Keep Budget Analysis and Cash Flow Reports, Projections Current to Manage Construction Business Costs in 2023

If you do not have the time to update financials monthly, outsource the process to a consultant.

Staying on top of monthly cash flow reports and projections will take a construction business far in 2023.
Staying on top of monthly cash flow reports and projections will take a construction business far in 2023.

Time flies, and here I am in the beginning of February, trying to think through how 2023 is going to look for contractors and the economy in general. Some say good. Some say bad. Some say they do not know. But, with every major economic event that takes place, there are those who gain from the event, and those that lose from the event. For contractors, you can qualify that further depending on your location, and if you are in one of the storm or flooding catastrophe areas you have a lot of potential work to do,. If you are not, you maybe have to spend some time figuring out how your market and area of influence will treat you. In either event, your management skills will be called upon to properly manage workflow and cash flow.

In terms of importance, there are a couple of areas every leader needs to cover:

  • Cost of materials
  • Employee strength and weaknesses and cost
  • Operating cost management
  • Productivity opportunities
  • Interest rates
  • Access to minority-owned subsidiaries versus wholly owned subsidiaries
  • Interest rates
  • Cash flow budgets
  • Bank covenants

We could go on and on. But really it all comes down to providing adequate cash flow to pay vendors and banks and leasing companies. “No cash flow” is not an available option. So, I guess it is no secret then that you start and finish your “management process” with beginning cash flow and ending cash flow, which means working through all other management issues to reach that goal.

After reviewing 2022 results with some clients, I noticed two issues that could hurt them. First, they were not sure where they were financially for 2022. Not good. Second, I asked what they were seeing for 2023 and what cash flow to expect for 2023. Again, the “deer in the headlights” look. Not good. My response was:

Stay current on financials. They do me no good three months later. You also need a projection and cash flow analysis for the coming year. And if you do not have the internal time to keep financials current and generate cash flow statements and projections, then do something to change that by outsourcing the process. I am not suggesting adding full-time employees, but instead find a consultant who knows the construction business and has the financial expertise to help you out. It will be money well-spent. And once you start the process, you have the template to continue as necessary.

I like to have both a monthly budget and cash flow reports to which I can compare actual monthly results. I prepare a draft using revenue and cost assumptions and then discuss the assumptions with the management team to see if we are in the ballpark. You will find this highly beneficial because you get all the “players” involved in visualizing how their performance will impact results. Then, I zero in on a quarterly basis and adjust projections if any changes pop up. After the end of the quarter, you see how the results compare to your budget. Then, take the actual numbers for the quarter and add in the balance of the budget for the next three quarters to see how the annual numbers changed.

You do the same with cash flow analysis. This is especially important if you are in a seasonal business. I have asked on many occasion to have my loan payments deferred during my slow season. As long as the bank can spread the deferred balance out over the remaining months, they will at least consider your request.

I have had a lot of luck finding retired financial folks who can produce and evaluate the budget and cash flow process. If they have been in the business, they may even have templates they can use that fit your operation. Believe me, you will sleep better knowing you have this process under control and that no unanticipated financial event is going to rear its head next month.

So, in 2023 I am still suggesting keeping fixed costs down and to outsource what you do not know. The financial news is saying that rental is getting stronger because of the interest rates and cost of new machines. I am still in favor of being able to return a machine when I no longer need it because it removes that cash outflow from my cash flow analysis.

Also, spend some time understanding your costs. The financial gurus keep talking about how inflation is slowing down when, in fact, the latest numbers overall are 5% over last year. That is on top of the already-high inflation that was present already. So, when they say inflation is slowing down or has stopped increasing, they mean it didn’t get any higher than it was already, and not that the inflation disappeared. You may want to check with your major vendors what they are expecting for 2023, and where their prices are now compared to what they were in 2020, 2021 and 2022. And, if prices are coming down, you had better check to see what you have in inventory and determine how you are going to use the information in your bidding process.

This is the beginning of the year and no time to mess around. You still have time to get finances under control and budgets fully visualized for the year. You will love it and your banker will love it.

In April, we will talk employee retention strategies and cost-savings mechanisms, just in time for the spring busy season.