New year, new budget … right?

Every new year brings with it the promise of brighter opportunities and greater success. So, like any business of any sort, you’ve laid out your construction company’s 2017 budget in minute detail … right?

If not, don’t feel too bad. In the hustle and bustle of moving from one project to the next, it’s not unusual for contractors to let new annual budgets slip onto the back burner or out of sight completely. Yet, at the very least, reviewing your budget — if not creating a wholly new one — is critical to properly managing revenue and cash flow. So let’s get started.

Minding your margins

First look at your income statement to analyze your sales, margins, operating expenses, and profits or losses. If times have been tough, you may not even want to know how little income you’re pulling in, but it’s important to look at the specific numbers.

Once you do look at the income statement, however, your natural tendency may be to get hung up on it — particularly if your construction company is showing a profit. Yet bear in mind that this part of your budget doesn’t reflect cash-related activities such as buying new equipment or borrowing money from the bank. Just because your business appears profitable now doesn’t mean it’s out of the woods, because the cash you’ve earned may be dangerously tied up in other financial assets or obligations.

An important number to focus on from an overall budgetary standpoint is your gross profit margin. If your margin is declining, you may need to adjust or increase your contract revenues or try to lower your contract costs.

Keeping the money moving

In today’s cash-conscious economy, the center point of your budget is surely the cash flow statement. It begins where the income statement leaves off — with your net income. From there, the cash flow statement is typically divided into three subsections:

  1. Operating (activities associated with running the business),
  2. Investing (activities associated with growing the business), and
  3. Financing (activities associated with obtaining money).

Cash flow is important for any business, but construction companies can all too easily be undone by a lack of available dollars at critical times. So your budget needs to account for cash flow at the time you re-establish your budget, as well as your projected cash flow for the coming year.

To integrate a cash flow projection into your budget, take your current and anticipated projects and estimate your expected revenue by month. Naturally, predicting exactly when cash will come in is tricky — especially if you’re working with an unfamiliar project owner or undertaking a spec job. But you can use your historical payment data to calculate an average for planning purposes.

Staying within yourself

With your income and cash flow down on paper, a third critical aspect of your budget is the balance sheet. Think of it as a snapshot of your construction company’s financial condition on a given date. The balance sheet usually lists assets, liabilities and shareholders’ equity. Elements such as these can help you realistically shape your budget going forward.

For instance, if your balance sheet shows a substantial amount of debt, you’ll likely need to curtail discretionary expenses (such as company parties) in your budget. You can also use your balance sheet to calculate your debt-to-asset ratio and working capital ratio. It can tell you how many of your assets (heavy equipment, office technology) are owned by your lender(s) and how this could impede your budget for the year.

Getting help

There’s no law mandating that you set a budget. But, without one, a construction company can quickly find itself cash poor and debt heavy. Your CPA can help you review your financial statements and establish a feasible budget that puts you on the road to greater profitability.