increase profits

A Budget Process in 7 Easy Steps

Financial Management, The numbers

To most trades business owners the mention of budgeting makes their eyes glaze over or reject the idea outright. “I can’t predict what is going to happen next week, let alone in 6 months or more!” is a common response. But it doesn’t need to be that way. A budget is the best way I know to gain a greater feeling of control over your business and therefore your life.  Knowledge is power, so they say, and the knowledge you will gain about your business and what you need to do in order to change it, is an empowering process. A budget also ensures that you know before the year starts what you need to do to earn the return on your investment that you expect.

tape measures as a graph

The Importance of Back-Costing

Financial Management, Owner, Profitability, The numbers

Do you know what the actual gross margin you make from a job as soon as its finished, or for bigger jobs how you are tracking at each stage? Or are you so busy you just rush to the next job and hope the previous job delivers enough profit to stay in business?

Tracking how a job performs from a profit perspective compared to a quote or estimate is called back-costing, or job-costing as Americans call it, and is vital to maintaining a profitable company and to help you achieve your goals.

Man with pen writing a business plan

How to Manage Variations

Financial Management, Owner, Profitability, The numbers

As the old saying goes, “The only certainties in life are death and taxes”. In the building industry that should read, “The only certainties in life are death and taxes AND VARIATIONS”.

There is seldom a project completed without some change to the original plan or scope and this can lead to work being done that is not well documented or billed to the client on a timely basis. Variations are therefor a major potential cause of profit leak from a business, and also disputes with a client. It is essential that you, your client and your build team clearly understand what variations are and you have a reliable system to capture and process them through the job management and billing areas of your business.

Leaky bucket

Are profits leaking out of your business bucket?

Financial Management, Owner, The numbers

It’s profit reporting season. Do you have your latest financial accounts back from your accountant yet? Does the Net Profit seem lower than you expected? Maybe the profit is leaking out somewhere.

Your business can be viewed as a kind of bucket.  In the top you pour revenue, which comes from your marketing, sales and production efforts, then deduct the direct and indirect costs of producing that revenue.  Unfortunately everyone’s bucket leaks and so the amount left over (as net profit) is often a lot less than it could be and what is required to balance the effort and risk that you assume as the business owner.  It leaks out through holes such as: too many overheads, insufficient margin, working with the wrong clients, burning hours on fixed price contracts and a number of other ways.

Bigger Size Does Not Equal Bigger Profits

Owner, The numbers

According to Nicholas Bloom’s Harvard Business Review article, “Corporations in the Age of Inequality,” a slim percentage of top-earning companies actually earn significantly more profit than their rivals in what’s been deemed the “winner-takes-most” economy. As leading companies earn more, there is less profit remaining for lagging companies, only widening the gap.

So, what does the construction industry in particular look like? In research between the Construction Financial Management Association (CFMA) and Coltivar Group, a representative sample of 363 industrial and nonresidential U.S. construction companies ranging from $1 million to over $1 billion in revenue were studied. Profitability and return on investment were used as an objective lens to compare the companies.

While 50% of companies had a competitive advantage, defined as the ability to earn above-industry-average economic profits, the calculation revealed that companies in the top 20% earn nearly 83% of all economic profit, fulfilling the Pareto principle, or the 80/20 rule. The remaining 80% of companies are confined to the dog-eat-dog environment of the lower deciles, where they contend for leftover scraps of industry profit.

How did these successful contractors achieve the initial success to advance up the curve?

Can You Fly Your Business in Bad Weather?

Financial Management, Owner, The numbers

In aviation there is a rule around the weather and when a pilot is allowed to fly an aircraft. It’s called Visual Flight Rules, or VFR. The average private pilot is only allowed to fly their plane under VFR conditions, i.e. when you can see the environment around you with your eyes and you know where you are going.
The same thing happens in business. Average business owners are fine in good economic weather, but what if that changes? Can you fly your business in bad weather?

Prevent Budget Blowouts

Financial Management, The numbers

With the construction industry being pretty buoyant at the moment, attention should be turned to improving operational efficiency as the best way to increase profits. Last year I ran a couple of seminars based on the results of an industry survey on the frustrations builders have in project management.  It sparked some interest so I thought…