Construction Financial Management: 4 Strategies to Curb Profit Leakage

You work hard to manage your construction financials, but there’s a good chance you’re missing out on potential revenue due to “leaky profits” that aren’t always obvious on a balance sheet. The key to increasing profit in the construction industry is to have a comprehensive view of your entire business. Make your business more profitable with these four strategies.

1. Improve Business Efficiency

Even the most efficient businesses have room for improvement in their financial processes. Construction financial managers use key performance indicators (KPIs) to measure and track performance. KPIs provide benchmarks based on specific metrics, helping you monitor progress, identify issues, and take prompt action.

For contractors in the construction industry, client demands determine your most important project KPIs. You should always know if your construction project is on schedule, within budget, and being executed accurately and safely.

Important Financial Management Indicators to Track

Important Indicators to Track: Accurate financial data is crucial for monitoring these key performance indicators:

Liquidity

Know your available cash at all times. Drill down to the project level to identify which projects are providing liquidity and which are draining resources.

Work Backlog

Monitor your backlog to estimate future cash flow and adjust business plans accordingly.

Labor Productivity

Track budgeted hours, hours worked, and percentage of work completed to understand productivity impacts on profits.

Schedule Adherence

Keep track of your work schedule to adjust for delays and unforeseen events.

Budget Compliance

Monitor costs in real-time to quickly identify and address any budget issues.

Change Requests

Track, document, and negotiate payment for all unplanned work and expenses to avoid profit loss.

Project Cash Flow

Identify successes and failures in project execution to understand which projects are consuming or generating cash.

Committed Costs

Ensure suppliers and subcontractors are contractually committed to protect against unnecessary risks.

2. Leverage Automation

Tracking everything manually can be overwhelming. Using construction financial management software can provide complete visibility into your cash flow, alerting you to any issues immediately. Fortunately, automation can provide complete visibility into your cash flow, alerting you to any issues immediately.

Automation streamlines essential finance functions such as payroll, expense management, bank reconciliation, accounts payable, accounts receivable, and compliance. Instead of sifting through traditional reports or spreadsheets, use software with alert systems that provide immediate, actionable information. When an issue arises, such as a late invoice, the system sends notifications so you can take prompt action and prevent profit loss.

3. Create Impactful Reports on Project Costs

Evaluate your reports to ensure they deliver the right information at the right time and provide a comprehensive view of your project’s financial health. Seek feedback to refine content, structure, and frequency as needed, providing clear insights for your team.

Reports and automated alerts are more effective when paired with a dashboard that consolidates metrics, KPIs, and other essential data. Dashboards offer a concise visual snapshot of real-time data, highlighting critical project and accounting details and helping make better financial decisions.

Dashboards can be customized to display data according to users’ roles, allowing detailed exploration and contextualization of specific data points. Users with permission can generate reports using self-service capabilities, providing instant access to information for informed decision-making.

4. Provide Accurate Estimates for Cash Flow Management

In construction, providing quick and precise estimates is essential for proper financial management and securing profitable projects. While a single flawed estimate might not jeopardize your business, consistently taking on unprofitable work can rapidly erode your profits. Bid strategically, prioritizing quality over quantity. Identify the most lucrative project types for your business and bid intelligently to secure construction projects that align with your strengths and profit goals. Continuously monitor your bidding success rate to refine your strategy.

Leverage technology to improve the speed and accuracy of your bids. Utilizing financial and project management solutions can enhance your understanding of actual project costs, enabling you to secure work that meets your standards and ensures a profitable margin. Strengthen your construction business finance by evaluating and enhancing efficiency, automation, financial reporting, and estimation capabilities.

While you may not predict every challenge, gaining comprehensive insights prepares you to tackle emerging issues effectively. Implementing appropriate changes in your construction company now can mitigate financial risks and establish a solid foundation for a prosperous future.