With rising materials and labour costs, plus the endless delays caused by labour and material shortages, profit margins are shrinking in the construction industry. In this situation, it’s tempting to believe increasing your sales will lead to increased profits. While growth is great, it’s not a guarantee of improved profitability.
A better option is to closely monitor 3 key areas of your business because they have the power to transform profitability.
Key area #1: Work In Progress (WIP)
The longer it takes to reach each progress payment or completion milestone, the longer your cash is tied up in a job. Even worse, if you have an overdraft, any delay in receiving payment is an additional hit to your profit margin.
By reviewing your project scheduling in terms of estimated and actual completion dates, you can factor in the cost of these delays to ensure your profit margins remain intact. We can also show you how reducing your average Work In Progress time by just 1 day can significantly improve your profits.
Key area #2: Managing your costs and expenses
In accounting, costs are divided into Overheads (such as vehicle and equipment leasing or warehouse and office rent) and Direct Costs (such as purchasing materials and paying sub-contractors).
When quoting jobs, it can be challenging to anticipate labour, materials and wastage costs. But these are areas that are highly unstable at the moment and, therefore, can have the greatest impact on improving the profitability of future jobs.
By analysing past projects, you will learn valuable insights to help you quote future projects more accurately to improve profitability. Reviewing your Overheads may also reveal opportunities to reduce them.
Key area #3: Invoicing
It’s common for businesses to have a bookkeeper come in once a month to take care of their accounts. But that means you are potentially waiting weeks between achieving a progress payment or completion milestone and invoicing a client.
Now add your payment terms which may be 30-90 days plus the actual time it takes for your clients to pay you. No wonder many businesses have problems with cash flow.
We suggest you:
- Look at reducing your payment terms so you will be paid faster.
- Start invoicing your clients within a few days of reaching every payment milestone.
- Monitor late payments closely and be proactive. If you don’t want to chase slow payers yourself, engage a service that will do it for you.
Remember, the longer it takes to receive payment for your work, the less profitable the project will become.
True profitability comes from understanding your numbers
The Construction Business Navigator Growth Program helps trades and construction business owners understand their businesses in a new way to improve profitability and scale.
To learn more, book your FREE, no-obligation 15 Minute Construction Growth call. After the call, you may be invited to participate in the Construction Business Navigator Growth Program.
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