524: How To Increase Your Construction Business Profit In Three Months

This Podcast Is Episode Number 524, And It's About How To Increase Your Construction Business Profit In Three Months Sales and profit are two very different things – as a construction business owner, you can find yourself without the cash to pay bills despite making sales you knew were profitable. You may also be startled to discover that solid cash flows from sales deliver little profit.   A cash flow forecast tracks cash flowing in and out of your business. The timing of these flows enables you to identify cash-rich and cash-lean periods. This helps make the right decisions, such as buying assets or preparing for cash shortfalls.   Cash flow is essential to the survival of your business – arguably more so than profit in the short term. Profit may be necessary for the longer term, but cash is needed to pay bills and operating costs quickly.   For example, if you're a plumber with reasonable cash reserves, you can survive until your business becomes profitable. However, if your business runs out of cash, you'll need to find a solution quickly to avoid going bankrupt.  

Profit is the money left in your business after all your expenses have been paid. An income statement (also referred to as a profit and loss report) reveals what profit your construction company made last month or last quarter. Your profit's detailed in two figures, namely:

Gross profit is what's left from sales after deducting the costs of goods sold or services provided. Net profit is left from gross profit after operating expenses (your business overheads) are deducted.

Note that net profit isn't the final 'bottom line' profit until all taxes have been paid.

Gaining more significant profits depends on accomplishing all the little things better – rather than making one huge change. You'll need to focus on every detail to reduce expenses and increase your sales turnover over the next 90 days.

Decreasing your costs

For most small businesses, reducing costs is the easiest way to increase profitability. Reducing direct costs can dramatically increase your sales profit while eliminating unnecessary business overheads.

Challenging your direct costs

Identify the steps you can take to minimize your direct costs, such as:

Negotiating lower prices with your suppliers. Reviewing processes and systems to minimize waste. Implementing additional security to reduce the chance of theft.

For example, you may have had one material supplier over the last five years. It might be time to challenge your supplier on their wholesale prices while introducing yourself to others who might do a better deal.

Some of your business costs, such as insurance, power, and the Internet, could be put out to tender.

The value of effective systems

Practical systems help you minimize errors – and save time and money. The time invested in creating designs is usually minimal compared to solving a problem from scratch.

Where appropriate, turn decisions into policies to avoid making the same decision again – or sort out the same issues repetitively.

Learn from mistakes and problem areas, and if systems go wrong, fix them. It's a wise idea to review your procedures periodically to see where improvements can be made. For example, if your software firm decides to place all its information on a central server to ensure staff can access it at any time, hours of productivity can be saved each week.

Stay focused on profitability

Focusing staff awareness on profitability can have a dramatic impact. Even if cash flow is your top priority, it shouldn't be at the expense of profitability. Monitor your actual costs against your budgets and your sales against your forecasts.

Measure staff performance

Monitor and measure staff performance and productivity. Be sure to reward productive staff members by linking pay rates to effectiveness.

It's important to praise and thank the staff when it's been earned. Aim to provide a clear career path so your team can grow, and they don't see their prospects as limited.

Aspire to get constant improvement

A simple planning cycle dramatically enhances your ability to make continuous improvements. Thorough planning also helps you anticipate problems and adapt as your circumstances change. Aim to:

Set measurable, time-limited targets – to monitor how effectively your plans are implemented. Review what you've achieved to learn from your experiences and continuously improve. Keep improving your underlying systems and planning process, but be ready to alter your strategy if necessary.

Increasing your turnover

To improve your turnover, look for new markets and distribution channels.

Some ideas to help you increase turnover include: for instance, are you making the best use of the Internet? Can you form a strategic alliance with a complementary business or a joint venture to tackle work you don't have the resources for?

Actively selling – simply taking orders won't ensure your survival as a business. Aim to gain more sales by being proactive. Retaining existing customers – through outstanding service and placing value on lifetime patronage. Maximizing the value of your sales – consider moving upmarket and providing a premium product or service. Add features to your offerings if the perceived value to customers is greater than the cost to you. Keep your products or services up-to-date – extend your product range or work to ensure it stays ahead of your competition. Focus your efforts on your most profitable customers – look after your customers who place large or frequent orders, pay their bills on time, and are low maintenance.

Review your profit margins

To improve overall profitability, review your sales and profit margins periodically. Divide your services or products into four categories, namely:

High percentage of sales and high-profit margins – nurture these stars. High percentage of sales but low-profit margins – consider a price increase and examine how you can cut costs to increase your profit margins. Low percentage of sales but high-profit margins – consider a sales push. Low percentage of sales and low-profit margins – eliminate these where possible.

Consider any possible effects before making decisions. For example, a low-profit product might be the one that brings other businesses from a significant, highly profitable customer.

It's possible to run out of cash or go bankrupt by taking on too much business too quickly, even though each sale is profitable. This is called overtrading – companies that sell on credit rather than cash terms are more at risk. Remember, use O.P.M. - Other People's Money.

Final thoughts

Familiarize yourself with the reports your accounting software can generate to track long-term trends, identify and mitigate risk, and discover new ways to increase profitability. Talk to your accountant about your construction business's most important reports and metrics and how to utilize them. 

You don't have to go through this alone. Don't try to manage your company's finances all by yourself. 

Collaborate with a trusted professional, invest in quality IT solutions, and spend some time familiarizing yourself with relevant tools and trends. Whether you improve your profits in three months, implementing these processes will result in better construction business management.

About The Author:

Sharie DeHart, QPA, co-founded Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com