How to Budget for a Construction Business Expansion

Author: Irene Malatesta | February 12, 2019

When you’re a new business owner, everything seems exciting. Your first client, your first dollar, your first day at work are all pivotal moments for your career. Though you may be operating from a single desk in a single room, you imagine the future, when your business is booming, employees are bustling, and you have more work than you can handle.

Unfortunately, many construction companies never reach that point. In fact, about half of new construction companies fail within the first year of business.

If you’ve built a strong foundation and emerged from your first few years with a thriving business, congratulations!

Now you’re looking to expand your business and wondering what’s next. First, a word of caution: Expanding your business too soon or too aggressively can be devastating to your construction company. The good news is, with some careful planning, you can avoid many common pitfalls.

In this guide, we’ll walk you through deciding when to expand your construction business, and how to prepare when you’re ready.

4 Signs You’re Ready to Expand Your Business

Before you go too far with the process, it’s important to make sure you’re actually ready to expand your construction business. One of the biggest mistakes you can make is expanding before you’re ready. In this scenario, you will tap out your resources, leaving yourself cash-strapped and stretched too thin. Here are the most important things to consider before you make the jump:

1. You Have Plenty of Work

When businesses consider expansion, it’s usually for one of two reasons:

  • Either they have more work than their resources can handle, or
  • They don’t have enough work and hope that expanding into new markets will fix this problem.

Usually, only the first type of businesses survive an expansion. While a new service or territory may be the answer for a small percentage of companies who are lacking sales, it’s rarely the best solution to the problem. (In this case, it’s better to reconsider your marketing efforts, customer service, and other potential problems before considering expansion.)

If your phones are constantly ringing and contracts are coming in quicker than you can count, however, you’re ready to go.

2. Your Clients Are Happy

Obviously, you also want happy customers. If you have plenty of repeat customers or word-of-mouth is your primary marketing strategy, then proceed to the next point. If not, you might evaluate the situation and fix the problem before considering expansion.

3. You Have More Money Than Time

Are checks coming in (fairly) promptly? Are you meeting payroll without any issues? Are you able to pay yourself a salary? Then you probably don’t have a lot of time on your hands, and that’s okay. In fact, that’s a sure sign that it’s time to consider expanding your business. If nothing else, you need another set of hands to handle some of the tasks and give yourself room to breathe.

4. Opportunities for Expansion Arise

Maybe your customers are requesting services that you don’t offer yet. Maybe clients are requesting bids or estimates for jobs outside your current territory. Maybe Jane Owner is selling her business, and you’re thinking it would be a great complement to your current services. These are all viable opportunities for expansion.

Construction business expansion: Planning your next step

Step-by-Step Expansion Budgeting Process

Now that you’ve decided expansion is the answer, it’s time to start the process. First things first: It’s time to make a budget.

What’s Your Plan for Expanding Your Business?

There are different types of expansions, and it’s important to consider all the different facets of your own plan. Depending on how you plan to expand, you’ll need to focus on different expenses and other considerations. For example:

  • Are you planning to acquire another company? If so, you will need to consider real estate closing costs, office and warehouse expenses (including rent and utilities), and additional employee salaries.
  • Do you want to add a few more services to your existing business? If that’s the case, your budget may be simpler. You will need to consider things like the materials and labor required to offer those services, as well as any possible overhead expense increases.
  • Are you planning to bid more jobs? This plan might require more employees. Consider all of the costs associated with those employees, and what they will need to take on more work. You may need to purchase more equipment, more materials, and more tools.

Whatever you’re thinking, it’s time to get it all down on paper. Start with the overall goal of your expansion, then start listing the steps you will need to take to achieve that goal. Don’t forget small things like acquiring permits and business licenses for new territories, too.

Estimate Your Budget

Estimating your budget seems like a huge task, but it’s quite simple when you break it down into smaller steps. You already have the overall plan for your expansion, so now it’s time to dig into the numbers.

If you need help getting started, take a blank business budget template and fill in the data using your current financial information. When you’re finished, you should have a strong starting point for a budget that reflects your current financial situation.

Next, using your expansion outline created above, fill in another budget template with your projected costs after the expansion.

You may need to do some research to estimate these numbers. For example, if you will need a new office for your expansion, search or available properties in the area to find a good estimate for rent. You may want to work with your bookkeeper or accountant on this planning exercise.

Overall, your goal here is to make sure you remember every possible new expense post-expansion. Common expenses include:

  • Employee salaries and benefits
  • Land and/or real estate
  • Acquisition costs if you’re buying another company
  • Materials, tools, and equipment
  • Marketing and advertising
  • Transportation and lodging if you’re expanding your service area

Now that you have estimated expenses outlined, you should also estimate your future sales.

Give yourself a “best case scenario” estimate and a “worst case scenario” estimate. You may want to fill out several different budget sheets to explore different possible outcomes. You can use these numbers to see when your expansion plan will start turning a profit and how much of a profit you can expect.

Finally, using the range of numbers determined from your budget estimates, you can research business financing, apply for the financing you need, and finalize the next steps of your expansion.

Final Thoughts

Expanding your business is seldom easy, but growth is almost inevitable for any strong business model. If you walk through these steps one by one and aren’t afraid of research, you can start your expansion with a strong budget and the funds you need to get the job done quickly. Then you can get back to what you do best: running your business.

 

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