The last few years have seen a lot of challenges for smaller businesses. While the construction industry in the United States is expected to grow over the course of the next year, history tells us the industry is not immune to the effects of a financial crisis. After all, the industry did not recover to its 2008 peaks until 2020. So, it's important for construction contractors to plan ahead and protect themselves from financial downturns.
According to Sir Richard Branson, a lack of cash flow is the biggest killer of smaller businesses. A project may be profitable, but if payment isn't made until it's completed, a construction business may not make it to the end. It's vital for businesses to have some cash reserves to pay for labor and materials. Ideally, those reserves would be enough to buffer against delays or issues with payments coming through.
With margins as squeezed as they are, underestimating the cost of a job could be a death sentence for some companies. If you still make "back of the envelope" estimates, consider changing that habit. Look for specialist software that can help estimate a build's cost based on the project's size and your desired profit margins. Today, it's possible to generate estimates with up-to-date pricing and even different time frames and margins quickly and accurately. For example, pro roof estimator software can help you:
Calculate costs of jobs. Calculations are based on the measurements of the roof.
Use up-to-date cost data. This provides an estimate of the costs of materials and labor.
Generate invoices. The software can create professional-looking, branded estimates to email to clients.
One way of staying in control of your cash flow is to be proactive with accounting. Many free accounting apps offer the basic tools every business needs, such as invoicing and tax management. Some apps even have smartphone versions so you can keep track of your finances on the go, saving you time and helping you stay informed. Take the time to compare Zenbusiness Money vs Quickbooks to determine your best option.
Look for software that handles invoicing, and be proactive about sending reminders to clients. Automated invoice reminders have been found to boost payment rates, which could help to smooth out your cash flow.
Learning what money moves you can make to save on taxes is a great way to help you build up cash reserves for your business. One of the first aspects of your company you should look into is if you’re structured correctly. Some small businesses are classified as corporations, but this type of entity doesn’t offer a lot of benefits to local contracting businesses that aren’t raking in tens of millions in revenue each year. It may make sense to switch to an S corp Michigan filing instead. This structure will offer you self-employment tax savings and give you the option of claiming your company’s losses as tax deductions, which can lead to a significant boost in your financial health.
While it's not possible to be a one-man band as a construction company, it is common for owners to wear several hats. If your goal is to expand beyond your immediate area and have several sites managed by a foreman, you'll have to delegate. This means paying workers a fair wage, because the cost of replacing an employee can be as much as 16% of their salary, even for entry-level workers. While you're still in the early stages or trying to save money, taking on some of the less time-consuming jobs yourself could make sense.
Preparing for an economic downturn means planning ahead. You never know how the financial winds will shift, so keep some money set aside to buffer against late payments or other unexpected issues.
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