Patricia Atallah is a director of Navigant Consulting, an international consulting firm, and author of “Building a Successful Construction Company.”

Take Action to Achieve Financial Stability

Subcontractors aiming to build long-term profitability have to keep track of bigger business trends and avoid shortcuts that will disrupt a steady cash flow and chances for growth.

by Patricia W. Atallah

As a construction business owner, you are painfully aware that you need “deep pockets” to succeed in the construction industry.

To win business, you must compete based on price, which creates a tendency to shave the bid at the expense of your profit margin. Once you’ve got the job, predicting and tracking cash flows and profitability are difficult. Payment streams can be altered, delayed, or derailed for a variety of reasons, some beyond your control. These problems can lead to cash flow crunches, “profit fade,” and losses.

With such uncertainty, how can you build profitability and long-term stability? 

As a business owner, you probably encounter no greater challenge than managing the financial picture. Your attention is focused on bidding on the right project, obtaining a fair price for your work, and completing the job cost-effectively. Concurrently, you must actively manage overall company financial performance. That’s a tall order requiring a good grasp of accounting and financial principles.

If you are weak on financials, make it a priority to learn the ins and outs of accounting and financial management, and rely on your construction accountant and construction-savvy bookkeeper or controller for support. Set aside quality time on a weekly and monthly basis to assess the following:

• Progress Relative to Goals - Provide your project managers with templates for project budgeting and cost reporting and review the reports regularly to gauge performance and determine where corrective action must be taken. Keep a close eye on daily project progress relative to goals, materials and equipment costs, subcontractor and vendor buyouts, and change orders. Consolidate project information in a 12-month company budget and periodically review overhead expenses to identify opportunities for savings.

• Avoid Cash Crunches - Make the effort to manage company cash flows. Maximize and accelerate inflows by negotiating favorable payment terms and schedule of values, submitting timely requisitions, staying on top of the project schedule, tracking receivables, minimizing idle cash, and actively managing contracts and change orders. Control cash outflows by negotiating favorable payment terms with vendors and carefully managing accounts payable and capital expenditures. Last but not least, create a cash flow forecast to determine if or when additional cash resources will be required. Roll project forecasts into your company cash flow forecast; gauge anticipated cash surpluses and deficits; and talk to your banker about the nature and extent of your borrowing needs.

• Monitor Financial Performance - The financial reports you generate are your primary tool for planning and managing. Make sure that you receive accurate information by having proper practices and procedures in place for data gathering and reporting. Set aside time on a regular basis to keep track of your cash position, receivables aging, project costs, and work-in-progress information. Also, review your monthly income statements. Timely data allows you to determine percentage completion, costs-to-complete, and profit margins on each project.

Going beyond the routine, you should review your financial performance periodically to spot trends: Are your profit margins improving or deteriorating? Is your working capital growing or shrinking? Are your receivables again as expected? Is your debt at a manageable level? How is your company doing compared to last period, last year? How are you doing compared to similar companies in the industry, using tools such as the Risk Management Association’s annual statement studies?

To enhance your analysis and diagnosis, you can use financial ratios that are routinely used by your banker and bonding company. Ask them about these comparative tools.

Your analysis will allow you to compare actual with expected performance, identify areas of weakness, and take action to avoid problems. Keep your banker and bonding agent abreast of all developments – good and bad – so that they are prepared to offer help.

To build your equity base, however, it’s absolutely essential that you keep profits in the business and invest in company growth. Put bluntly, don’t overcompensate yourself when cash balances are up because the firm is bound to suffer when balances are down.

In addition, avoid subjecting your company to unnecessary risks and expenditures by taking on contracts that greatly exceed your equity or by trying to grow business infrastructure without adequate resources. Similarly, resist the temptation to use company funds to dabble in unrelated businesses.