1 – Doing Work Without Documentation

One common financial mistake construction companies make is doing additional or changed work without documentation.

The construction industry is very hands-on, meaning a lot of decisions and changes are made on the field based on a quick conversation and a handshake. All too often, that additional work doesn’t get documented through a formal change order before the work is done.

If the change does make it to the office for documentation and invoicing, it’s common for the pricing to have already been negotiated on-site and invoiced without formally crunching numbers. This often results in little to no profit for the extra work. The result of these undocumented changes is an added cost to the contractor that may or may not be billed in the end.

Why it’s an issue: Undocumented changes or changes that have invoiced at a loss can mean reduced profit margins or even a loss on a project.

How to fix it: Construction companies can fix this financial issue with a better set of processes to facilitate mid-project changes. It starts before the project begins with a detailed scope of work and is supported by a detailed change-order process. This process should be designed to allow time for the contractor to put together pricing—instead of shooting from the hip—as well as document project changes and send them to the finance team for invoicing. This document should be signed by both the contractor and customer before the additional work is started.

2 – Invoicing Late & Missing Bank Draws

Many projects have invoice submission deadlines for a monthly draw from the bank. If you miss the deadline, then it may not be until the next month before the invoice can be submitted to the bank and paid.

Why it’s an issue: Just because your invoice hasn’t been paid on time doesn’t mean your workers and vendors are going to wait for their money. If late invoicing has become common practice in your company, you’re likely having to front or float costs until the invoice is paid. This not only increases your financial risk but also means you have less cash on hand to put back into the company.

How to fix it: Late invoicing is often the result of lax reporting systems, a lack of communication from the field, or an overworked financial department. Consider consulting with an outsourced CFO to determine where systems can be improved for more timely invoicing and optimized cash flow. Many financial issues related to cash flow in construction companies can be resolved by restructuring a few key financial processes. However, if your processes are optimal and you believe the issue lies in overworked financial staff, you may consider hiring a part-time bookkeeper or financial controller to help balance the workload.

3 – Misunderstanding Costs

One of the most common financial mistakes in the construction industry is not having a clear understanding of costs. A construction company should have comprehensive knowledge of down-to-the-detail costs. This includes not only materials and labor but equipment and administrative costs as well. Without this understanding, projects may be incorrectly priced, leading to jobs that are ultimately destined to be money losers.

Why it’s an issue: Without in-depth knowledge and processes surrounding costs, you can’t have an educated view of your profit structure. You’re likely bidding some jobs too low, losing out on some projects you’ve bid too high, and may have undiscovered adjustments that, if made, could maximize profits across the board.

How to fix it: The best place to start is to look at your income statement. Are expenses being properly allocated to the associated jobs? Are there any costs that aren’t accounted for? Do you have a method for factoring in expenses such as equipment depreciation, administrative expenses, or property rentals? If you’re not sure where to start, consider consulting with a CFO advisor.

4 – Misallocating Costs

Hand-in-hand with the mistake of misunderstanding costs is the misallocation of costs. Each project’s costs should be meticulously accounted for to achieve a more reliable analysis of profitably. Without this information, a construction company may not know whether a job is truly profitable or not.

Common issue construction companies may find is that they have some jobs that are extremely profitable, and others are not. While for many construction companies these projects balance out to be “overall profitable,” without a deeper look, construction companies may be leaving money on the table and missing out on a higher level of profitability.

Why it’s an issue: Making the best financial moves for your construction company means having detailed financial data to make more informed and strategic business decisions. This starts with an accurate allocation of costs. Better understanding costs can lead to more optimized profits on all projects, ultimately leading to a more profitable company.

 How to fix it: If you have a talented financial staff, then some analysis and a more detailed refinement of financial processes can usually do the trick. However, if your financial department is staffed only with bookkeepers and/or accountants, you may want to consider bringing in an outsourced CFO on a fractional basis to help with some optimization. Not only can a CFO help implement a better system for predicting and allocating costs, but they can also refine your vendor agreements and service contracts and make strategic adjustments to maximize profits and accelerate sustainable growth.

5 – Fixed Material Cost in Bid Contracts

Some contractors have built into their contracts the ability to adjust material prices due to market fluctuations…and some don’t. For example, when steel prices jumped a few summers ago, some companies saw an increase in material costs almost overnight and many had to eat the cost since they couldn’t contractually pass the cost on to the customer.

Why it’s an issue: Market changes, especially in the current manufacturing environment, fluctuate quickly. This can mean taking an unexpected loss if you don’t have language in place to protect yourself from unexpected changes.

How to fix it: Implement language in your service contracts to allow for adjustments based on market price. Some construction companies, to avoid ambiguity and distrust with their customers, will set standard language where if the market price for materials changes by a certain percentage then the extra cost will be invoiced to the customer.

6 – Insufficient Cash Reserves

Construction companies generally have to front all of their labor and material expenses, sometimes by as much as 90 days or more. Depending on where they are in the construction cycle and how big the job is, they may not see some cash come in for up to a year. If a construction company doesn’t have the cash reserves to handle this, they may end up having to take out unnecessary loans or delay important payments such as payroll. This can accrue interest costs or cause distrust with vendors or employees.

Why it’s an issue: The construction industry is already laden with plenty of financial risks. It’s important to minimize the amount of time between the time you pay your employees and vendors and the time you receive payment from the client. This will help to minimize your financial risk and keep more cash on hand for seasonal fluctuations, unforeseen circumstances, and for preserving working capital to grow your business.

How to fix it: One change contractors can make is by requiring a 25-50% deposit on a project. This can help reduce the amount of labor and material costs being fronted by the company. You can also consider renegotiating vendor contracts to extend billing cycles or to pay some or all of the costs after the project is complete. This works best when you have a good, trusting relationship with your vendors. If you don’t yet have this type of relationship with your vendors, start cultivating one now.

7 – Front-Loading Costs

A final critical issue construction companies often face is front-loading costs. This is the tendency to use money received from one client project to pay for the costs of a second construction project. This often occurs because of a problem project, such as one that is improperly bid or that runs into delays or labor overages. The construction company will scramble and “rob from Peter to pay Paul.” This can often turn into a cyclical problem, causing issues further and further down the line and creating significant risk.

Why it’s an issue: Taking from a second project’s funds to pay for the first project can put the company at risk of not being able to finish the second project, ultimately putting both projects at risk. It can also damage relationships with the other customer since this misallocation of their project funds may mean a lack of funds for their project and can often result in delays or temptations to cut corners on quality.

How to fix it: Front-loading is often the result of poor project planning, improper bidding, and/or lack of a timely and robust forecast. Bids should ensure that the fees charged in the early phases of a project correlate to the value of the work performed.  Implementing a rolling forecast for each project and ensuring that all bids have a sufficient contingency built into the later phases of a project estimate can both manage or eliminate the risk of front-loading.

The post Most 7 Common Financial Mistakes Construction Companies Make appeared first on VVREDDY & ASSOCIATES.

First Things First

Before you begin searching for vendors, it’s important to analyze your business requirements. What products or services do you need? How important are they to your business? How often do you need them? How will these products and services affect your bottom line? How much are you willing to pay? What are your expectations of a vendor?

Thinking through these issues and putting the answers in writing makes it much easier to narrow your list of candidates and eliminate those that don’t meet your minimum requirements. Be sure to get input from those who will be directly affected by the vendor relationship.

Once you have determined your requirements, it’s time to put together a document that you can give to potential vendors stating your requirements and soliciting a response. Depending on your needs, this may take the form of a Request for Quotation, Request for Proposal, or Request for Information. In each case, this document should contain a detailed description of your requirements and expectations as well as any assumptions, constraints, or special conditions the vendor should know about. If you are looking for materials, be sure to request samples.

When you have received enough vendor proposals, you can begin the selection process. Always keep in mind that you are looking for a vendor that can provide what you need when you need it at a price that fits your budget. Due diligence in the selection process can make or save you a lot of money in the long run.

Pricing Isn’t Everything

It’s easy—and often foolhardy—to choose a vendor simply because they offer the lowest prices. It can also be tempting to switch vendors whenever you discover a less expensive deal. That deal can go sour very quickly if the supplier doesn’t deliver on time, fails to provide consistent quality, or refuses to work with you in times of special need. Value for your money should be a greater concern than just getting a bargain price.

Following are some other qualities you may wish to consider when searching for the best vendors for your enterprise:

Reputation

These days it’s easy to check a company’s reputation online. Look for ratings and comments from past and present clients and note especially any that talk about the financial effects of the vendor relationship. Be aware, however, that there may be false reviews, either positive or negative, on the Internet. If appropriate, you may wish to contact companies that have dealt with the vendor and get their opinions directly.

Stability

If you are looking for a long-term relationship, you will want to find a vendor that is likely to stay in business and provide consistent service for the foreseeable future. Longevity may be a key consideration, as well as the stability of the industry. Another consideration may be the number of clients the vendor services. A company that has only a few clients can quickly get into financial trouble if any one of those clients should disappear.

Reliability

The last thing you want is to fail your customers because a vendor failed you. You want to find a vendor who delivers accurately, on time, all the time, without excuses, and who acts quickly to resolve any problems. Spending time and money to fix mistakes caused by a vendor can be extremely costly both in lost revenue and loss of customer confidence.

Flexibility

When unexpected problems or opportunities arise, as well as in times of seasonal changes in demand, you want to be able to work with your vendors to make adjustments. An ideal vendor is willing to help you fill rush orders and change or cancel orders after they have been placed. There may be times when you need to delay payments or adjust terms. A vendor who understands and is willing to work with you can be a priceless asset.

Responsiveness

The right vendor will be easy to contact and will promptly answer your calls and correspondence. You should look for vendors who care about your business relationship and are committed to helping you succeed. Ideally, your vendor will be knowledgeable enough to give quick answers and creative enough to help you find quick solutions.

Integrity

Too many vendors make promises they can’t keep, in order to land a contract. Others may misrepresent their capabilities or fail to disclose potential problems. Look for vendors who are honest about what they can and cannot, will and will not, do. Watch for red flags that may indicate overpromising or dishonesty. A vendor with integrity will ask questions and point out concerns before entering into a contract.

Remember that integrity is a two-way street. It’s important that you be honest with potential vendors, and fully disclose any circumstances that could affect your business relationship. The value of a long-term partnership based on mutual trust and accountability cannot be understated.

Sealing the Deal

Once you have found a vendor you want to work with, it’s time to negotiate a contract. You want to work out the best deal possible for both you and the vendor. Some things to take into consideration are:

• Pricing and expectations regarding increases or reductions
• Payment terms and flexibility
• Communications
• Inventory balance (having sufficient to sell without tying up too much capital tied up)
• Exit strategy in case things don’t work out

Additional Tips for Choosing the Right Vendor

It’s important to remember that vendors are critical to your business. It’s a good idea to have at least 2 “go-to’s” for critical items. That way, if one is struggling you have options (as the saying goes, “Don’t put all your eggs in one basket”). It also helps in negotiating prices when suppliers know you have options to help keep them honest. We’ve found that, for the most part, vendors seem to understand it is part of smart to have a few sources of supply and don’t take it personally if they don’t get all your business.

For critical suppliers, it is important to meet with them at least a couple of times per year in a semi-formal “business review” setting. This helps keep surprises to a minimum for both parties and helps the relationship.

Final Thoughts

Having the right vendors can make or break your business financially. A long-term relationship with a vendor who provides well-priced products and services in a consistent and timely manner and is willing to work with you in times of special need is of inestimable value.

The post Choosing the Right Vendors for Your Business appeared first on VVREDDY & ASSOCIATES.

But budgets can feel tricky – if you’re still in the early stages, you may think it’s impossible to make an accurate budget. Or if you’ve been operating for years, tracking every nickel and dime can make your head spin! But regardless of where you’re at in your business journey, having a business budget allows you to be proactive, instead of reactive, for your important expenses.

Looking to start building your business budget? Here are our simple tips to help!

Start with Expenses
Starting with fixed expenses lets you know your break-even point and the primary bills that need to be covered. These are the easiest to find because they tend to be the same month over month (rent, internet, hosting, staffing costs, etc.). Then, determine variable expense (COGS, variable staffing, utilities, etc). You can include a variety of scenarios for this budget depending on your income for each month.

It’s also important to note down seasonal, annual, or one-time investments. If you decorate the office for the holidays, make sure you account for that expense in your December budget! If you require additional staff in the summer, make sure your staffing budget allows for that. If you have a large upcoming expense, such as new equipment or furniture, you can also begin setting aside money each month to fund the purchase, instead of having payments afterward.

List Your Revenue Streams
Depending on your business, you may have multiple streams of income. From multiple clients to different streams of your business, or even investment income, it’s important to account for all of the different sources of revenue your business has. If you’ve been operating for years, you can use historical data to determine what your average monthly income will be for each month. If you’re just getting started, you may want to mark down a minimum revenue needed to keep your business operating smoothly.

Most businesses have high seasons and slow seasons, so accounting for the increased revenue at different times of year is important, as it can impact your expenses as well (more sales could mean more supplies, longer hours, and additional support).

Plan for the Future
Are you thinking of growing your space, investing in new equipment, or breaking into a new market? After subtracting your expenses from your revenue, you can now start to look for opportunities to invest in your business and set yourself up on a path for growth.

If you have accrued revenue in your business, consider how that could best be spent on the business, or if additional investment is a way to go. If you see that there’s some wiggle room in your monthly budget, perhaps a new team member to help take your business to the next level, or investment in streamlining and automating your systems to scale would be a great way to use those extra funds!

Prepare For Any Scenario
When building a budget, it’s worthwhile to plan for any scenario. Ideally, you’d want to have a ‘break even’ budget – knowing which expenses you could cut or revenue streams you could rely on if you needed to simply break even each month. Then, you can make a ‘stretch’ budget – if you reach all your big goals, what would that look like for revenue, expenses, and investment in your business?

How To Track Your Budget
The easiest way to track your budget is through cloud-based accounting software that automatically tracks your expenses and revenue and tracks how much you have in each of your accounts for a 360-degree view of your business finances. We recommend using Xero for its simplicity, user-friendly design, and powerful features!

Meeting with your accounting or virtual CFO on a monthly or quarterly basis also helps you to stay on track, and get an expert perspective on your business’s finances, helping you make the most of your current position and setting yourself up for success in the future.

Looking to take your business to the next level? Reach out to the Virtual CFO and let us guide you in making the best financial choices for your business.

The post A CFO’s Guide to Building Your Small Business or Start-Up Budget appeared first on VVREDDY & ASSOCIATES.

Time management techniques for working from home all have to do with better planning. Ultimately, you’re in charge, so you have to map out your work ahead of time if you want to be most productive.

We’ve already covered how to stay productive when working from home. Now let’s jump into how to manage your time better when it’s just ‘me, myself, and I’ at the ‘office’ all day.

Plan Your Time
Depending on the nature of their work, some remote employees will have to stick to strict working hours, just as if they were coming into an office.

But for many of us, working from home offers us the freedom to find a schedule that works best for our lives and other commitments. That doesn’t mean, though, that you should roll out of bed whenever you feel like it, work whenever you feel like it, and change course whenever you feel like it.

It may take a little experimentation at first, but make a daily schedule for yourself, and stick to it. Write it down, and share it with your team, so that you’ll be more likely to hold yourself accountable.

If you’ve been struggling with at-home work, you might be surprised what a difference a real schedule can make.

Plan Your Breaks
Part of managing your own time is managing your own breaks. We all need breaks to avoid burnout and stay productive. Again, exactly when to take breaks will be individualized, but make sure you’re scheduling them in – and then actually sticking to them.

Plan Your Physical Space
We’re (sadly) well more than a year into the pandemic. And (sadly), things are far from back to normal. The reality is that most of us can expect to work from home at least some of the time, well into the future.

So take the time to set up a workstation that is separate from the rest of your home/life. Even if that’s just clearing out a closet for your desk, having separate spaces for work and not work can help you stick to that schedule we just discussed. When you have a place to ‘go,’ it’s easier to manage your time once you’re there.

Plan Your Digital Space
This is really key for managing your time at home. Make sure you’re using an app or software that helps them keep track of your time, your schedule, and your tasks. For example, Asana is one of our favorite apps for remote teams. It’s a great way to keep on track and stay in the loop regarding projects, workflows, and team collaboration.

And while we’re on the topic of your digital world, try to set some guidelines regarding your own use of social media and other online distractions while ‘on the clock.’ You wouldn’t let your boss catch you killing time on Instagram, and it’s probably not the best idea for when you’re working at home, either.

Plan To Connect
When we feel disconnected, it’s easy to feel unmotivated and start wasting time. To counter this, make connecting with your team part of your regular routine. See our tips on how to keep your remote team connected here. Finally, if you’re struggling with time management while working from home, maybe it’s time to take a few tasks off your to-do list. We love helping tech-based startups stay in control of their finances, so they can focus on what matters. To find out if a Virtual CFO is right for you, please reach out.

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