Construction companies need to carefully manage their business to address cash flow and other financial risks.
There are a range of reasons why established businesses fail or suffer financial distress.
These include a lack of adequate funding, a lack of an early warning reporting system, a failure to recruit quality personnel and a lack of contingency planning.
It is vital to seek professional advice to assist with your business systems.
There are several things that businesses need to monitor:
Pricing and Costing Measures
1. Review market information for labour and material cost movements
2. Secure prices for labour and materials from suppliers
3. Review current pricing structure to maintain gross profit margin required to cover overheads and expected profit from operations
4. Liaise with materials suppliers to determine future price trend and extend trading terms based on past trading history
5. Review advertised prices of competitors to determine appropriate sale price rises
6. Maintain wage parity with competitors in relation to senior administration and supervision staff to avoid losing key personnel
1. Develop streamlined reporting management structure
2. Allocate mobile senior supervisors to site to control building costs and on site issues
3. Emphasis on completion of existing contracts to achieve next progress billing stage
4. Utilise WIP management recording system that monitors precisely daily/weekly movement in costs on building projects
5. Offer incentives to skilled labour to ensure continuity of future services
6. Determine if alternative products are available to reduce material costs
7. Monitor debtors and cash balances compared to budgets daily
8. Improve real time reporting from building site
Financial Monitoring Measures
1. Know your business numbers by monitoring:
· Daily/weekly/monthly sales
· Daily/weekly/monthly variable and fixed costs.
· Gross profit margin.
· Breakeven point for sales and gross profit margin
2. Understand your financial statements:
· Profit and loss statement
· Balance sheet
· Cash flow/fund statement
· Financial ratios eg liquidity ratio
3. Obtain regular financial reports from senior administration management:
· Short written form
· Key reports attached only eg chart of sales/gross margins on jobs completed to date
· Report on new work/WIP
· Compare annual budget with monthly breakdown
· Reports to include comparison between actual results with budget and reasons for variance
· Review profit margins on different designs and buildings offered to the market to determine profitability in the current market climate
4. Understand the link between cash and profits by preparing a cash flow statement that adjusts for:
· Loan repayments
· Capital expenditure
· Non-cash items eg amortisation and depreciation
5. Review costing/quoting system:
· Regularly updates for changing costs
· Ensure includes all costs including overheads
· Review mark ups
· Compare to competitors
· Review your competitors, eg. websites, visit, call and meet
· Attend industry conferences, seminars and discussion groups
· Liaise with industry membership association
· Liaise with bank to provide short-term funding facilities
· Seek professional advice on cash flow management
Acknowledgement: Grant Thornton.