Managing Your Business

Managing Your Building Business in Changing Economic Conditions

The primary causes for established businesses failing or suffering financial distress are:

• Lack of adequate funding
• Lack of an early warning reporting system on unacceptable performance
• Failure to recruit quality personnel
• Lack of contingency planning for critical situations
• Failure to use professional advice

The following is a checklist of matters to consider in your building business to avert the above:

Pricing and Costing Measures

1. Review market information for labour and material cost movements
2. Secure prices for labour and matierals from suppliers
3. Review current pricing structure to maintain gross profit margin required to cover overheads and expected profit from operations
4. Liaise with materials suppliers to determine future price trend and extend trading terms based on past trading history
5. Review advertised prices of competitors to determine appropriate sale price rises
6. Maintain wage parity with competitors in relation to senior administration and supervision staff to avoid losing key personnel

Management Measures

1. Develop streamlined reporting management structure
2. Allocate mobile senior supervisors to site to control building costs and on site issues
3. Emphasis on completion of existing contracts to achieve next progress billing stage
4. Utilise WIP management recording system that monitors precisely daily/weekly movement in costs on building projects
5. Offer incentives to skilled labour to ensure continuity of future services
6. Determine if alternative products are available to reduce material costs
7. Monitor debtors and cash balances compared to budgets daily
8. Improve real time reporting from building site

Financial Monitoring Measures

1.  Know your business numbers by monitoring:
   • Daily/weekly/monthly sales
   • Daily/weekly/monthly variable and fixed costs
   • Gross profit margin
   • WIP
   • Breakeven point for sales and gross profit margin
2. Understand your financial statements:
   •  Profit and loss statement
   • Balance sheet
   • Cash flow/fund statements
   • Financial ratios eg liquidity ratio
3. Obtain regular financial reports from senior administration management:
   • Short written form
   • Key reports attached only eg. charts of sales/gross margins on jobs completed to date
   • Report on new work/WIP
   • Compare annual budget with monthly breakdown
   • Reports to include comparison between actual results with budget and reasons for variance
   • Review profit margins on different designs and buildings offered to the market to determine profitability in the current market climate
4. Understand the link between cash and profits by preparing a cash flow statement that adjusts for:
   • Debtors/creditors
   • Loan repayments
   • Drawings
   • Capital expenditure
   • Non-cash items eg. amortisation and depreciation
5. Review costing/quoting system:
   • Regularly updates for changing costs
   • Ensure includes all costs including overheads
   • Review mark ups
   • Compare to competitors
6. Understand market:
   • Review your competitors, eg. websites, visit, call and meet
   • Attend industry conferences, seminars and discussion groups
   • Liaise with industry membership association
   • Liaise with bank to provide short-term fudning facilities
   • Seek professional advice on cash flow management

Acknowledgements:

www.grantthornton.com.au