When thinking about starting or restructuring your construction company, it’s vital to have a smart financial strategy in place, rooted in accounting basics. The decisions you make early in the process have a deep impact on your company’s financial and ongoing success.
You can leverage accounting basics to reduce cost, increase profitability and minimize tax liabilities. To get started, ask yourself these five questions:
#1: Will my choice of entity type support personal and business goals while helping me to save on taxes?
In a word: Yes. Each entity structure has its own pros and cons. Entity structures vary based on liability, transferability, cost, taxation, and simplicity. Choosing your entity structure is one of the most important decisions to make when starting your business because it affects business decisions, tax efficiencies, and your ability to scale.
#2: Are my job costing practices aligned with effective cost management?
In addition to keeping an eye on revenue, it is important to watch your construction company’s financial and operating costs. This includes overhead, labor and materials for each project. Your job costing practices need to enable you to break down all the expenses per project. Accurate data allows you to make more accurate estimates, lower risk and analyze each job’s profitability. With detailed operating cost tracking, you can quickly make any pricing changes or adjust costs before your projects shows a loss.
Your job costing process should also account for the unexpected, like supply price increases, additional labor and equipment costs, as well as delay and scheduling costs against potential future claims.
#3: Can I maximize cash flow and financial standing while accurately assessing and projecting capital and liquidity needs?
The construction industry can see quick shifts in cash flow and liquidity. This is in part due to some costs being paid in advance, while other payments are less certain in their timeline. Regular accounting reviews allow you to take corrective or preventative actions. Have your accounting team prepare financial statements, cash flow forecasts and similar projections, and then regularly measure them against actual cash flow.
You’ll also want to make sure that you’re on top of financial options and surety bonding relationships by keeping your accounting practices transparent. When you need to communicate with these organizations, be proactive. If you suddenly have a new opportunity arise that requires funding, it’s good to have relationships in place already to expedite the process.
#4: Does my strategy account for risk management?
Risk management is vital to your business strategy. Making a competitive bid is important, but make sure you’re rating your projects using a system that includes work type, predetermined minimum profitability, bonding needs, overall timeframe and if your workers have the right skillset. This will help you prioritize your time and expense estimates so you’re choosing jobs the right jobs for you company, thus reducing your risk.
Remember that subcontractors can also increase your risk. You don’t have the same kind of control over your subcontractors as you do your own employees, so it’s extremely important to properly vet your subcontractors to further manage your risk.
#5: Does my strategy leave options to leverage new technology?
Technology continues to change at a rapid pace, so it is important that your construction company stay on top of modern technologies to maintain your competitive edge. Make sure your company is prioritizing education about new products, methods and updated standards because your clients are certainly reading up on new ideas and you need to be able to help guide and suggest the best path forward for their projects. Clients want to know you have the most up-to-date information and that they can rely on your expertise.
While the initial expense to implement new technology can be significant, it can provide a solid return on your investment. Advances provide new opportunities for vertical integration, such as operations structured for in-house distribution or using prefabricated, modular construction processes to reduce costs, improve efficiency and improve profitability. For example, investing in an estimating software that allows real-time costing, asset management, risk assessment and customer relationship management can save you hours of manual computing, which improves your overall profitability.
Corrigan Krause Specializes in Construction Accounting
As you’re asking yourself these five accounting questions remember, the Construction Services group at Corrigan Krause can help. Email firstname.lastname@example.org for more information and sign up for our Construction Services newsletter here.