0348: The Number One Thing You Need To Know About Your Construction Business

This Podcast Is Episode Number 0348, And It's About Construction Business Blueprint For Updating Plans And Setting Goals When you own a small construction business, it's vital you understand how money flows into and out of it. At a basic level, you need to know where your income comes from and what your expenses are. At a deeper level, knowing how money moves through your business can help you make strategic decisions about growth, invoicing, and debt management.    The consequences of not understanding money can be drastic—poor financial management is one of the main reasons businesses fail. That's why you need to understand cash flow.    What is cash flow? [Starting Cash + Cash In - Cash Out] = Cash Flow Before you can start to understand your cash flow, you need to know what cash flow is. Cash flow refers to the movement of money into and out of your business. It's fundamentally understanding how much money is coming into your business (your income, loans, and transfers of personal funds into the company) versus how much is leaving (your expenses, taxes, and loan payments).   

How do I conduct a cash flow analysis?

An accounting software allows you to conduct a cash flow analysis through the platform itself or possibly via an add on. Open the program, and often a cash flow statement can be found under a "Reports" tab or something similar. So if you're already using accounting software, you can have a cash flow statement with minimal effort. 

If you don't use one, you'll have to conduct the analysis manually. Here is a basic cash flow analysis (This can easily be done using a spreadsheet): 

First, enter the amount of cash your business had in the bank at the start of a financial period (say a month). Second, add up all the money that came into your business in the month. Include only money that came in, not money owed by clients. Third, add this to the cash from the start of the month (in Step 1). Fourth, add up the cash that went out for the month, including rent, cost of goods, fixed costs, and loan payments. Fifth, subtract the total in Step 4 from the total in Step 3. This gives you your cash at the end of the month, which is also your starting balance for the next month. 

If the cash in your account is lower at the start of each month from the previous month, you have a cash flow problem that requires further analysis. 

Why is cash flow important?

Not making enough money to cover debts is the primary reason small businesses fail. Understanding your cash flow can help you take the steps you need to identify and address issues before they threaten your construction business. 

A cash flow analysis can tell you if you're allowing clients too long to pay their invoices, making you financially vulnerable. You can then determine if you need to charge a deposit for your services or shorten the payment terms. It can also tell you if you're spending too much in areas that are not profitable for you. This can help you figure out where you need to cut back on spending—or charge your customers more. 

Regular cash flow analysis can also show you what times of the year your construction business drops off. This can help you plan for those times to make sure you have enough money to cover a loss in revenue. 

Accounting software to boost cash flow and improve your bottom line

If you think accounting software is just for tracking expenses and generating financial reports, you're losing out on an opportunity to improve your bottom line. By taking advantage of insights provided by your software solution, you'll benefit from a more informed approach to marketing and customer service – and by making the most of all the ways your software can improve productivity, you can take meaningful action to increase profits. Here's how:

Understand client behavior

In addition to storing real-time financial data, your accounting software can also retain important information about your clients. Insights into your customer history and preferred payment methods, for instance, can help you tailor your marketing strategies to each type of client you serve. Use what you know about customers to set up a segmented mailing list. Marketing directly to the clients who tend to hire you for a particular service is a much more effective way to make sales than approaching your customers with a one-size-fits-all email campaign or promotion.

Reporting capabilities built into your accounting software can show you who your best customers are and your most popular products. With this crucial information, you'll hit your sales targets by only promoting the goods and services that you know your customers want. The real-time data your accounting software provides can also translate to an improved overall experience that will win over your customers. For instance, when a client gets in touch with a question, you'll be able to respond quickly with useful, accurate background info. With more in-depth knowledge of your customers, you'll be able to cross-sell and up-sell more easily by suggesting additional products and services that might meet their needs. 

Free up time to reach more clients

One of the great things about accounting software is how much time you'll save by automating processes like invoicing and payroll. And if your software solution integrates with your other construction business apps as well as your CRM (Customer Relationship Management) System, your business will be even more productive. By getting more efficient, you'll have more time to touch base with previous customers and find new clients. 

Consider making the most of that extra time in your schedule to: 

Organize professional development opportunities that improve your team's sales skills. Update your business plan based on real-time financial data and enhanced reporting. Implement growth strategies designed to scale your construction business and Make more informed decisions on every aspect of your business to cut costs, improve productivity, and boost your profit margin.

Are you using QuickBooks for your Construction Business? Gain insight from the Contractor's Accountant, Randal DeHart, and master the skills needed to generate useful reports, repeat quality performances, and make informed decisions to operate and grow your construction company. Visit Construction Accounting Academy to learn more.

Final thoughts 

Understanding your cash flow and making strategic decisions about your company's future is vital for business survival. Unfortunately, many construction business owners make the mistake of not understanding or, even worse, ignoring the importance of cash flow, and that often results in losing their business. Now that you're fully aware of the customer insights and time-saving capabilities your accounting software provides, what will you do differently to boost your bottom line and build a more profitable construction company?

Start the year right! Need help managing your cash flow? We can help a little or a lot depending on your needs. Fill out the form on the right, send me an email sharie@fasteasyaccounting.com or contact me today at 1-800-361-1770.

About The Author:

Sharie DeHart, QPA is the co-founder of 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 how to manage 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