Unlocking Success Through the Art of Effective Financial Management
Financial management is crucial for the success of any business, and it’s especially important for those in the construction industry. Construction is known for its large projects, lucrative contracts, high overhead costs and high-risk opportunities, all of which can create many financial challenges for a business like yours.
1 - Problem: Management skills
You do what you do, and you do it well.
One of the obstacles to overcome when you grow as a business owner is developing skills that are not your core skills. It’s hard work keeping on top of the administration stuff, all the paperwork, paying the bills, collecting bills and working out which subbie has sent their bill in yet and what invoices you haven’t you haven’t sent yet. No doubt you have a helping hand.
Management skills, more importantly financial management skills is the next level. Most builders I know leave this stuff for their accountant and if you are big enough, the internal accountant. But if you are growing you are not likely to have an in-house accountant. A bookkeeper perhaps.
Management or more precisely financial management is what happens in between paying the bills and seeing your accountant. Accountants typically tell you a story about your history. This is how your revenue, your margin, and expenses and this gives you a profit and by the way, here is the tax bill.
What I am talking about here is your cash flow management, your budgeting or tracking, managing suppliers, getting the quote right and managing the project so it delivers on time and on budget.
- Solution: One solution is to get the right help.
Get in administration help and hire yourself a decent bookkeeping. Get the boring or mundane out of your head. Spend time on the key management activities. It will reward you. Don’t forget to get some help on the management activities. It will reward you also.
Australian business owners are facing a staggering $50 billion in unpaid corporation taxes - an unprecedented amount that has forced many businesses to close their doors. This tax is a problem. It creeps up on you before you know it. Easily managed. A good cash flow tool lets you know how much of the tax is building up over time. Also setting aside the tax burden as it accumulates into a separate bank account is a smart move. When the tax is due you have the money to pay it. Setting aside the money doesn’t mean you can’t use it to your advantage while it sits there. Linking this account to an offset account helps reduce any interest accruing on loans. A double benefit.
2 - Problem: High use of cash
The majority of insolvency cases are occurring among small businesses and contractors are among these. The firms typically have assets valued at less than $10,000 and represent a significant portion of corporate insolvencies compared to those with greater financial resources. The impact of these insolvencies is often felt more harshly due to the limited scope of their operations and their inability to weather economic downturns or other challenges as easily as larger firms.
For a variety of reasons, we still like the feel of cash. The folding. The brown paper bag. The trouble with this is that it is hard to control. Cash slips through your fingers easily. This makes managing difficult.
How do you know how much you have made and what you have paid for?
You don’t know, well, not exactly at least unless of course you are keeping a little black book on the side. What’s the point of that I say.
- Solution: Keep a record
This will help you to identify any areas of overspending. The right system will provide you with a greater general oversight of your finances, in turn helping you create opportunities to reduce costs and add value. A budgeting and forecasting system will identify trends in your company’s financial performance such as fluctuations in revenue or costs. This data can then be used to make informed decisions about where to allocate resources and how to adjust your operations to improve the business bottom line. You can enhance this process through the use of automated financial tools to create budgets, manage and analyse data.
3 - Problem: Overtrading
You remember the time when you first started in business and your biggest challenge getting enough revenue. Where was the next client coming from? If you didn’t have enough in the pipe, then you were likely to go broke.
Let me tell you about this other killer. Overtrading. If unchecked more of something will kill you. The difference with closing your business when you are under selling is the damage is minimal. With overtrading the damage is huge.
Overtrading basically means you are doing too much. In doing so your resources get tied up and you simply run out of cash. Any good builder knows going from building 6 houses a year to 26 will tie you up in knots especially if you don’t have the systems in place to manage this growth. You will also need to invest in cash to simply keep the wheels moving.
- Solution: Set realistic goals
Only take on projects that you know you can handle, both in terms of volume and complexity. It’s also important to have a system in place for monitoring your cash flow, so that you can identify potential problems early on. Start every new growth phase as if you are restarting your business. A good business adviser will help you through this.
4 - Problem: Trading losses
Another common and frustrating occurrence in the construction industry. Running a business at a loss can only happen for so long. At some point you will have to put more money into the business or shut shop. Now trading losses can occur for a variety of reasons:
- Buying a job, hoping variations will cover you
- Delay in supplies
- Rising labour and material costs
- Errors in estimating
- Poor project management
- Something out of left field, outside your control such as a non-paying client
- Solution: The trick to trading losses is staying ahead of the game.
Too many business owners look at lagging indicators. That’s too late! Identify leading indicators and manage them. If you have a detailed quote monitor that as purchase orders (preferably) or invoices, come in. Manage key phases of the build.
There are a multitude of project management tools on the market that can help with all this. Using a tool to anticipate unexpected costs and build contingencies into your work will allow you to stay ahead of the game, and offset any decrease in the project margin resulting from an increase in material costs or other unexpected expenses. Not only will this minimise trading losses, but you'll also have the peace of mind knowing that you have a plan in place to tackle any unforeseen challenges that come your way.
5 practical steps for success
- Track your cash flow: Tracking your cash flow is essential, this means having a thorough understanding of your income and expenditure. How much cash is coming into your business and what is going out on expenses. When you know and understand the comings and goings you can measure and manage it.
- Set financial goals: Setting financial goals can help you to focus your efforts on specific objectives that will improve your financial management practices over time. For instance, setting goals such as reducing your overall debt by 20% within the next 6 months or increasing profits by a certain percentage or increasing revenue by a certain percentage or perhaps it is targeting marketing statistics to evaluate the performance of your marketing spend.
- Accumulate and allocate funds: Having a reliable source of saved funds can help cover any costs. I spoke about tax earlier. The same can apply to you. Setting aside for your personal use will then separate business and personal use of business funds.
Effective financial management is crucial for the success of any construction company. By implementing the above strategies, such as setting realistic goals, monitoring your cash flow, and investing in training and development, you can mitigate any industry-specific risks to your business and build it to be both sustainable and profitable.
The key to survival is to be proactive. Get and stay on top.