, payroll and invoicing. The right combination of tech assets can help:
- Automate calculations and processes,
- Create more accurate estimates,
- Track a variety of costs and accurately allocate them to projects, and
- Generate the necessary documentation for your records, as well as for financial reporting.
As always, however, selecting the right tech tools for a construction business’s distinctive needs and comfort level is the hard part. A business should choose purchases and upgrades carefully — always with the goal of improving the clarity of its finances and the owner’s control of them.
Lay the Foundation
Managing cash flow, materials, labor and technology costs for a hardworking construction company may seem as difficult as laying a solid foundation on unstable soil. But with the right personnel, policies, procedures and computing tools in place, it can be done. CBM is happy to help review your construction company’s approach to financial management and target areas for improvement.
Contact Thomas Burton with any questions via our online contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from our office in Bethesda, MD.
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