29 Jul What is Construction Financial Consulting?
Have you ever heard of an "entrepreneurial seizure"? Michael Gerber talks about this phenomenon in his book E-Myth Revisited. This happens when someone brilliant at a craft—like design or landscaping—decides to start their own business. They're great at what they do, but suddenly, they're faced with running a whole company. It's a bit like a master chef opening a restaurant without knowing how to handle the books, manage staff, or comply with legal requirements.
You don't learn about the nitty-gritty details of business operations in high school and college unless you're on a specific business track. Even then, the concepts taught are more theoretical than the practical, day-to-day applications. Financial consulting gives you the expertise in the legal, accounting, and human resources sectors, bridging the gap to help transform your craft into a thriving construction business.
Unique Financial Challenges in Construction
Imagine this: when a construction company takes on a new customer, it's like giving that customer a loan without any credit or financial checks. The company has to spend a lot of money upfront, which depletes its cash reserves, and then cross its fingers, hoping to get paid later to replenish those reserves.
This situation is surprisingly similar to how banks operate, but many construction companies don't fully grasp the implications. Think about it: if you asked someone to lend you $50,000, they might refuse. Why? Because they don't know you or your financial situation, or simply because they don't have that much cash on hand.
For construction companies, this cash flow cycle—where there's a significant gap between cash outflows and inflows—is a major challenge. It's all about managing that gap effectively to keep the business running smoothly and successfully.
Financial Consulting in Project Management
Financial consulting is like a secret weapon for your project management and budgeting. One of our critical roles is helping construction companies estimate projects by breaking down budgets for different items, such as materials and labor hours, before the project even starts.
By doing this in advance, construction companies can track their progress throughout the project to ensure they stay on budget. Plus, it sets the stage for rewarding workers. For instance, if the budget and standards are met or even exceeded, companies can implement profit-sharing schemes to reward efficiency and adherence to the budget.
Let me share a story about a landscape company I worked with. Initially, they bid everything per unit—like per valve or per tree—without having detailed budgets. For instance, they charged $110 per tree, covering both planting and purchasing, but they didn't actually know if they were making a profit.
We shifted this company to a model where they bid based on time, materials, and overhead. This change allowed them to create detailed budgets for project management. The result? They saw a 10% increase in profits, job after job. By tracking numbers and efficiency, they could identify budget-killing issues and improve those areas for better profitability.
Common Financial Mistakes in Construction
One common management mistake construction companies make is paying bills only when people start screaming at them. Instead, it is best to adopt a pay-when-paid approach, which strikes a balance between keeping subcontractors happy and maintaining healthy cash flow.
When a construction company sacrifices its cash reserves to placate a complaining subcontractor, it harms their overall financial health. The best approach is to match the money received from jobs to the bills for those specific jobs rather than trying to pay everyone off indiscriminately.
Choosing the Right Financial Consultant
When choosing a construction business consultant, look for someone with industry experience and if possible, someone who has owned their own company or worked in the industry as an AR clerk, controller, or CFO. These individuals understand the intricacies behind a company and can help set up the necessary systems and processes for success.
This kind of expertise is far more valuable than working with any run-of-the-mill tax accountant. Many people turn to their tax accountants for business advice, but they often lack the practical experience you may need. Finding a construction accounting consultant who fits your needs is important.
Tips for Considering Financial Consulting
My advice to any construction company considering financial consulting is simple: find someone who can turn your money into more money. A good financial consultant should have a clear plan with specific processes you can easily implement to help you achieve your financial goals.
Conclusion
A construction business consultant is a vital resource for any construction company. By offering meticulous project management and implementing strategic financial practices, a skilled consultant can drastically improve the financial health of your business. If you are looking for construction consulting services, reach out to our team at Foundation Accounting & Consulting today.
Author Bio
Jeremy Lott's academic journey at Brigham Young University helped him found a landscaping company in 2006. Though the venture was initially successful, the 2008 market crash ultimately led to a heartbreaking bankruptcy.
This pivotal moment spurred Jeremy to take charge of his financial future. Through rigorous self-education and academic pursuit, including an MBA at the University of Utah, he honed his accounting skills and became proficient in tools like QuickBooks.
Now armed with expertise and experience, Jeremy helps business leaders in construction and other industries navigate financial uncertainties. His approach blends bookkeeping proficiency with strategic financial guidance, offering a lifeline to those seeking to transcend financial chaos and achieve lasting prosperity.
