Most construction company owners and managers spend most of their working hours on two of the three required operational functions it takes to make a profit and grow their companies. First you must win profitable revenue. Pounding the pavement to find good projects to bid is hard work. Then it takes more effort to estimate and put together a competitive bid. And then you lament over how much to mark-up or cut your bid to beat your competition. Secondly, after you land a contract, it takes more hard work and time to get everything ordered, subcontracted, scheduled, installed, completed and paid.
All this effort to find and do work leaves little time to focus on the third and most important function required to make a profit. Knowing and tracking your numbers must be the number one priority for construction business owners to be successful. Unless your goal is to be busy and broke, you must spend an equal amount of time focused on accounting, financials and job costs. Too many construction companies do great work, with excellent quality, and make too little money because they don’t know their costs and how much they need to charge to make a profit at the end of the year.
Hard work makes you tired, not rich!
Without an accounting background, many tradespeople go into business and win work charging standard prices accepted in the marketplace. By charging market prices, they keep busy and pay their bills. In the long run, this practice leaves them tired without enough profit to get ahead. To know your costs starts with learning what you need to know. For example, every drywall contractor needs to know how many man-hours it takes to hang drywall per square foot. This requires them to have timecards with work tasks broken down by work activities their crew can track every day. Then at the end of every job, you can determine how many man-hours it took to complete the job tasks versus your estimated budget. Without this ongoing up-to-date knowledge, you’ll never know your costs, be able to track your jobs, estimate the next bid accurately or make any money.
Knowing your numbers requires owners and managers of every construction company to learn how to read a financial statement, interpret their income statements, calculate accurate job cost budgets, fill out work-in-progress reports, track overhead, determine how much sales are required, and know how much mark-up they need to make a profit. The mistake I see owners make is to hire a bookkeeper who is not experienced or qualified in construction accounting. They turn over the finances to them without direction or knowing what they want them to do, except pay the bills and balance the checkbook. Business owners realize they need to know their numbers and costs but don’t dedicate time required to learn what it takes to make a return on their assets, investments, risk and time.
To know your numbers and make more money, you must make learning construction accounting a top priority. Foreman need to know what field employees need to do and how to do it. The same is true for business owners and accounting. You can’t run your company if you don’t understand construction finances. Take a class, go to a workshop, attend a boot-camp, read a book or take an online class. Just like learning a trade, accounting and finance take time to learn. Learn your numbers or don’t expect to get ahead and make any money. And trying to farm it out to someone else doesn’t let you off the hook as the owner of your financial future.
It seems as if business owners hope hard work will eventually make them money. But the odds they hit a jackpot, win the lottery or inherit a fortune to create profits are better than continuing to run their businesses without focusing on numbers. The following numbers you must know, track and review on an ongoing weekly and monthly basis, even if you hate numbers!
1. Know your mark-up numbers
You must know how much mark-up you need to cover your overhead and profit for the year. Bidding lots of jobs won’t make your numbers work. You need to balance your overhead and profit goals with your mark-up and sales to end up at year end with the profits you want on your income statement.
2. Know your costs
Bidding work starts with knowing accurately how much it costs to actually build work. Do you know your labor, crew and equipment costs? How much does it cost to have a crew on a job per day? How much does it cost to own your trucks, tools and equipment? How many hours does it take your crew to hang 500 sheets of drywall on a ceiling 20 feet in the air?
3. Know how much sales you need
How much revenue at what mark-up do you need to cover your overhead and then make a profit? The total annual sales required is determined by the annual overhead and profit you want divided by the gross profit margin you can get in the market you compete in. Do you know these numbers?
4. Know your numbers are accurate and timely
Who cares what your numbers are six months after you complete your jobs. When you start your construction company, you invested in tools and equipment to build projects. Without a similar investment in a fully integrated accounting package that gives you weekly and monthly job cost updates, it won’t matter what equipment you have working and how fast your crew performs. In addition, you need someone to manage your accounting department who is an expert in job costing, construction financial statements, over-under billings, competed contracts and getting you the numbers you need to know to always make a profit.
Know your numbers
Working hard and performing quality work doesn’t really matter unless you make it your priority to make a profit. Don’t delegate or ignore the most important part of your business. Stay on track by taking at least two to four hours every week to review these numbers with accounting and project managers. This small investment of time will give you a much better return than going out to the jobsite to try and encourage your field workers to go a little faster.
George Hedley CSP CPBC is a certified professional construction BIZCOACH and popular industry speaker. He helps contractors grow, make more profit, build management teams, improve field productivity, and get their businesses to work for them. He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. E-mail GH@HardhatPresentations.como sign-up for his free e-newsletter, start a personalized BIZCOACH program, attend a 2 day BIZ-BUILDER Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors. Visit www.HardhatPresentations.com for more information.