Getting into the construction business can be risky and take a lot of investment in equipment, payroll, labor, and general operating expenses. Cash flow is probably one of the most important things to manage and going into something like that without a good mental model of your business model and strategy is a mistake. You should have a pattern / template / game plan for the types of jobs you want to do and the resulting costs / benefits. Let's talk more about the business.
Plan your strategy with this: Construction Business Cash Flow Forecasting Model
Orchestra: You can also compare a construction business to an orchestra. Just as an orchestra needs to harmonize the various instruments to create beautiful music, a construction business needs to harmonize the various financial elements to create a profitable business. These financial elements include revenue streams, expenses, and cash flow. By aligning these elements, a construction business can create a sustainable financial model that supports growth and profitability.
Revenue Management
First, let's talk about revenue streams. This will be the payments received from various jobs. It is important to have policies for when payments are collected.
- Do you collect a percentage as the job is completed?
- Do you collect half up front, half when you are finished?
- Do you require a smaller down payment and then the rest when the job is completed?
- What price will you charge to get the job done?
All of those things will effect cash flow and growth. You can plan them with the financial model linked above and there is no single right answer. Often times it will depend on the construction industry you go into.
Also, you will have to decide what types of jobs the business is going to take on. For example, is it bigger government or commercial contracts that have a long period for completion (years) or do you do smaller jobs that may take days or weeks? It all depends on the strategy and the economics should all jive no matter which way is chosen.
Expense Management
Now, let's talk about expenses.
- Are you going to rent or own the equipment?
- How is payroll setup?
- Are you sub-contracting labor?
- How do payments work for sub-contractors?
- Will you finance any costs or get started with all equity and sustain operations with equity?
- What kinds of payment terms will you plan to have with suppliers?
These expenses need to be close to lining up with when revenue happens in order for things to move smoothly. Over time, as you build up working capital, the amount of buffer goes up and there is more room for mismatching on revenues and expenses (which can help you get better terms on things) but in general it is good to line these financial pieces up as much as you can.
For the above, you generally use percentage of completion as an accounting method and driver of when payments are received and when expenses are paid for if the jobs last many months / years. I do have a nice bookkeeping template for accrual or cash-basis accounting.
More related content: Construction Business Competitive Advantages
Related Financial models and Tracker Templates:
