Construction companies and contractors that follow the calendar year for their fiscal schedule start to wrap up their financial metrics in the last quarter of the year. This is when CFOs, accountants, and billing departments prepare year-end financial statements, an overall budget report as to how much profit or loss a business had this past year and a pipeline report for future planning.
Even though your company may be in the final month of the year, you can still do some things to make your company more financially sound in time for the new year. Here are some steps to take based on five year-end financial realities.
Five Year-End Financial Realities
Your construction company probably fits into one of these five categories at the end of the year. Once you figure out which one is you, take action to remedy any potential problems.
- 1. On Budget
- 2. Ahead of Plan
- 3. Profits Without Cash
- 4. Behind Plan
- 5. No Budget
If you’re on budget at the end of the year, congratulations to you and your financial planners! Everything worked out great and keep up the good work. Review several KPIs, including your backlog, pipeline, gross margin on the work-in-progress schedule. Examine any possible major overhead you may incur in the final month of the year.
If you’re ahead of your financial plan, determine two things. First, take a look at why your company made more money this year. Did staff work a lot of overtime? Were many people stressed? Did any department submit sub-par work? This type of work ethic isn’t sustainable as tired employees may burn out eventually while creating shoddy products leads to unhappy customers.
Second, invest some of your profit into making it easier to generate a profit next year. Make some technological advancements, hire more staff or pay down some debt. You might also consider sharing more of the profits with company stakeholders.
If you made a profit this year but have little to no cash on hand, find out why. Perhaps accounts receivable didn’t get money from customer orders just yet. Maybe you took on too much debt or some equipment costs came in too high. Consider extra financing from the bank if you’re able to take out a loan so you start the new year with some cash on hand.
If your company is behind on its finances, definitely find out why as soon as possible. Did your firm lose a huge customer? Were workers less productive? Did the sales pipeline break down at some point? Did the market for your products or services change due to some outside influence beyond your control? The sooner you find answers to these questions, the sooner you get back on track.
Were you too busy to plot out a budget for next year? Take a few weeks in December to make one.
Best Practices for Hitting Your Targets
Hitting your company’s end-of-year financial targets is important. Investors, whether they are banks, venture capital firms or stockholders, want to see positive progress. Consistent earnings and positive profits are important, especially in the up-and-down nature of the construction industry.
Your overall revenue is important because it shows bankers, bonding agencies, and customers that you have a viable company that works hard to try to make a profit. However, consider placing an emphasis on these other metrics ahead of revenue as a way to determine your company’s fiscal health.
- Profit before taxes as an absolute number and as a percentage of end-of-year revenue
- Profit after taxes with the same criteria
- Working capital (assets minus liabilities) as a measure of your company’s true worth
- Enough cash flow to cover three months of expenses
- Current ratio, or assets divided by liabilities, of at least 1.50 to show your assets are worth more than your liabilities
- Debt-to-equity ratio, or liabilities divided by equity, to indicate whether your profits help pay down any debt
Actions to End the Year Right
You may think of December as a slow month for the construction industry, but that’s not true as you work to shore up your financials. Do these things to put your company in a better financial position.
Finish up as many jobs as possible by the end of the year, and then collect the payments owed to you. Having fewer jobs going into the new year makes your budget easier to manage, especially when you consider jobs that keep dragging on and on become less and less profitable over time.
Let Go of Underperforming Assets
Do you have an old backhoe that just is more trouble than it’s worth? Do you have a foreman who simply can’t get jobs done on time? Consider cleaning house in December to make turning a profit next year an easier task.
Talk to Your Accountant
No one has a better year-end strategy for your company’s financials than an accountant. Talk to yours to see what you can do to get ready for tax time, implement forecast planning and create financial strategies for the new year.
Why Is Your Budget Important?
Your company’s budget shows two main factors of your company’s success. It proves your management team can come together to get something done, and it also lets everyone know about your firm’s financial standing. Implement these steps to strengthen your company’s financial standing as you head into another successful year.