It feels great when your construction business wins more jobs and stays busy. But as you grow, sometimes things feel much harder to manage than they should. This feeling is a sign that your back-office accounting, the systems, people, and paperwork, might be breaking. Don’t worry, this isn’t a problem; it’s a chance to get stronger.
Is Your Growth the Right Kind?
Growth is good, but you must decide if it is the right kind of growth. Are you going after bigger, more complex projects, or are you taking on smaller jobs? Either way, taking on more jobs means more paperwork, which increases the risk of mistakes. Before you take on any new job, ask yourself whether you have the people, technology, and processes in place. If you keep doing things the old way as you grow, it will likely lead to chaos. Watch for these first warning signs that your back office is stressed:
- Margins are getting tighter: Are you taking jobs at lower margins just to get work?
- Things are lagging: Are you billing jobs on time? Are you getting change orders approved quickly?
- Paperwork problems: If your documentation is not in place, you are going to take a hit.
Where Breakdowns Happen First
Problems often start in the manual functions, especially billing. The breakdowns usually happen because of two key areas:
- People Issues: Do you have enough project managers and accountants? When you hire new staff, do they understand your company’s systems and processes, like how you handle change orders or track time? If you are expanding into a new geographic area, you may need a strategic hire who knows the local people and vendors.
- System Issues: If you are a smaller company using a simple system, you might need to switch to a larger system that can support future scale. A system that works when you are a $50 million company may not work when you reach $500 million.
More jobs = more paperwork = more risk for error.
How Weakness Impacts Your Profit
Even if your revenue is going up, a weak back office can hurt your profit in big ways.
- Falling Through the Cracks: If you miss change orders or forget to bill for subcontractor costs, it directly hurts your bottom line.
- Misallocated Costs: Putting the cost of one job onto another can skew your profit reports. For example, if a cost is put on a job with a 10% margin instead of one with a 20% margin, you lose half the expected profit.
- Cash Flow Problems: When billing is slow or clients delay paying, you can end up using a line of credit to pay your own costs, like labor. The interest you pay on that credit cuts into your profit.
Reports You Need to Check Today
You need good, timely information to stay ahead of problems. Construction company owners and leaders should review these reports regularly:
- Cash flow position on projects: Make sure your jobs are staying cash-flow positive.
- Committed costs versus budgets: Check that you are not exceeding your planned spending.
- Receivables and Retainage: Are clients paying on time? Are you collecting retainage as fast as possible?
- Labor efficiency and productivity: Check whether budgeted hours align with hours worked.
Work in Progress (WIP) Schedule: This is a key tool for a contractor, but its value is only as good as the accuracy of the information entered.
What to Fix Right Now
If you realize your back-office accounting is lagging, the first step is to stabilize the initial problems.
- Be Picky About Jobs: Take a “go, no-go” approach. Sometimes, the best job is the one you don’t take on. Make sure you have the people and capacity to take on new work.
- Address People and Training: If the problem is tied to your staff, address it through training. You must align the right people with the right skills for the right projects.
- Fix Cash Flow: If you have cash flow problems, deal with them right away, because “cash is king”.
- Strengthen Controls and Systems: If your growth is tied to system or control issues, focus on key areas, such as change order management and timely billing. It is important to have the right processes, controls, and systems in place before you grow significantly.
Being proactive with your growth plan is always better than reacting to problems after they happen. Growing for the sake of growing won’t work; you must approach growth the right way. It’s also exciting, but it needs a strong foundation. By focusing on the right projects, aligning your processes and people, and using the right reports, you can ensure your business grows without breaking.
Get help building a plan.
If you are seeing signs that your back office is stressed and you want help building a plan for smart growth, LGA can help. Contact us today to talk about your business and how we can provide the advisory guidance you need.
