Staying on top of a small business’s finances is never easy—and it’s especially challenging for construction companies. Construction businesses face some unique hurdles when it comes to managing their finances:
- They work on complex projects lasting many months with lots of different expenses.
- They often have to finance materials, labor and equipment for a project upfront, weeks or even months before sending the first invoice and getting paid.
- Legal issues, lawsuits, weather-related delays can all prevent clients from paying on time.
Fortunately, there are steps you can take to gain control of your construction business’s finances. If you’ve resolved to get a financial grip for 2018, try these tactics.
Focus on project management.
Over the length of a typical construction job, it’s easy to lose track of estimated versus actual expenses—and lose sight of how profitable the job actually is. Invest in project management software designed for the construction industry. (Here’s a look at the best construction management software for 2018.) Make sure it has an easy-to-use mobile app so your team in the field can update the information on the fly.
With a user-friendly app, it’s relatively quick to update the project management data at the end of each day and discuss any problems with the team. For example, if you see you’re expending a lot more work-hours than expected, you might decide to bring in more subcontractors to help so you don’t end up paying your employees overtime.
Use job costing to fine-tune your finances.
Job costing refers to a system for allocating costs for all materials, labor, and overhead for a specific job. This allows you to allocate the proper expenses to each job, so you know exactly how much it cost to complete.
When each construction project is finished, it’s worthwhile to review the job costing data you’ve collected. Over time, you’ll notice patterns. For example, you may find you’re consistently underestimating the cost of materials or of labor, which means you need to either reduce your costs or increase your bids. Check out this list of the top job-costing software for 2018.
Plan material purchases carefully.
Timing is tricky when it comes to buying materials for construction jobs. You don’t want to buy too much too soon—the materials will end up sitting in storage (costing you money) or on the job site (at risk of theft and decay). On the other hand, if you wait too long to order your materials, unexpected delays can throw the project’s whole schedule off. Worse yet, you may have to pay for expedited delivery, or the materials may not be available at all. Construction inventory management software can help; find top-rated solutions here.
Keep Your DSO Low.
As a construction business owner, you’re often looking for ways to keep your days sales outstanding (DSO) down, which means getting paid as quickly as possible. Surveys indicate that the average DSO for the construction industry is over 70 days, making construction one of the toughest businesses to run. By invoicing thoughtfully and quickly, you can get ahead of your competitors and free up some of that money sooner. One way you can do this is by making sure your contract specifies the different stages of completion at which you will invoice the client. As soon as each stage is completed, invoice right away—the faster you invoice, the faster you get paid.
It’s also a good idea to accept as many different forms of payment as possible, such as online payments and mobile payments. The more options your clients have for paying you, the fewer excuses they have. If you offer net terms, though, it can still be 15 days, 30 days, or even longer before you get paid. Of course, since many customers depend on getting net terms, reducing yours could mean reducing your sales.
A few products let you and your customers have the best of both worlds, however: you get paid right away, and the product extends the credit to your customers. One of these is Fundbox Pay, a service that allows you to get paid right away, while offering your customer flexible terms to pay their invoice in installments if they choose. It’s a serious win-win for approved business owners. Learn more and apply here.
Manage your payables.
Spreading out your payments for materials and supplies as late as you can without missing due dates so you can keep cash in your bank account longer. You can also negotiate with your suppliers for more flexible payment terms. For instance, will a long-time lumber supplier offer you net 60 terms instead of net 30? Can you pay for a big shipment of roofing tiles in monthly payments instead of one lump sum?
You’ll need to create a cash flow forecast to determine the best options. Sometimes it’s worthwhile to pay a little more to spread out your payments; other times, you may be willing to pay early to get a substantial discount. You may even want to shop around for new suppliers and see what kinds of deals you can get.
Be financially prepared.
No matter how carefully you manage your construction business’s finances, it’s the nature of the industry that “stuff happens.” At some point, every construction company will run into slow paying clients and unexpected expenses. Plan ahead, and you’ll be covered.
One of the best ways to plan ahead is to apply for a line of credit, even if you don’t need the cash right away. If you and your business are in a strong financial position, you’re a highly attractive applicant for any lender, which means you’ll be eligible for higher credit limits if you apply when things are going well.
If you’re curious about business credit, consider Fundbox. You can find out if you qualify online, and get a credit decision in just hours. Approved businesses can get access to credit as soon as the next business day, and you only pay a fee when you draw funds.
With more credit available, you can rest easier, knowing that you have the means to face the challenges in your business, no matter what curveballs your customers throw your way.