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.

In my conversations with many C-suite executives, I have observed that diversity, equity, and inclusion initiatives are often approached by organizations and the leaders within them as a “feel-good” initiative – the right thing to do. Diversity is so much more than that. The tenets of diversity and inclusion are a moral imperative for all of us. Deep organizational changes are usually required to begin to approach the goal of being a diverse and inclusive environment. This effort may seem daunting and, in some cases, may be difficult to get the buy-in to launch.

Fortunately, there are very real financial reasons to embrace diversity, as well bringing yet another reason to the table to support necessary organizational change and another measure for the results of investment in these initiatives.

As with any initiatives, leadership teams would be remiss if they did not question the impact of dollars and long-term results. Without a doubt, diversity drives dollars to the bottom line, increases shareholder value, and is a characteristic sought out by investors. Let’s examine just a few of the many data-driven reasons to focus on diversity, not only because it is the right thing to do for business, but because it is also the smart (and profitable) thing.

Diversity Improves Problem Solving and Decision Making

Companies that demonstrate diversity in the workplace can examine issues and decisions from multiple points of view and solve problems in different ways. As mentioned in the Harvard Business Review article “Why Diverse Teams Are Smarter,” diverse groups raise more facts in their problem-solving processes than homogeneous teams, and when errors occur, they are corrected faster. In a PNAS study where financially-oriented participants were placed in either ethnically diverse or homogenous teams and asked to price stocks, the diverse teams were found to be 58% more likely to price stocks correctly. This is but one of countless examples of how diversity leads to better decisions and takes away blind spots that would otherwise be present but undetected. Further, reducing these blind spots also reduces an organization’s exposure to a variety of risks.

Diversity Increases Productivity

The Network for Business Sustainability cites research showing that “a 1% increase in racial diversity similarity between upper and lower management increases firm productivity by between $729 and $1590 per employee per year.” This evidence came first from studying tech organizations in a given period and showed even greater productivity gains in comparable diverse Fortune 500 organizations. Diversity improves productivity in part because of the widened perspectives previously highlighted. It instills the ability to examine tasks and strategies from multiple angles and allows organizations to pursue those that are the most advantageous. Productivity gains from diversity also stem from more effective communications and interactions when people see others like themselves in an organization, including presence on upper and lower management teams. Diverse teams empower more people to feel heard and allow leaders to tap into new approaches, interpretations, and perceptions that drive innovation at higher rates than homogeneous teams.

Diversity Expands Customer Base and Revenue Streams

Broader representation within an organization also permeates areas such as product design and marketing and fosters overall innovation. In short, wider collective inputs lead to insights that expand views on what is possible and what is wanted or needed from both current customers and groups not yet served or marketed to. The beauty industry provides a great example of diversity’s expansion power. When cosmetics companies used inputs to recognize that skin tones are not simply light, medium, or dark, new shades and products were formulated to individualize offerings and revenues soared. At the forefront of this was Fenty Beauty, which launched in 2017 and was lauded for its 40 shades of foundation and commitment to inclusion. The company generated $100 Million in its first 40 days, now generates more than $570 Million per year in revenue, and has an estimated worth of $12 Billion.

Diverse team members will often drive conversations that lead to the expansion of products and services to address segments of the market that might have been otherwise ignored or missed. This is reflected in simple customizations leading to expanding SKUs; for example, when a manufacturer of leashes and accessories for dogs expands its products to address needs for service dogs based on input from the disability community. Customer experience is also taking the forefront as a brand differentiator, in many instances surpassing products and price. A diverse team will lead to better connections and better communication with a broad customer base, playing a key factor in customer satisfaction and brand appeal. Some brands will focus on specific segments of the population, and that might be a great niche, but others might simply be missing out by not reaching other groups. That means leaving money on the table and not serving potential consumers.

Diversity Improves Employee Retention and Acquisition

Most companies are competing for the right talent. CFOs and CHROs must take a serious look at the cost of talent acquisition and, what we all hate to think about, the cost of a bad hire, which can be close to 30% of their annual salary, according to the U.S. Labor Department.

Employees in diverse companies report that they feel more at ease and that their contributions are both appreciated and recognized. These feelings lead to increased loyalty from employees that in turn leads to higher retention and longer tenures. Anything a company can do to retain its talented employees directly impacts the bottom line in a positive way, as it reduces the time and expense associated with having to find, hire, and onboard new employees. Improved retention also increases employee morale and productivity in general.

Diversity also improves talent acquisition by expanding the pool of candidates made available to an organization, reducing the time and related costs to fill positions. Individuals want to feel represented in an organization and see that there are opportunities for advancement based on merit, not on unspoken norms and discriminatory criteria. This includes adults with disabilities, a group that experiences the highest unemployment rate of all minority groups. Organizations who make accommodations and take actions to welcome disabled individuals and other underrepresented groups into their workforce gain an incredible opportunity to strengthen their business.

A Positive and Profitable Path

Diversity and inclusion must be more than a feel-good initiative that organizations casually pursue. Organizations need to approach diversity actively and with intent. It will not result from simply having “we-welcome-everyone” statements on employment applications or other communications and by just saying all the right things. It won’t happen just because you’ve had all staff participate in training. Legitimate, significant change must permeate all processes within an organization, impacting employees, customers, and markets alike. The rewards for companies that achieve this go well beyond knowing they have done the right thing.

CFOs must embrace diversity, equity, and inclusion initiatives…not only because it is the right thing to do, but because it will deliver profitability, long-term sustainability, and so much more for their businesses.

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Keeping an eye on your cash flow ensures that you are staying on track with your monthly expenses, including those unplanned ones that seem to always pop up. It will also help you determine when you can start to grow your business, or if you need to adjust your strategy based on seasonal or fluctuating business.

What Makes Up Cash Flow?

There are different streams, or categories, that fall under cash flow; some of which are outgoing and others of which are incoming or are assets.

• Revenue – This is the money that you make for the goods or services that you sell. This is your bread and butter and why you do what you do.
• Costs – This will be your longest list and will include things such as staff, business expenses, building costs (rent, utilities, etc.) costs of materials for goods sold, etc.
• Assets – These are items that are neither incoming nor outgoing but that have value to your company, such as equipment, inventory, etc. Things that you will, or could, get money for in the future.

Bust out an Excel document and mark down all of the cash flow items that apply to your business. Do you make candles for a living? You need to think about the wax and wicks you use, any finished candles you keep in the studio to sell are assets. Do you have a photography studio downtown? Don’t forget to write down rent and each of your utilities as costs, plus all of your camera gear as assets. No matter which industry you’re in, when you sell something, that’s revenue.

Once you have a list of all of your cash flow items, it will be easier to track in your cash flow system.

How to Track Your Cash Flow

There are several different ways in which you can track your cash flow. These days it is recommended to use cloud-based accounting software, such as Xero so that you can access your financial information from anywhere, and you won’t have to worry about losing any of your data. You will also be able to automatically track revenue and expenses and generate reports.

Keeping digital receipts is another way to ensure that you’re accurately tracking your expenses, giving you a more accurate picture of your business’s current financial standing.

Once a month meet up with your accountant or Virtual CFO to ensure that you are on the right track and that everything is balancing the way it should be. This way, if something isn’t measuring up, you can catch it early, knowing you don’t have to go back further than 31 days.

Having a Virtual CFO is a great alternative to having a full-time company CFO. This way you get all the knowledge and expertise, with the savings of not having to pay for a full-time salary.

Common Cash Flow Issues

There are going to be times when you go to balance the cash flow and things just aren’t aligning. Some common cash flow issues are:

• Expenses are too high
• Income is too low
• Not making the most of your assets
• May have forgotten to enter something in
• May not have categorized something correctly

Once you get used to updating your cash flow regularly, you will probably see the number of occurrences for these issues diminish. That’s not to say that there won’t be mistakes or errors, but don’t panic. It could simply just be something was entered in incorrectly, and if not, talk to your Virtual CFO or accountant. The great thing about having everything online is that it is all traceable, up-to-date, and easy to identify opportunities for your business.

We hope that managing your start-up’s cash flow doesn’t seem so scary or overwhelming now. Knowing how important it is, and how much it can save you in the end, monitoring your cash flow is a simple way to invest in the health of your business. Remember, you’re never alone, there are plenty of online resources, plus you can always ask your accountant or Virtual CFO for assistance and advice!

The post Cash Flow 99: How to Manage Your Startup’s Cash Flow 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.