Construction executives in small companies have to get creative when managing a smaller budget. They don't enjoy the same degree of flexibility as more established companies, and these constraints can often feel frustrating. However, it's important to look at a limited budget not as an obstacle, but as an opportunity for growth.
When small business owners approach limitations with a positive perspective, they'll find it's far easier to adjust their current practices. Sure, they'll have to make a few sacrifices here and there, but the pressure on their finances is ultimately beneficial. It helps them adapt and improve.
At the same time, a small construction firm can incur a substantial amount of debt through mismanagement. The cost of equipment, labor, supplies and similar necessities will build quickly if an executive isn't resourceful. They need to know how to plan, organize and direct their budget.
What should construction executives keep in mind when developing that budget? What strategies should they employ to reduce their expenditure? Here are the top five techniques for tactical budgeting.
Startup contractors will often begin the budget process with an estimation of their total revenue for the year. They think the number will provide context for how much they're free to spend. While this makes sense to a certain extent, it's far better to start with the projected spending instead—something they can actually control.
To that end, they should divide their expenses between hard and soft costs. Hard costs will typically account for the majority of their expenses at 70% of a project's budget, while soft costs cover the rest. When they split their budget into these categories, they'll have a clear idea of where they can and can't apply cost control measures.
As executives develop the rough draft, they'll need to consider a few key points that will affect their final budget. They should review their income statements from the past several years and determine any relevant trends. It's easiest to take the most recent income statement and adjust each line item for the pattern, up or down, including:
It's also important to check the average gross margin, which is just as crucial to establishing a construction budget. Once an executive has looked over the trends and data, they can accommodate what they've learned and refine their budget. For example, if evidence shows the market is likely to shrink, they can assume their sales volume and margins will also decrease.
A contractor can fall short of their profit goals for a variety of reasons, but a recurring issue that shows up again and again is overconfidence. That's not to say confidence is a negative attribute—which isn't the case at all—but optimism is potentially harmful during discussions about operations and sales. Executives have to remain realistic about gross margins.
They need to look at the past performance of their companies and see if anything has changed. Have they reduced turnover, purchased new equipment or employed strategies to mitigate the risk of downtime? If not, the business owner shouldn't assume they'll see an increase in productivity over the coming year.
Executives can prevent budget issues when they secure full financing before a project begins. This isn't always easy, of course, and they'll occasionally have to compromise to get ahead in the competitive bidding process. However, racing to win a bid is often harmful if a company isn't prepared to meet the expectations of the client.
Instead of rushing into a project, executives should take time to ensure they're financially capable of accepting a contract. Budgeting software is often helpful for managing money and decreasing the likelihood of delays, and small business owners should look into their options if they haven't already pursued this measure.
A proactive approach to maintenance is always preferable to the alternative. If construction executives wait for their equipment to fail, they risk delays and additional expenses. Fortunately, they can address this specific issue by scheduling preventive maintenance, saving a substantial sum of money on repairs and downtime.
Executives who properly maintain their fleet will encounter far fewer problems on their worksites. In time, they can reallocate some of the money they've set aside for maintenance and spend it on something else. It's crucial to develop a preventive maintenance program, so executives who have postponed this responsibility should research the subject as soon as possible.
Construction executives have to get creative when managing a smaller budget, and there are strategies that can help. Whether they take time to reevaluate their existing budget, develop a preventive maintenance program or follow another suggestion on this list, they can feel confident in the success of their companies. With that in mind, executives should review their options and make the necessary changes today.
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