While there are uncertainties that can have an impact on your business performance, with proper financial planning, you can ensure you’re as prepared as possible to deal with these challenges.
In this article, we’ll take a look at how to develop a financial plan that will help you steer your company through good times and bad. It’s all about taking a systematic approach that creates secure foundations for the future.
Let’s get started!
Financial Challenges in the Construction Industry
The construction industry is big business in the US. According to the US Census Bureau, total construction spending reached a seasonally-adjusted annual rate of over $2.1 trillion in September 2024. It’s a highly competitive field.
But it’s not all sunshine and roses for construction businesses. There are certain financial challenges the construction industry needs to face in general.
Every construction project, large or small, involves a lot of different moving parts. You’ll be juggling demands from clients, suppliers, contractors, and other stakeholders in the building process. And because construction projects take a long time to complete, it’s easy to run into unexpected cash flow problems.
Some potential problems are:
- Cash flow issues resulting from clients not making payments on time or requesting payment extensions
- Spiraling costs due to unforeseen operational complications or unexpected regulatory changes
- Lack of contingency funding arising from cost underestimates during the competitive bidding process
Some of these are within your control to a certain extent. For instance, making sure you create realistic cost projections when bidding for work prevents the headache of having to complete a project without adequate funding.
But some are beyond your direct control. You have no say over market regulation or clients’ financial positions, for example. But you can mitigate the risks these pose by developing a robust financial plan.
Elements of a Financial Plan
Let’s have a quick overview of the sections you should include in any financial plan. The main ones are:
Income Statement
The income statement should account for all streams of revenue generated during the reporting period, which will typically be monthly, quarterly, or annually. Here, you list the following details:
- All relevant revenue streams from ongoing construction and development projects, consultation services etc.
- Cost of sales, in other words the total cost of generating the revenue, which will include things like labor and raw material costs
- Any other operating expenses
- Total net profit or loss for the reporting period
Balance Sheet
This represents a snapshot of your business’s financial position in terms of its assets and liabilities:
- All assets including cash in hand, current materials and other resources
- All liabilities including debt such as money owed to suppliers
- Shareholder equity (total assets – total liabilities)
Sales Forecasts
This one’s fairly self-explanatory. You need to include realistic projections of the revenue you expect to generate from sales over the coming period.
Break it down by revenue type. So, for instance, you might have a line for revenue from construction projects delivered and one for consultancy services. Obviously, what you put in this section will depend on the exact nature of your construction business.
Cash Flow Projections
Forecasting cash flow can be tricky, but this is one of the most important sections of the financial plan. It’s worth spending some time analyzing how cash flows in and out of your business’s coffers so you can estimate cash flows as accurately as possible. Break down your forecast like this:
- Current cash position
- List of sources of cash
- Where you intend to allocate the cash you currently have
- Forecast schedule of cash inflows and outflows
Personnel Plan
A report from the AGC found that 94% of construction companies have been experiencing difficulties in finding qualified workers in 2024. This has obvious implications for labor costs going forward.
And since labor costs constitute one of the most significant expenses in most construction businesses, you need to devote a section to them in the plan. Don’t forget to include every labor-related cost, not just wages. The full list might look something like this:
- Wages
- Cost of employee benefits
- Travel expenses
- Training and certification costs
- Employee-related insurance costs
Break-Even Analysis
Finally, it’s crucial to establish what your business needs to do to be profitable. This means conducting a break-even analysis to determine how much revenue you have to generate to cover your costs.
Doing this helps you develop your sales strategy because it keeps you focused on what you have to do to make sure your business remains viable.
In addition to these sections, you may decide to include others if they’re relevant to your business.
For instance, if you have high-interest bank debt, a debt management section can be helpful for your financial planning. This can also be useful when the time comes you need to file a full financial report before other potential investors.
Getting to Grips With Financial Planning in Construction – Key Steps
Now let’s turn our attention to the practical steps you should take when drawing up your financial plan. These will ensure your plan is not only realistic, but also comprehensive enough to help you navigate any unexpected challenges.
1. Assess the Existing Financial Situation
First, you should conduct a review of your business’s current financial position. This will form the basis of your plan. Collect all your financial information including:
Current Income and Spending: Create a detailed list of all your organization’s incomings and outgoings. These will be valuable when you’re drawing up your income statement.
Short-Term and Long-Term Debts: Set out all your current debts; this will typically include loans, overdrafts, and any accounts payable.
Overall Financial Analysis: Drawing up something like a SWOT analysis can be useful here. Test your current data against potential disruption scenarios to see how resilient your company would be if the unexpected happened.
2. Set Your Business Goals
Having a good grasp of your company’s financial situation, you can then move on to developing specific business goals for the upcoming period.
As well as listing core goals such as project delivery, you could also consider breaking down your goals into short-term and long-term objectives. These could include:
- Short-Term: Reducing debt, increasing profit margins, boosting cash reserves
- Long-Term: Entering new markets, developing new services, other diversification
3. Implement Budget Control
Effective cost management is vital if you hope to achieve sustainable business success. First, create a set of cost forecasts based on industry benchmarks and your own company’s historical data. Doing this creates a framework that will guide your project budgeting.
Keeping control of your budget means paying close attention to every aspect of your operations. Consider both direct costs such as salaries and the cost of buying raw materials, and indirect costs like insurance and licensing.
It’s important to prepare for the unexpected, too. Always keep a cash contingency fund to hand to deal with any unforeseen problems.
4. Optimize Cash Flow Management
One of the best ways of making sure you control your budget effectively is by focusing on cash flow management techniques. Small differences in how you manage cash flow can add up, and the impact on your overall financial resilience can be significant.
For instance, a simple change like setting up your invoicing system to send out automatic reminder notices to clients can help increase payment rates, for very little effort on your part. Other strategies that you might consider are:
- Breaking down projects into distinct phases and staging payments due accordingly
- Offering clients a wider variety of payment options for their convenience
- Making strategic use of financing options
5. Mitigate Potential Risks
Any robust financial plan has to take account of the risks involved in construction work. The first step is to identify all possible risks, breaking them down by category. Then, analyze the potential impact each risk could have on your business and develop a strategy for dealing with it. You can think about:
- Financial Risks: Late payments/non-payment of invoices, sudden cost increases, delays to project completion
- Legal Risks: Lawsuits, changes to regulatory environment, contract disputes
- Safety Risks: Workplace accidents, extreme weather events
- Operational Risks: Supply chain disruptions, delays caused by external events
6. Conduct Regular Reviews
As with any plan, it’s crucial to revisit it regularly to check how well it’s faring in practice. Look at all your income and costs, both overall and broken down by project, and reconcile the accounts with the forecasts.
This can be a somewhat laborious process, so a good option is to do your account reconciliation with OneStream software. It makes the process of comparing your accounts payable/receivable, cash and investment positions, and assets and liabilities to look for discrepancies easier.
You’ll probably find your financial plan will need to be fine-tuned to account for changing realities in the operational environment. That’s fine. Remember that the main purpose of the exercise is to make sure you have a clear understanding of your company’s financial health at any given period in time.
Solid Financial Foundations Take Work
In such a competitive industry as construction, having a solid handle on your business’s finances is essential to ensure long-term success. That’s because given how complex each construction project can be, you need to be certain your business is ready to withstand the unexpected.
Luckily, you can achieve this by taking a prudent approach to financial planning. If you commit to systematically analyzing your company’s financial position on a regular basis, keeping a close eye on cash flow, and making plans to mitigate potential risks, you’ll be creating a great foundation for business growth.