If you operate a construction company, it’s important to ensure that it is financially secure. It needs to generate profit so that you can pay workers and healthily grow the business.
There’s no denying that the construction industry has faced unforeseen struggles over the past few years. From the halt that stemmed from the Covid-19 pandemic to the collapse of construction firms, it’s clear that running a construction company demands resilience in the UK economy.
Here’s what you need to know about running a financially secure construction company.
Finance in the construction industry
Often, a self-employed builder will make the shift to owning a full-blown construction company. Having a handle on how finance in the construction industry works is an important first step.
This means you’ll need a good understanding of cash flow, overheads and forecasting in this particular industry. On top of this, you’ll need to be open-minded, quick-thinking and resilient to unforeseen changes. Being good at financial management means you’ll need to be adaptable for the greater good of the company.
What are the main costs?
Some of the main costs when running a construction company include:
- Employee wages
- Equipment
- Materials
- Rent for the premises
- Utility bills
As with any business, there are variable and fixed costs to consider. It’s important to forecast future costs and cash flow to stay on top of everything. There are often external factors out of your control that will dictate variable costs. For example, political affairs and global conflict can disrupt supply chains and transportation, which in turn can cause costs to rise. The pandemic created a lot of havoc in this respect.
Material costs
Often, material costs tend to be the highest in the construction industry – and they’re necessary for every single building project, regardless of its size.
You may need to make bulk orders of concrete blocks and other materials in a bid to reduce costs and take a more long-term approach. Another way of reducing costs might include finding alternative suppliers or cheaper alternatives that still allow you to maintain the minimum standard required when building. In some cases, it’s a trade-off between reducing costs and using materials that are slightly poorer in quality.
Forecasting
As touched upon, forecasting is a huge part of running a successful construction business. You need the ability to forecast financial markets and the performance of the company. Often, the former can dictate the latter, so you’ll benefit from identifying trends and planning to address these and mitigate the risks. There could be internal stallers as well that could impact the efficiency of the business.
When forecasting particular projects, it’s important to be realistic. A client quote should be reflective of the length of time you predict it could take, as well as the type of manual labour involved.
Cash flow
Cash flow is an important element of forecasting. It involves getting a clear overview of the cash coming in and out over a particular period. You should conduct regular cash flow audits to assess whether cash is getting stuck in one particular area, as this could hinder your original approach and prompt you to adapt. You might have a client who is time-poor when it comes to payments, for example, so you could introduce incentives that encourage timely payment going forward.
Ultimately, you’re looking for a positive cash flow and ideally, have a good level of ‘financial cushion’. Slim profit margins mean you’re more at risk if something were to interrupt conventional cash flow.
