The single most important document you can create and maintain for your construction business—or any small business for that matter—is a budget. A properly maintained budget allows you to determine how much revenue you need to generate in order to be profitable—or just stay afloat. A budget forces you to track your expenses carefully, ensuring that you notice problems and rein in your expenses before it is too late. Plus, if you are looking for capital to grow your small business, most investors and banks want to see a budget before they cough up a loan, to ensure that your financials are on track.
Beyond those very good reasons, a budget protects your business because it forces you to be a better decision-maker and planner. When you have an accurate financial picture, you are less likely to allow impulses to dictate your decisions. For example, your budget will tell you pretty quickly if you should invest in that new work truck.
If you don’t have a budget—or if you have just done a bad job of maintaining one—start from scratch using this process:
Estimate Your Sales
Projecting your sales can be difficult, especially in the construction industry, where weather, cost increases in gas and materials and other factors affect profits. The task is even tougher if you are just starting your business and have no history on which to base your estimates.
Still, you can make an educated guess about how much revenue you can expect to generate over the course of a year, taking into account how many clients you can serve during that time and the average profit you can expect per client. Be realistic. Your business might take off, but it is best to err on the side of caution and underestimate your revenue potential. Do some research to find out what is typical in your industry and geographical location.
Remember: This step is critical to business planning because you will need to base all of your other decisions on what you expect to bring in.
Calculate Upfront Costs
If you have not started your construction business, you must account for any initial investments required to launch the business. Such costs include:
- Business permits
- Licensing requirements
- Down payments to purchase real estate or security deposits on rental spaces
- Heavy machinery or vehicles
- Tools
- Marketing collateral, such as website development, signage for your business, business cards and advertisements
- Office supplies, including computers, software and furniture
- Fees and deposits on utilities and other services
Depending on your location and the competition you are up against, those costs could be high. You will need to spend time bargain shopping and collecting quotes to calculate a baseline cost for starting your business. Be sure to stick to only the necessary costs initially.
Figure Out Your Monthly Expenses
Each month, you will have ongoing fixed expenses that are the same month-to-month (for example, rent, insurance and payroll taxes) and variable expenses that fluctuate depending on vendor price increases, seasonal variations and more (such as employee hourly wages, building materials, gas for vehicles and utilities). Monthly costs include:
- Salaries, wages and benefits for employees and yourself
- Supplies and inventory
- Utilities, including phone, gas, Internet, water and trash removal
- Business insurance and taxes
- Rent or mortgage
- Loan and credit card payments
- Services such as accounting, maintenance and marketing
- Vehicle or equipment payments and insurance
Be thorough and account for every payment you make on a monthly basis. If you have been in business for a while, review your past 12 months’ worth of expenses to project future expenses. If you are just starting out, you will need to conduct some research and come up with estimates of monthly expenses.
Track Expenses
Using budgeting software, an app or a simple spreadsheet, log every purchase—no matter how small—you make for the business. SCORE offers free budget templates and other tools to make budgeting less daunting.
Unexpected costs, such as repairing vehicles or replacing broken tools, are going to pop up. Keeping a detailed list of everything you spend ensures that you know how much money is available to cover those unexpected costs.
It is smart to categorize your expenses (for example, “Employee Costs,” “Equipment and Tools,” “Utilities” and so on). That will allow you to see where you regularly experience deficits and typically have a surplus so you will be able to reallocate funds as needed.
Tracking is key to your success, especially when it comes to saving on building materials for each of your jobs. If you don’t have the time to log every expense, hire someone to manage your books, even if it is just for a few hours each week.
If you are just starting a business—or even if you have been in business for a while—don’t underestimate the importance of creating a budget—and maintaining it. While it will take some time and effort upfront, having a budget that you follow can mean the difference between your small business succeeding and failing.