What’s In Your Contingency Fund?
If you own a construction business, you well know stuff happens, and you have hopefully figured out how to set aside some contingency funds for crunch time. Cash flow challenges are common in every small business but can be extra difficult in construction. For practical tips and advice from pros (and dads) about steering your business through bumpy patches, read on.
Do Like Dad…
Having grown up with a father who owned his own construction business with fifteen full-time employees, Louis DeNicola of Clockshark is empathetic to the challenges that unexpected issues present: “There are simply so many moving parts in construction that you need to map out a strategy before getting started. And each of those moving parts can entail major expenses if there’s any type of unexpected development that causes a delay or setback.” One specific piece of advice DeNicola offers from his father is to work toward having a contingency fund as you build your business: “Most of the clients didn’t pay until 30-, 60-, or 90-days later … .Once I was established, I could weather ups and downs…Many of my jobs were in the $300,000 to $1 million range and I was comfortable if I had $50,000. That would put me through the rough spots.”
Deposits, Forecasts, and Separating Accounts
If you are hesitant to ask for a well-thought out up front deposit, don’t be! Within the deposit limits of state and local laws, obtaining a deposit is critical for cash flow management as you grow your business. Nicole Landau of Landau Consulting Solutions, which offers outsourced CFO and accounting services to construction companies, shares: “One of my clients was asking me daily for the cash balance as they were floating day-to-day. He didn’t want to ask his clients for a lot of money upfront, but once he changed his mindset of getting a larger deposit his cash flow was much more manageable….He is now able to pay vendors faster. Most importantly, he is once again confident in his business.”
While deposits are a smart practice, so too are forecasting, and resisting the temptation to “go overboard” at the beginning of a project, which DeNicola(and his Dad) caution against: “Contractors get a check for a lot of money, and somehow that translates into them thinking they have a lot of money. They miss all the costs that are associated with the payment.” To keep track of expenses, overhead and profits for each job you take on, it may be helpful to use separate project accounts, even if only “on paper,”, as Glenn Amerson, president of FGC, Inc., a Florida-based general contractor, points out: “When you have one bank account with all of your jobs’ payables and profits coming in and out, overspending happens…Each project needs to have a separate checking account, so you’re not mixing and matching money….”
Sustain—and Be Growth Ready
Even when you are not yet ready to take on more and bigger projects, it’s wise to be strategically thinking forward. To do so, it is imperative to actually understand the finances of your business. For example, Shauna Huntington of Small Business Bootcamp encourages business owners to develop and stick to effective daily, weekly and monthly processes. Examples of monitoring and validating your financial data regularly include:
Daily or Weekly Tasks
- Reconcile job costs, invoices, and bank transactions.
- Review automated transactions for discrepancies.
Month-End Close Tasks
- Reconcile all accounts to month-end supporting documentation (statements, reports, etc.)
- Analyze job profitability and financial trends to make data-driven decisions.
- Verify that all expenses are categorized correctly to prevent misreporting.
Knowing where your business stands helps you make smart decisions—about small but critical day to day matters, and the bigger picture too. As you work toward scaling up, keep in mind too, that it’s never too early to build relationships with financial partners, as Landau reminds us: “It can take months or years to secure financing for a large job. Even if you’re working on a smaller scale, or already have your financing lined up, you may want to keep an open dialogue with different banks and lenders.”
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