by George Hedley
As your construction business grows, you get to the point you can't do it all yourself. You really don't like paperwork, accounting or bookkeeping. But you have to pay your bills, balance your checkbook and collect your receivables to keep your doors open. So you try and pawn off the accounting to your spouse or a friend you met at church who once did accounts payables for a retail store. This works for a while, until you finally realize you know more about construction accounting, job costs, receivables and cash-flow than they do. Now what?
This is a major crossroads for most construction company owners. Should you hire a professional full charge construction accounting manager to be your bookkeeper, controller and chief financial officer? Or, do you continue to limp along with an untrained, behind the times, and part time accounts payable clerk managing your money?
As we discussed in previous articles on entrepreneurial excellence, step one begins with a picture of what you want. I know you want a business built on sound financial principles, systems and controls. Step two is to always make a profit. The only way to make a profit is to know your numbers and make them a top priority in your construction business. Step three is to develop and install solid organizational systems that produce consistent bottom-line results. Step four is to get control of your finances.
Hire a pro now!
As your business grows, one of your most important hires must be a professional accounting manager. This is a necessary investment in your future and required to build an excellent company. Without a 'pro' managing your finances, you business can't reach its' full potential or grow profitably. Hiring a qualified and experienced full charge manager to run your accounting department is just as important as hiring a professional estimator, and more valuable than any good superintendent or foreman.
A professional accounting manager knows construction accounting. This includes: how to manage and control your accounts payables, accounts receivables, lien releases, financial reports, balance sheets, income statements, payroll, job costing, retention, collections, bonding, banking, month-end close-out, bank reconciliations and cash-flow projections. A professional accounting manager knows what software your company needs, can supervise its' installation and fully maximize your return on investment. A professional accounting manager stays abreast of the latest construction tax and contract laws, construction accounting methods, industry financial trends, software upgrades, attends the 'Construction Financial Management Association' training seminars and conferences and becomes a trusted partner in your business growth.
Install financial systems now!
Trying to build a construction business without organized and systemized financial management tools and controls in place is like building a project with an empty toolbox and no set of plans. You can't do it. You must also make it a priority to install the best possible systems, technology, reporting methods and tracking systems. This will allow you to make good decisions, people accountable, keep your eyes on the bottom-line and time to focus on what makes the most money for your operation.
Entrepreneurial Excellence Business Tip:
- Hire a professional accounting manager before you hire your next employee or buy another piece of equipment.
The construction business is tough. There is nothing in your control. It is even harder when you don't know what your finances and job costs are. Financial systems and controls are required to build an excellent business and hit your goals. Let's start with the basics. In order to run a successful and profitable construction company you must know where you stand at all times including:
- Equity & working capital
- Overhead & fixed costs
- Company & job profit
- Job costs and cost to complete
- Labor & equipment costs
- Accounts receivable
- Accounts payable
- Cash & cash-flow
Construction accounting made simple!
Sales is income or revenue you earn, invoice and collect.
Cost of sales or direct costs are your field job costs. These include all costs required to build projects in the field: labor, labor burden, supervision, project management, materials, equipment, subcontractors, rentals, production costs and services required to complete your contracts.
Indirect costs or overhead are your fixed costs of doing business without any projects under construction. Overhead includes your home office expenses, general and administrative costs, rent, utilities, estimating, bidding, marketing, sales, accounting, legal, staff, administration and company management. Your overhead markup compensates for the cost of doing business.
Equity is total capital, retained earnings, net worth or the money invested in your company. It includes the current equity or net worth of your business.
Working capital is often called net quick. It is your current short term assets (everything you can sell & collect in 30 days minus your current liabilities (everything you currently owe now and for the next thirty days. Working capital does not include long term assets like buildings, equipment, or retention due.
Backlog is the unfinished amount of all your current contracts in progress. According to bonding company standards, your working capital needs to be at least ten percent of your contract backlog. I don't feel this is enough. I recommend at least twenty percent of your backlog as working capital to avoid cash-flow problems and allow for profitable and comfortable growth. For example: if the total of all your contracts in progress is $2,000,000 and you average fifty percent complete, your backlog would be $1,000,000. The required working capital to run your business would be $200,000.
Profit is financial gain or return from the use of capital in a business. This assumes you started your business with an adequate capital investment to run your business properly without cash-flow problems. Profit is the remaining amount after all direct & indirect costs are deducted from total revenue collected. Note: profit is not 'owner's compensation' for running the business. All employee compensation including the owner's must be included in either overhead or job cost. If you are the owner and work in your business, you should be compensated accordingly based on fair market value for the work you do. Profit is reward for taking business risk.
Return is net profit as a percentage of equity for the year or current period.
Financial targets. Sound financial management includes tracking your targets and staying abreast of your progress. To build an excellent business, make it a priority to set annual financial goals in the following areas and then keep track of your progress:
- Job Cost
- Net Profit
- Average Markup %
- Average Gross Profit %
- Sales to break-even
- Sales to hit gross profit goal
- Working capital
- Return on equity %
- Return on overhead %
- Average final gross profit %
by contract type
by project type
by project size
by project location
- Average job size
- Bid-hit ratio
- Volume & profit per key employee
It's hard to go broke with good financial systems!
Sound financial management includes keeping track of several key success factors. Get your reports on-time to stay on top of your company. Company owners without good accounting records and reports, never know how they're doing, bid too cheap, can't retire and don't have any investments.
Monthly financial reports required:
- Job cost report for current projects
- Completed contracts for current fiscal year
- Income statement (profit & loss)
- Balance sheet (financial statement)
- Working capital
- Cash-flow projections
- Accounts receivable aging
- Accounts payables aging
- Cash balances - all bank accounts
Weekly reports required:
- Accounts receivable aging
- Current accounts payables
- Deposit log of payments received
- Cash needs report
- Cash balances - all bank accounts
- Current payroll report
- Line of credit status
- Discounts available
Let go, but keep financial controls!
Several years ago I learned the hard way that even good employees can go astray without sound financial controls in place. In the construction business, it's too tempting and very easy to 'stick your hand in cookie jar.' I thought it would never happen in my company, but it did. I found the greed factor influenced some great employees to go beyond the ethical line and put a little cash in their pocket whenever possible. I trusted them too much without checks and balances in place.
Some financial problems areas to watch out for include poor personnel or vacation records, credit card or reimbursable expenses not being reviewed, automatic payroll deposits, company accounts or shipping charges or excess materials being ordered for jobs. Protect your money with these financial controls we have installed in our company. (And, in advance, I know you may not agree with all of them!)
Seven financial controls that work!
1. Never issue company credit cards - let employees pay for items and then get reimbursed
2. Never issue company cell phones - give employees a monthly lump sum amount ($75 to $150) to reimburse them for the use of their personal cell phones
3. Have bank statements sent to the owner's home - this allows for review of checks and signatures
4. Require owner or two management signatures & approvals on all:
- contracts that obligate the company contractually
- subcontracts, purchase orders & change orders
- credit card payments
- automatic payroll deposits
- reimbursable or expense accounts
- overtime or vacation approvals
- payroll preparation, approvals & deposits
- project payables & job costs
5. Keep perfect personnel, sick time & vacation records - this is a must and no exceptions for any employee including relatives
6. Follow your employee manual to the letter - no exceptions for anyone especially your long time employees
7. Trust your people, but follow your rules!
Today I still trust my people to do a great job, but I have installed these additional controls. A few simple checks and balances eliminates future problems, disappointment, stress and potential financial loss for your company. Don't wait until it's too late to implement financial safeguards and controls.
Get rich or die trying!
People constantly brag about how big their company is and how busy they are. I am not impressed with $1,000,000, $5,000,000 or $50,000,000 in volume if you don't know your job costs, don't have an overhead budget, your finances are out of control, you don't manage your money properly, you're getting deeper in debt, you need to collect money every week to make payroll, your equity isn't growing, you can't pay yourself a hefty salary and you aren't making a good profit. Most construction business owners reach age sixty-five without a net worth to boost about and have to keep working to make ends meet and pay their bills.
The key to your future is not staying busy. It's making a profit and keeping some of it to invest for your future. You've heard the old saying: 'it's not how much you make, it's how much you keep.' The goal of business is not to stay in business. The goal of business is to always make a profit. An excellent business does more than keep some money, it uses it to create wealth. 'It's not how much you make, it's how much money your money makes!"
Could a CEO of a major company survive without excellent financial systems and controls? No! To build an excellent company, seek profitable contracts, do the work and then collect all revenue earned. Cover your direct job costs or actual cost of doing the work first. Next pay your overhead and then make a profit. As an entrepreneur, your biggest and most exciting decision is what to do with your profit - spend or invest.
Within five years a new construction company should be out of debt and make a reasonable return on their equity of at least fifteen percent. Within ten years, you should be making lots of profit and have several investments in place. Within fifteen to twenty years in business, your company should be able to survive on its' investment income alone without any jobs under construction. The greatest advice I give to young construction business owners is to buy your first investment property before your second truck! Real estate is a better investment than a depreciating piece of yellow iron.
Financial Steps To Success
Year 20 - 30 Enjoy Financial Freedom
Year 15 - 19 Grow Wealth & Investments
Year 10 - 14 Invest Company Profits
Year 7 - 9 Grow Company & Build Equity
Year 5 - 6 Get Out Of Debt
Year 3 - 4 Make Average Profits
Year 1 - 2 Install Financial Systems & Controls
Who is your spending consultant?
Building an excellent construction business is not an easy task. Construction companies typically don't make enough money for the risk they take. To maximize your return, follow the steps outlined above plus get some outside professional help. You can't do it all yourself. You need a team of financial pros who can give you advice as your business grows. Your financial team should include a bonding agent, CPA, banker, insurance agent, attorney, and technology consultant. Get some professional advice and make installing financial systems and controls a top priority and part of building an excellent business. You can't run your company in the dark. Remember the more you know, the more you can grow.
ABOUT THE AUTHOR
George Hedley is the best-selling author of "Get Your Business to Work!" As a professional speaker and business coach, he helps entrepreneurs and business owners build profitable companies. E-mail: email@example.com to request your free copy of "Everything Contractors Know About Making A Profit!" or signup for his e-newsletter. To hire George to speak , attend his 'Profit-Builder Circle' academy or find out how he can help your company grow, call 800-851-8553 or visit www.hardhatpresentations.com
3300 Irvine Avenue #135
Newport Beach, CA 92660
Phone (949) 852-2005
Fax (949) 852-3002
Email: firstname.lastname@example.org website: www.hardhatpresentations.com
George Hedley owns a $75 million construction and development company and
Hardhat Presentations. He speaks to companies on building profitable businesses,
leadership, and loyal customers. He holds 3-day in-depth "Profit-Builder
Circles" open to construction company owners in an interactive roundtable
format every 3 months. His "Profit-Builder System" includes proven
tools to always make a profit, build equity, create wealth, win profitable
jobs, motivate your people, and enjoy the benefits of owning a profitable company.