431: How To Build An Effective Financial Plan For Your Construction Business

This Podcast Is Episode Number 431, And It's About Consequences Of Avoiding Your Construction Bookkeeping Every business needs a financial plan. Your financial plan gives you a way to monitor and review your cash flow, make adjustments to your spending, and anticipate any upcoming economic issues. It can also make you more prepared to request funding or find investors so you can bring more money into your construction business.   Although many business owners are aware that financial planning is essential, it is often overlooked. Without a financial plan, however, you could find your business doesn't make the money you expected it to—or you could wind up with unanticipated expenses and no way of paying for them.   If you are a contractor, you are most likely a "doer," someone who gets things done, not now but right now! When you see anyone not swinging a hammer, drilling holes, pouring concrete, laying carpet, putting paint on the walls, or a thousand other construction tasks, the first thing you think is they are wasting time and money, and you want no part of that nonsense!  

Having worked with contractors for a long time, we saw what highly profitable contractors do those other contractors don't: they all have a documented Business Plan that they review and update during the two weeks following every calendar quarter.

Advantages:

Prior Planning Prevents Poor Performance. When you take a vacation, you plan for it. When you buy a truck or a tool, you plan for it. You can plan your exit strategy to retire comfortably. Cash flow and Profit is no accident; it is a result of deliberate action. The economy will not impact you as hard because you will see changes coming. When you were a child, you enjoyed surprises but not in your construction company.

Excuses: 

I don't have the time to plan; I have work to get done! It is a lot of work, and I don't know if it will be worth it. None of my contractor friends who are in debt up to their ears do it. 

Most contractors hate putting together a documented Business Plan until it is finished, and they start seeing the power of setting financial goals come alive then they say, "why didn't I do this sooner?"

As Napoleon Hill is famous for saying, "Whatever the mind of man can conceive and believe, it can achieve." It is not enough to say, "I want to make a lot of money!" because the Universe is always in balance and responds to specific requests.

Here are some steps to take to build an effective financial plan for your construction business:

1. Set your goals

You need to know where your construction business is now and where you want it to be so you can develop a financial strategy to move forward. At least once a year, ask yourself important questions so you can plan for what's to come. Among the questions to ask:

● Do I need to expand or grow my business (in terms of staff, locations, or goods and services)?

● Do I need to make any large equipment purchases?

● What resources might I need to buy this year?

● How will any acquisitions or expansions affect my cash flow?

● What adjustments might be required to address these expenses?

2. Understand your cash flow

To build an effective financial plan for your business, you must understand your cash flow. Your cash flow is the movement of cash into and out of your business. If you have more money coming in than going out, you have a favorable cash flow situation and can pay your expenses. If more money is going out than coming in, you are in a negative cash flow situation and need to bring in more money.

Understanding cash flow—including sales cycles—will help you build a plan for your business. For example, if your business is seasonal, it helps to know when sales drop and for how long, so you can plan for those periods. You can also anticipate when sales will be higher, and you'll have extra money to set aside for emergency expenses.

Remember that cash flow and profitability aren't the same things. Your business can be profitable, but if none of your clients are paying you on time, you won't have the necessary cash flow to stay afloat.

3. Create a sales projection

An essential part of your plan is your sales projection. This is related to your cash flow forecast but focuses on your sales. It gives you insight into every segment of your construction business to better understand which of your offerings brings in the highest sales.

When you forecast your sales, make sure you include the cost of goods sold to determine your predicted growth margin. This information will help you determine which of your offerings are most profitable and which should be revised to increase your profits.

4. Talk to an expert

You don't have to have all the answers for your construction business, but you have to be willing to talk to people who have the information you need. Once you know your current situation and goals, speak to a construction accountant or financial expert to figure out your next steps.

Experts can help you make sense of your financial situation and how to move forward—whether that's the best use of your profits or getting yourself out of a negative cash flow situation. They can offer you effective solutions you may not have considered or help you revise your plan, so it's more realistic.

5. Monitor your progress

Throughout the year, take a look at your plan and projections to ensure you're still on track. If things are progressing as you expected, excellent. If not, explore how you can address the situation before financial problems become unmanageable.

Final thoughts

Creating a financial plan may feel overwhelming, but by having a clear picture of your goals, current situation, and progress, you can write an effective financial plan that increases your chances of success.

Next week we'll do a deep dive into cash flow for your construction business. Reach out to me if you need help with building your construction business plan today. 

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