Most contractors confess “I never have as much money at the end of the year as I expect to.” Do you suffer the same fate?
Do you arrive at year-end wondering where your money went?
Pay attention here, I’m going to let you in on a little secret that will help you end those unpleasant year-end surprises. Lean in close. Don’t tell anyone about this. It’s so secretive that few contractors do it. Are you ready?
Use a Budget
That’s it. That’s all it takes. Create a budget, track the variances and take corrective action when necessary.
Annual budgets allow you to stay on top of your financial progress as your year unfolds. They arm you with the ability to reel in expenses before they kill your bottom line. They force you to think through your business’ strategy and its resource allocations.
When you don’t have a budget to monitor or don’t monitor the one you have, you are destined to arrive at year-end thinking, “Rats. Where’d my money go?”
Contractors’ aversion to budgeting has always struck me as funny (not in the ha-ha sense). On the one hand, contractors tend to be obsessive about planning field work. They know that letting their field crews sort out what to do from day-to-day is a recipe for disaster. But on the other hand, they don’t apply that reasoning to their business. Lack of business planning leads to poor financial performance; it’s as simple as that.
You need a budget and it needs to reflect the reality of your market. You then need to keep a close eye on its progress and take corrective action when it’s called for.
Look at the Market
Before diving into the how-to budget details, you must understand the connections between your budget, your business plan and your market.
Your budget is a financial representation of your business plan. Your business plan’s purpose is to take advantage of profitable opportunities in the market. Budgeting should not be attempted until your business plan has been developed.
Your business plan should be aligned to the size of your market, the prices your market will pay and the cost of serving its needs. You can only make as much money as your market will support and your business plan will deliver. Budget accordingly.
Contractors often put the cart before the horse. They set sales, overhead and net income goals, put them into a budget and then try to craft a strategy to fulfill them. That sequence ignores the market.
It’s foolhardy to create the financial model and then craft a business plan that fits it when the business plan hasn’t been tuned to the market. Work in this order: Develop strategy, establish the budget, meet the budget then build a bulging bank account.
Your budget will be developed through five stages: preparation, rough draft, refinement, reality check and rollout.
Stage 1—Preparation
Unless you implement a new sales and marketing plan, improve labor productivity, or reduce overhead, your financial performance will be controlled by the market and the economy. If they grow, you will make more money. If they shrink, you will make less or even lose money.
In this industry, past performance is the best predictor of future performance, unless you force change. Build your budget on the foundation of your recent three-year financial performance. To do that, gather together the balance sheets, income statements and cash flow statements for those years.
Next, tap as many information sources as possible to gain an informed view of upcoming market changes. Visit with your banker. Visit with your insurance and bond agent. Buy construction forecast data. Search the census bureaus’ website for reports on economic projections. Call the Federal Reserve to see what reports they have available. And call your local economic development councils.
Eventually, you will discover the experts’ consensus opinion. Even they can be blindsided by turns in the economy,
