Financial essentials for your construction business
Industry specific advice for construction businesses on how to handle supply chain issues, use debt strategically, create cash flow projections and maximize slow seasons.
By ATB Financial 16 August 2022 7 min read
You’re busy doing what you do best: running your construction business. We’re here to give you industry-specific insights so you can serve your customers, adapt to an ever-changing economy and maximize your profits.
We talked with our Entrepreneur Strategists—industry experts who provide free business advice to Alberta business owners like you—to get a pulse on what the construction industry is facing in today’s market and strategies you can use to adapt.
Here are some of the key strategies they recommended:
How to plan around supply chain issues
You’ve likely experienced the effects of supply chain issues firsthand. According to Stats Canada, a survey from March 2022 showed that over half of Canadian businesses expect product and supply issues to continue over the next six months domestically. A Bank of Canada survey in the first quarter of 2022 shared that 4 out of 5 businesses would have some or significant difficulty meeting the increased demand coming out of the pandemic. One third of companies blame supply issues for holding back sales opportunities.
To combat ongoing supply issues, companies say they are:
- Trying new supplies or contracts
- Increasing order wait times, reducing product or service availability or turning down the work.
- Raising prices.
According to Hub International, supply chain issues in the construction industry from both COVID-19 and natural disasters in 2021 will continue into 2022. The lumber shortage is only now rectifying itself — it was US$610 per thousand board feet in early November, down from a record US$1,711 in May but still far up from about US$250 in April 2020.
While the supply chain issues facing the construction industry are very present, there are opportunities to adapt to the economic challenges. Here are a few strategies to help kickstart some brainstorming for your business.
- Reevaluate or renegotiate with your suppliers. Make sure your suppliers are integrated into your business, working seamlessly with you from ordering to invoicing. Work with them to create the best practices for both parties. If you’re considering a domestic supplier, make sure that work processes offset the increased cost of labour. If an international supplier is the only option, work with them to maximize shipping container space and reduce transport costs. It’s also important to consider inflation and international tariffs when looking at your current or new suppliers.
- Reconsider your offerings. By re-evaluating your current offerings you may be able to locate some opportunities to save on supplies. By routinely completing a self assessment, you'll be able to recognize areas where your business operations can save money.
- Adjusting your sales. While supply chain issues may be unavoidable, communicating with your customers is key. Most consumers are aware of ongoing supply chain issues. Through transparent and honest communication, you’ll be able to manage their expectations and continue to build relationships based on trust that will outlast any economic downturn.
- Forge new and unexpected partnerships. A potential takeaway from this kind of supplier shuffling could be forging new and unexpected partnerships. As the World Economic Forum writes, supply chain issues “have led to new alliances and co-development ventures between original equipment manufacturers (OEMs) and suppliers.”
Utilizing debt for bridging capital
Line of credit
Debt can help you navigate economic crises, finance your business and benefit your accounts receivable. You could apply for a loan, like a revolving line of credit (RLOC), to give your business funds to draw from for everyday operations while you’re waiting for your accounts receivable. Already have a line of credit (LOC)? You can try applying for a LOC increase to boost the funds available to you.
You have options if you don’t qualify for a RLOC as well, like factoring. Here’s how it works: you, the business owner, sell an invoice to a factoring company. They pay you a big percentage of the invoice as an advance. The factoring company will follow up with your customer for payment. After getting the payment, the factoring company pays you the rest of the invoice amount, minus fees.
Not sure what option is best for your business? One of our Entrepreneur Strategists would love to walk you through your options and give you the information you need to make financing work for your company.
Cash flow projections
A cash flow projection is a breakdown of the money that’s expected to come in and out of your business. Taking the time to forecast and plan for your businesses finances can help you prepare for the best and worst case scenarios, reveal opportunities to cut costs and set your business up for success. Here’s a cash flow projection template to get you started.
Setting up your cash flow projection
We recommend that you forecast two years out and break it down monthly into a 24 month forecast.
For incomes, break down your projection at least into:
- Cash sales: immediate cash received, exclusive of the amounts that will be invoiced, like deposits.
- Invoice payments: payments scheduled to be received from invoices sent (accounts receivable).
- Capital introduced: funds put into the business by the owner or investors.
- Loans received: funds put into the business by a lender.
Cash sales and Invoice payments can be broken down to reflect different services offered as well).
For expenses, break it down into the following:
- Inputs and materials for projects: this can be broken into cash payments and scheduled invoice payments (accounts payable) for clearer projections
- Wages directly related to project completion
- Contractor expenses directly related to project completion
- Wages for support staff
- Equipment and tool purchases
- Office expenses
- Leases or rentals
- Loan payments
- Add more categories for whatever you need (we recommend including everything)
Break each of these down to specific categories as much as you can. For example, utilities can be broken into phone, power, gas, etc.
When making the above projections, take into account:
- Seasonal changes to business. When is the busy season? When is the slow season? Do you have alternate services to offer during the slow season? How much variance is there between the seasons?
- Supply trends. Are the supplies and materials you need more expensive at certain times per year? Can you time your purchases to reflect this?
- Labour trends. If there are seasonal changes, how does this affect labour costs? Are subcontractors difficult to get at certain times? Will staff be without work or with little work for certain periods? How do you plan to mitigate these issues?
Cash flow projection reviews
With the seasonal and unpredictable nature of the construction industry, we recommend owners do a quick review of their forecast monthly and a full revision quarterly. This allows you to identify trends and spot shortfalls or surpluses early.
Monthly review. Compare your projections to what actually happened. Don’t panic if the numbers don’t match up perfectly, but watch for patterns month over month.
Quarterly review. Work with any categories that consistently did not fall in line with projections. What was missed when making the projections? Adjust accordingly.
Also use the quarterly review to look for ways to improve cash flow or lower costs. Give particular attention to:
- Accounts receivable. Can terms be restructured to receive payments faster? (Larger deposits? Discounts for early payment? etc?)
- Accounts payable. Can you negotiate with your supplies for longer terms or better interest?
- Inputs and material costs. Are your actual costs falling in line with your projections? How much does waste factor in? How much does delivery factor in? Do you have options to improve these costs?
- Employee wages and contractor costs. Are your actual costs falling in line with your projections? Can work assignments or pay structure be adjusted to increase productivity—for example, comparing piecework versus hourly? Adjusting bonuses?
- Overhead costs. Can you renegotiate terms or find new providers for phone, utilities, etc?
If you need support to set up your cash flow projection or have questions during the process, our Entrepreneur Strategists are here to guide you every step of the way.
Planning for the slower season
While some construction businesses are year-round operations, other companies provide seasonal services that create lulls in work. Here’s how to make the most out of your slower times to help your business (and bottom line) thrive.
- Provide other services during the slow season. For example, if you’re a stucco company, you could provide drywalling services during the winter.
- Reflect on the past season: your budgets, production numbers, how your crew met schedule, costs, clients.
- Review your marketing. Is your website up to date? Should you shift or add to your advertising efforts? Could social media be a useful tool for you?
- Connect with clients from the previous season to continue to grow and solidify your relationships.
- Go to trade shows to network with potential suppliers and clients.
- Take inventory on your equipment and supplies.
- Plan team training.
- Take time to relax and recharge—that’s hard to come by during the busy season.
Meet with a Strategist
Whatever obstacles your business is facing in this challenging economy, you have opportunities to pivot and optimize your funds. If you’re ready to talk through strategies and create a personalized plan for your business, reach out to book a meeting with an Entrepreneur Strategist. They’re here to give you free, timely insight with no strings attached.
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