How to Keep a Close Eye on Profits (for Construction Business Owners)
We all know about two of the most helpful forms of reporting required by many institutions like Banks and IRS : Balance Sheet and Profit & Loss (Income Statement).
Without diminishing the importance of those two, this time I would like to mention a couple other great sources of information for your construction business.
In the past, I have talked about Statement of Cash Flow. Why is it important?
Because on paper you may be earning huge revenues, but you still have no money in your bank account.
It happens more often than you think.
The Statement of Cash Flows is different from Income Statement because most businesses use accrual method of the accounting. You may have earned let’s say $5,000, spent $1,000, so Income Statement will show that you have a Profit of $4,000. But, in reality, the customer hasn’t paid on the invoice yet, so you have NO CASH. Besides, things like depreciation and any other credit sales are not included into Statement of Cash Flow. You get a better picture of your cash on hand this way.
In construction company, there are even more options to obtain a more detailed analysis of your financial standing.
It all starts with estimates…
The person who creates bids is playing a huge role in profitability of the company. Poorly-derived bid can lead to a sale that has little chance of earning profit or leads to no sale at all. The estimates have to be carefully double checked, everything has to be taken into consideration, from including ALL costs associated with the projects to applying the right markup according to the desired margins.
It may be very valuable to track the usage and cost of equipment. Track the revenues and costs associated with each equipment that the company owns. The report may show that some equipment hasn’t been used enough and it would be better to sell it and rent instead. It also would show if the maintenance of one piece of equipment is too costly and it is better to replace it.
This one is obvious and has been used by you at some level I’m sure. You can see if your actual numbers are meeting your estimates, which is the important way not to make the same mistakes in the future. Make sure you attach every expense, equipment usage, labor, change orders, even a part of fixed expenses to each of your projects correctly. You also can analyze which types of projects are the most profitable and which ones perform very poorly.
Yes, it is important to analyze the job profits for each customer. If you notice unusually high or low profits that relate to the same customers or types of customers, you may want to rethink your partnership with them. Avoid working with some and build stronger relationships with others.
Every time I say don’t be afraid to say goodbye to the customers that don’t value your services I get those judgmental looks. But let’s look at numbers:
Let’s say you’ve been undercharging for your high-quality services, you did 10 jobs $10,000 each.
Now that you can prove your value and quality work you sign up clients that pay $30,000 per job but sure you will have less of those projects, let’s say you lost half of your clients (5 projects).
Well, this still brings you $50,000 more in revenue then if you would have kept the same clients.
I know those numbers are very rough, but try to plug in your estimated numbers and see what you could do.
It is a good idea to identify those crews that are the most efficient and inefficient. You will have the idea of your most productive people and how to make changes with the rest. I have mentioned the Parkinson’s Law before stating that the demand for something expends to match its supply. It’s applicable to this situation as well. If you give your crew a small task to be completed in 8-hour day, then even though they could do it within 5 hours, they will use 8 hours instead. Not all subcontractors are the same, but you should clearly communicate the schedule with your crew.
I know you may think right now: “I don’t have time for all this!”
Don’t be afraid to ask for professional help. Bookkeeping/accounting professional will save you more money with professional advice then you would spend on her/his services.
Contact me today to find out more about how I can help!