Weathering Financial Storms in Your Construction Business
Updated: Jun 23, 2020
Financial storms in varying sizes
Financial storms can be minor or they can be devastating. Think of the way dust devils and tornados create different levels of damage. However, even a dust devil can grab and keep your attention when you’re in the heart of it.
Financial storms are real
Joe, Tonya, and I were having a chat. Consequently, this post was born. I mentioned I had come across another wayward piece of information. In short, the owner of an accounting service declared he could make his clients audit proof.
It would have been laughable, except . . .we weren’t laughing. We wondered how many people might think becoming audit proof is a possibility. To clarify, it is not.
In other words, it ain’t gonna happen, Baby.
When a tornado hits your town or business, there is likely to be damage. That is why the wise folks who live in Tornado Alley have built storm shelters.
Consequently, they are tornado prepared.
Likewise, when the IRS comes your way, the best safeguard is to be audit prepared.
Financial storms to prepare for
However, the IRS isn’t the only possible storm on the horizon. Commercial construction subcontractors need to be prepared for other inevitable financial storms. Because, there is every likelihood one or more storms are just around the corner from your construction business it is wise to be prepared. Be on the lookout for these possible financial storms.
A downturn in the economy
Job shutdown due to weather (yeah, the real weather)
Owner or general contractor bankruptcy
Pre-bid reviews by general contractors
Loaning institution reviews
Bonding and insurance requirements
Some of the above items are more akin to dust devils which cause you to duck and protect your eyes. However, others are more like tornados, and being in a safe place is called for.
3 financial storm preparedness measures
Controlled operational systems
You can set yourself apart as a savvy contractor by getting all your operational systems documented and in place. You become a savvy contractor ready to make the best of the good times. Furthermore, you’re known as the wise contractor ready to hunker down in the stormy times.
Remember all those little signs posted on the wall which direct you to the nearest exit or safe place where you can take shelter? That is to say, documented systems tell you which path to take.
Construction contractors with a well-designed organizational structure are better prepared and more likely to complete work on schedule. Don’t think the GCs in your area won’t notice.
My cliché bell is ringing. Yet, having “all your ducks in a row” concerning financial documents is imperative in both good weather and bad. They’re in place to serve you. Having your financial reports and documents ready and up to date means you can be better prepared for the future.
For instance, it is likely the general contractor considering your bid will want to assess:
statement of cash flow
backlog levels in relation to working capital
available bank funds or financing options
past credit problems
Having all your financial documentation ready and accessible gives you peace of mind for day to day operations. More importantly, those documents act as a buffer when a financial storm hits.
Dedicated save/spend accounts
A good start is to have a savings account for your commercial construction contracting business. However, there is more to it than having a savings slush fund.
Dedicated save/spend accounts put you ahead of the game. This method is similar to Dave Ramsey’s personal financial recommendations concerning envelopes. Using this system helps keep you from making spending mistakes. You know how much is available in each account.
More importantly, you know what it is for. As a result, you don’t buy equipment or perform tenant improvements with your personal tax liability funds.
Some categories which you should consider are:
Owner’s Personal Tax Liability
Equipment (and/or Vehicle) Repair, Maintenance, Replacement
Customer Satisfaction Program
Real Estate or Tenant Improvements
For example, take a look at the equipment account. You know that big shiny piece of equipment will need to be repaired, replaced, or removed at some point in the future. Setting aside a percentage of real income (real income = revenue – cost of doing business) puts the equipment-storm at bay.
* Your Profit account should be built up and not touched until it contains at least 6 months of operating expenses just in case. A fund of 12 months of those expenses is even better.
In conclusion, being audit prepared makes sense. What makes no sense at all is thinking you’re audit proof.
Being prepared to weather financial storms allows you to walk in confidence as well as gain peace of mind.
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