Running a lean, financially stable construction company is not always an easy task. It’s important, therefore, for construction companies to engage in better financial planning that allows them to save money, increase profit margins, improve cash flow and generally operate with greater efficiency. Seventy percent of Construction companies fail while profitable, predominantly due to cash flow issues. Don’t allow your business to be one of them.
Here are a few tips to help your construction company become financially stronger through better planning:
Plan to bill ahead of your costs: You should avoid using lines of credit or company funds at all costs to fund a project. You can front load your contracts to ensure you have enough money to get you through the bulk of the project—this shifts the financial risk onto the client instead of you as the contractor, and gives you enough to cover costs of materials before you have to pay your full expenses for labor, subcontractors and vendors.
Adjust payment terms for each individual project: Do not use a “one size fits all” payment plan for your work. Instead, create payment schedules based on the completion percentage for the project, and include clauses in the contract that require the client to meet certain payment milestones.
Manage the costs of materials: While you can’t control the prices of construction materials, you can plan for ways to manage how much those costs will impact your job. Try to minimize procurement costs as much as possible, and time out the purchases of materials to be spread throughout the job site as you’ll need them, rather than ordering them all at once.
Collect interest when payments are late: You should let your clients know about this policy and include it in your contract. The interest rates should be high enough that it discourages late payment. If the client is late on payment, stick to your guns as much as possible. Don’t waive the interest charges unless it’s extremely important you maintain a long-term working relationship with the client, and you believe charging the interest would damage that relationship.
Make sure materials are delivered exactly when you need them: Timely delivery of materials is crucial. Materials that arrive too late will stall the job, resulting in increased costs. If they are ordered too late, you may need to pay for expedited shipping, an extra (and unnecessary) expense. If materials arrive too early, they’ll need to be put into storage, which could result in additional costs if you do not have your own storage space available for them.
Maintain strong processes and automation: Automation and efficiency are crucial to running a lean, profitable construction company. It is especially important for maintaining profitability when the company is between jobs.
Strong financial planning is crucial to success in the construction industry. Contact us today to learn how our team of financial consultants can help.