Inflation. Shrinkflation. Supply challenges. Other complications. Absorbing higher costs into your business. Yeah, yeah, yesterday’s news? Not so fast, advise construction pros. Analyzing current costs, comparing them with what you were paying last year, and letting vendors know your eyes are open will protect your profits and cash flow.
Priorities: Manage Cash Flow
At GB Financial Services, Gary Bartecki points out, “Bankruptcies are up 30% this year compared to last year, and those bankruptcies are a result of not being able to manage cash flow related to the higher prices and higher interest rates now tied to business bank loans.” Clearly, managing cash flow has become ever more important, and generally that requires reducing costs while improving productivity, which is generally far more easy to say than to do. Where to begin? Barteki offers this practical advice for getting a grip on costs:
Do yourself a favor and take a dive into your accounts payables and the checks you write to pay vendors. I would assign someone or have your system produce today’s line-item charges against what you were paying in prior years to get an indication of which way prices are headed. With the industry in a slump, you would expect prices to be on the negative side, if I added them to that chart I was looking at. In addition, check the invoices coming in and make some phone calls to let your vendors know you are looking at their invoices. And in terms of insurance, I find that by using a real pro who knows the construction business can help you manage your insurance costs if you abide by the terms of the policy. You would be surprised by what you can do to lower rates if someone goes through the policy and helps you understand how you are being charged.
If you are not keeping a close eye on payroll, chances are some analyses will yield insights that will further help you consider costs and productivity. Bartecki shares these pointers for reviewing payroll costs: “Check the reports so you can see who is getting paid and for what they are getting paid. I would also ask for an analysis of hours worked monthly for the last 12 months. Is what you are seeing make sense? Or should you take up a program to review the entire payroll operation to ensure cost is what you expect it to be? If they know you are looking, there will be fewer problem areas popping up.”
Where Are You Making Money?
Toward improved profitability, it’s also smart to analyze and compare the costs and profits behind each project you take on. Job costing can really shine the light on the niche where you are most likely to truly win, and inform decisions about marketing, bidding, and more.Specifically, “Job costing is the accounting activity of assigning your revenue and expenses to the specific jobs/projects that they relate to. This allows you to see the profit you’re making on each specific job instead of only seeing your revenue and costs in total.”
For example, looking at your total revenue from three projects, you may conclude that you are running a solid 30% profit margin, but job costing is likely to help you do even better. Through a deeper analysis of the projects, you may discover something like this: “Two of the jobs…have greater than a 60% margin, while another actually lost money. If those two jobs that are a higher margin are similar in type, this might tell you that you should focus your effort on those types of jobs. You will also want to dig into the details of Job #2 to see where you went wrong.”
Keep in mind that to benefit from job costing at your business, it’s important to be disciplined and organized about how revenue and expenses are routinely assigned to projects:
For every expenditure, note which project the transaction was for. When you enter that cost into your accounting system, you’ll assign it to that job. As you bill customers, you should make sure that you record the revenue to the specific project as well. All revenue and all costs should be assigned to a project. If you have administrative or overhead expenses, you can assign those to an “Overhead” project … .After recording all revenue and expenses to each job, you’ll be able to run profitability reports for each job … .Once you have this information, you should use it to evaluate your business. If it’s clear that you are making better margins on one type of work versus others, consider focusing on getting more of that work. Or, spend some time adjusting your pricing on the other types of jobs so that you can achieve better margins on all.
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