All business owners can look into the rearview and see mistakes they've made down the road. Whether it’s making a bad technology investment, hanging onto a painful client, or just not embracing the bigger picture, these potholes can hurt at the time, but should always lead to better decisions in the future.
After all, every successful business person learns best by doing, no matter how many degrees they have hanging on the wall.
When it comes to the financial side of your construction business, avoiding the mistakes of the past can help you to build a solid foundation for the future. In this post, we’ll look at several common financial mistakes and how you can avoid them going forward.
When you need equipment right away, it can be tempting to purchase it at any cost. You may rationalise that you can use it on future projects or sell it later if it’s gathering dust. However, without considering how this investment plays into your overall financial strategy, you could be setting yourself up for future losses.
In some instances, such as when you use a piece of equipment regularly, it makes sense to purchase it outright with an effective equipment loan. However, leasing can be smarter if you don't use it often or if your cash flow can’t bear the burden of a large purchase right away. The key is to align your capital purchase with your overall financial planning.
Who will lead your business if something happens to you? Every business needs a solid succession plan that includes provisions for the owner's retirement as well as cultivation of future leadership.
Too many companies find themselves in crisis mode because the owner didn’t plan for succession. Don't make this mistake. By starting early on your succession strategy, you can strengthen your company both now and in the future.
One of the most common financial mistakes in the construction industry is embarking on additional or altered work without documentation. Big decisions made on the worksite, away from computers and accountants, can be caused by the heat-of-the-moment and future deadlines. It's nice to work on a handshake, but too many sad stories begin this way.
To make documentation more accessible, make sure your systems and processes can handle mid-project changes. Your methods should allow contractors to put together accurate quotes supported by contracts instead of having to shoot from the hip. You'll also need the ability for contractors and clients to sign contracts on the go, which is where digital signature platforms like DocuSign can help.
Late invoicing is a big problem for projects that have submission deadlines for monthly draws from the bank. If you miss the deadline, you won't get paid for quite some time, but that doesn't mean you can put off paying your workers and suppliers.
This mistake usually comes from loose reporting systems and poor communication from the field. Outsourcing CFO services can help to bring more structure to the process, so you don't miss important deadlines.
It's nearly impossible to give accurate quotes without a realistic understanding of your costs. And without accurate quotes, you either miss out on jobs or lose money on them.
Avoid this mistake by taking a hard look at your income statement. Take note of how expenses are allocated to associated jobs. Are they accurate? Have you neglected to account for some of your costs? If you don't already have one, establish a method for factoring in project expenses such as property rentals, administration costs and equipment depreciation.
Some contractors build into their contracts the ability to adjust prices based on market fluctuations, and this can save their profitability. For example, if the price of steel rises a lot during a project, you could end up eating the cost of the more expensive materials. Ultimately, your bottom line suffers from these changes.
Learn from this mistake by implementing contractual language that allows for adjustments based on market prices.
If you’re making financial decisions without complete confidence in their merit, it’s a sure sign to take the foot off the accelerator and look in the rear view mirror. Ask yourself; are you speeding towards a similar mistake to what you’ve made in the past?
At Altus, we have several business experts with substantial experience within the construction industry, and we can help. Get in touch with us to discuss how we can work together to set your business on a path to effective financial management.