Financial leaks draining building and construction business profits

 

 

 

Hidden construction profit killers: The financial leaks that could be draining your business

 

Your active project list and pipeline looks healthy, and money is consistently coming in the door. Yet, you feel like you’re always a little short or having to stall until the next invoice payment clears.

What’s causing you to leak money left, right and centre?

As building and construction business advisors, this is a very real and common conversation we have with new builder clients. But it’s not big business issues usually slowly draining their profits. It’s the smaller, hidden costs and efficiencies eating away at the bottom line.

Feeling the financial pinch? Here’s what could be costing you profit.

 

Hidden profit killers and how to solve them

Providing gut or verbal estimates

 

When you’ve been in the building game a while, it can be easy to provide an estimate on the fly. Afterall, that gut feel is based on experience. But your gut could be leading you astray and causing:

• Incorrect material pricing
• Resourcing and material gaps
• Missed margin opportunities
• Scheduling and supply chain issues

It’s not about your gut being wrong but more backing it up with the latest pricing, project and resourcing information. By creating a process for formal estimates, you can review builder margins, better consider risks and required contingencies, and negotiate material pricing with suppliers.

 

Not using cash flow reporting

Just as quickly as money comes in, it goes out again, and you never feel like you can get ahead. While the kneejerk reaction might be to get more jobs, it won’t solve the problem.

This leak can often be plugged with cash flow reporting and forecasting. With these in place, you can more actually see where your money is going, when it’s needed and predict when you might fall short. The result? You have the ability to make more informed decisions and have a bigger picture view of your cash flow.

> Signs your cash flow could be in trouble

 

Poor communication

Poor communication causes more than simply scheduling issues and conflict onsite. Miscommunication can lead to major productivity issues, impacting everything from costly rework errors to material over or under ordering. So much so, 9 in 10 construction leaders recently listed collaboration and better communication as their biggest productivity driver.

However, improving your communication is more than simply getting your team to communicate better. Think about introducing standard processes and channels of communication, utilising your toolbox meetings more effectively and actively using WIP and project reporting to keep up to date.

 

Irregular WIP reporting

Work In Progress (WIP) reporting is one of the most unrated tools in the profit toolbox. As well as identifying potential profit leaks, it can highlight cost variations, scheduling issues, and additional resources and materials you need.

Yet sadly we find many builders don’t keep their WIP reporting up to date, leading to inaccurate project information and out-of-date insights. Without regular reporting, it can be impossible to identify profit leaks before they happen.

> Hidden dangers waiting in your WIP reporting

 

Using old price lists

That existing price list might be winning you jobs and helping you quote faster, but it could be losing you money before you even start the job. 

By not regularly reviewing pricing, you could be creating margin leaks, revenue gaps and project blindspots.</b As business advisors, we recommend our building and construction clients review their price list on an annual basis or when they:

• See large ups and downs in sales
• Experience cash flow decreases, tightness or on going gaps
• Start relying heavily on discounts
• Notice changes in competitor pricing

Identifying margin losses and profitability after each project can also provide insight into what pricing strategy changes you need to implement.

 

Finding and plugging your financial leaks

When identified early, a lot of these profit risks can be reduced or avoided. This is where regular risk assessments can come in handy, and why they are a key focus in our building and construction improvement program.

 

Step 1: Identify your risks

During this process, you step through potential scenarios and explore how it would play out, how likely it is to happen, what would occur and how we would manage it.

Using something like the Mead Partners risk survey can be a great starting point.

 

Step 2: Implement risk controls and strategies

Once you have identified potential risks, it’s about taking proactive measures to reduce their potential impact. This could be creating strategies to reduce the risk straight away or identifying triggers to look for before you take action.

As business advisors, we work alongside you to introduce proven controls and strategies to better manage risks – many of which have been used by other builders. We also take into consideration how much risk you are comfortable with, also known as your risk appetite. This approach ensures you have strategies in place that match you risk appetite and also helps define what triggers need to occur before a strategy comes into play.

 

Step 3: Review your risk management plan

In fast moving industries like building and construction, reviewing your business and financial risks on a quarterly basis is key.

Doing this as part of a wider business improvement program or quarterly business review can also help you be better manage these risks and unlock more profit opportunities.

 

Start step 1 now and uncover your biggest profit risks

Take our risk assessment survey and understand where your financial leaks are lurking.

>Take the survey