Updated: Aug 25, 2020
This is part of the series Construction Finance on Construction Cost Accounting website.
Running a new business is nothing easy, especially when it is a small construction business with under 20 employees. Cash flow is a common challenge faced by many small businesses that typically have a difficult time trying to get their income and expenses align.
It’s great if a small construction business gets an initial deposit and have a clear progress payment schedule. But then comes the ongoing expenses associated with each job. On top of that, many small businesses don’t have someone to manage finances for them.
Here are some tips for small business owners to put their construction finances under control.
Create a Plan before you start
“Proper pre-construction planning is arguably the most critical project phase any owner can undertake,” says Brandon Hurd, managing director at Hurd Construction Management, a general contractor and construction management company. “Unqualified schedules, scopes, specifications, and particularly budgets are recipes for legal and financial disasters.”
Planning is one, if not the most important stage for any business, construction or not. There are so many moving parts in construction, and each of them can entail major expenses if there’s any unexpected change that causes a setback or planning.
Always leave parts of the budget for the contingency fund
Just like any other business, things go wrong in construction firms. And when things go wrong in construction businesses, they can be much costlier than other industries.
“There will be times when something goes wrong, and there should be a line item in your budget or estimate to cover that,” says Nichola Landau, president of Landau Consulting Solutions.
Resist the temptation to overspend
While the deposit can help you cover costs, don’t try to overspend at the onset. Many contractors get a check for a lot of money, which somehow turns into thinking that they have a lot of money on hand. They don’t think of the costs that are associated with payment.
If you’ve already forecast your weekly, monthly, or long-term cash flows for the project, it could be easier to avoid the cash crisis later on.
Know that your personal finances may be on the line
Having a loan with the bank without proper planning and a good payment solution will make it difficult for your small construction business.
When your construction business takes on a loan to invest in a project, you (and your partners or your financing team) will have to sign a personal guarantee for the loan. That means even when the loan and project are in the name of your business, you agree to pay the loan from your personal finance if the project doesn’t go as planned.
Consider outsourcing some of the financial work
Many of you are business owners, and you build your business so that you don’t have to worry about financing works.
Good financial management is needed so that construction businesses have a long future with positive financial flows. However, it doesn’t mean that the business owners have time – or doesn’t want to – manage their financial situation.
Bringing in an expert in finance can lift a heavy weight off your shoulders. They can also help you secure funding. By organizing and cleaning up your books with all the transactions on different projects, which is a lot of work considering the nature of construction businesses, you can have your books ready to be given to the banks, making your funding process easier and faster.