Having a robust accounting system and understanding your numbers in the building and construction industry is absolutely vital to the success of your business. In South Australia in 2019 at least 11 different home builders went into administration and a further 2 have already done so in the first month of 2020. These numbers are alarming, but in good news, there are things that can be done to protect your business.
Have an accounting system with job costing
In the previous 5 to 10 years, the accounting industry has undergone a significant change and has been revolutionised by the introduction of cloud based software that is paid for on a monthly subscription. It is now easy for small businesses to fully digitalise their accounting and administration function.
By utilising software and apps such as Xero, Xero Projects, WorkflowMax, Simpro, Receipt Bank, Hubdoc, Stripe and many more you can create a system for your business to automate your business processes. These apps will allow you to go through a whole project cycle of quoting, recording costs of both time and materials, invoicing, receiving payment and preparing reports, including reports on the profitability of each job.
These systems allow you to use automation to save time in your administration work and will also allow you the benefit of real time information that you can draw on quickly to make better informed decisions about your business. Accurate accounting and job costing software will mean that you can highlight areas of concern, before it is too late, and whilst you still have time to make changes within your business to improve the profitability.
It is essential that you estimate and quote jobs accurately. If you under estimate and have agreed to a fixed price with a customer, it is very difficult to go back later and ask them to pay more. It can be damaging to your customer relationships and to your brand in general. If you are regularly under quoting on jobs, you will lose out on any profits on those jobs and it will put significant strain on your business cash flow.
A good way to ensure you quote accurately is to use the job/project data that we spoke of earlier in our accounting system. Using data collected in your project management system, you can determine exactly how much you spent on labour and materials for each job. By comparing previous actual costs for similar jobs, you will be able to prepare accurate quotes going forward. It avoids the need to quote using gut feel and takes away a lot of the guess work.
Choose the correct billing method
Another way to ensure profitability on a project is to consider moving to a cost plus margin method of billing rather than fixing a price for job. This means, if there are fluctuations in how much the job costs you, you can pass this on to the client and still maintain your profit.
If you are currently using a fixed price model, you need to ensure your quoting is accurate and that you stick closely to your original quote. It can be easy for the client to request extras and additions. You need to be very clear with what is and isn’t included and ensure you issue variation quotes when additional items are requested.
Invoice regularly and collect on your debtors
As mentioned above, prioritising preparing your invoicing is essential. Best practice for smaller projects is to invoice it immediately after completion. For larger projects you should ensure you agree to invoice clients at certain key milestones, or better still on a weekly or fortnightly basis. Regular invoicing will assist with your cash flow and ensure that you are able to continue paying for the labour and materials for each job.
You should also ensure that your payment terms are short and that you regularly follow up your debtors. If you are invoicing electronically, your software system can be set up to send automatic payment reminders on a regular basis to ensure that your invoices are paid promptly.
Another great tip is to ensure you make paying you as easy as possible. I frequently encounter invoices that do not have the details on it to allow me to make payment. You need to ensure that you include your BSB and account number on your invoices. You could also look at setting up payment facilities that allow clients to pay using credit card or BPAY. Using software such as Xero, you can have a direct link to the payment options on your invoice that you send out electronically. The easier you make it for someone to pay you, the quicker you will get paid.
Prioritise reviewing your numbers
It is common for accountants to have business owners tell us that they are too busy working in their business to work on it. It is absolutely essential in the building industry that you regularly review your financial data. The biggest for builders is their cash flow so it is important that you prepare accurate cash flow projections for each job and for your business as a whole.
You should also be regularly reviewing each job to ensure that it has not exceeded budget and that the job will be profitable. Identifying early that a job is going to exceed its budgeted cost will allow you to have discussions with customers around varying the initial quote and on charging some of the added expenses.
Identifying issues early allows you the time to find possible solutions. Again this is the benefit of having real time information in your software systems. If you do not discover that a job has made a loss until 6 months after it is completed, there is not much that can be done about it. If you discover it whilst still in progress, you can make adjustments and have positive discussions with your customer around potential changes.
Seek professional help
If you are concerned about your construction business, if you need help with changing your systems or you just simply don’t understand your numbers, your accountant can always help! Accountants are there to help you with much more than just completing your annual tax return. They have the benefit of working with a lot of different businesses within the same industries and they understand what makes businesses successful. They can help you to understand your business and help you grow and achieve success. Always remember to ask for help before it is too late!