The construction industry is vital in our communities, providing essential infrastructure that keeps our cities thriving. But while many construction companies focus on staying competitive for project bids, they often neglect to monitor their profitability in the process. Knowing your company’s profitability is the first step to helping your business thrive and grow. Working with a business accountant to help track and report income and expenses is the baseline for monitoring profit margins, but there are more detailed factors to pay attention to. Let’s examine six areas of your business that might be affecting your profitability.
Your Overhead Costs
Before any business can begin to calculate its profitability, it must first know its overhead costs. Many construction companies don’t know what their overhead amount is. Without knowing this detail, it’s impossible to accurately estimate the budget for a job and balance the books at the end of the year. The question to ask is: how much does it cost for your company to operate in a given year? If you don’t know the answer to this question, we recommend meeting with a business chartered professional accountant to run your numbers and determine your exact overhead costs.
To determine the baseline cost of keeping your business running, you’ll need to review all your essential operational costs, including labour, equipment, and real estate. It doesn’t matter which order you review and calculate for, as long as you include all the details for your CPA to compile into a balance sheet. Once you have this number figured out, you can measure your profitability in other areas.
Infrastructure and Real Estate
Does your company have an office location? If so, you’ll want to review all the essential costs to keep that office running. Make a list of all the recurring bills associated with that space:
- Rent or lease
- Phone Service
These are all important details to track. If you don’t have a commercial office space but perhaps use a home office for administrative tasks, you’ll want to discuss with your CPA how you can calculate your expenses for work. These are also important details that will be useful for your annual tax returns.
You’ll also need to determine the cost of the vehicles and equipment that your business owns. How much is required to pay insurance costs, payments, maintenance, and fuel on an annual basis? Your equipment costs will vary, depending on the job your company is working on. For overhead costs, the primary concern is the cost to keep the equipment you own operational.
Your labour costs for each job will fluctuate depending on the size of the project. You’re only calculating the essential personnel for overhead that keep the company operational. This usually includes the heads of the company and basic administration.
For these employees, you will want to determine what it costs to support them, including:
- Worker’s compensation costs
- Health Insurance
- Vacation pay
- Union dues
- Other benefits
Cost of a Job
When it comes time to compete for projects, it’s essential to know the actual cost to your company to complete the job. This requires detailed calculations of what is involved in the job and how much each segment will cost. If you’ve already calculated your overhead costs, then you’re on the right track. Next, you’ll want to determine what it will cost your company to complete a job. Factors that you’ll want to include are:
- Overhead costs
- Additional labour costs
- Equipment and machinery
Cost of People
Every employee that works for you for the project has a list of costs in addition to their salary. You’ll need to include insurance, worker’s compensation costs, health insurance, vacation pay, union dues, over time, small tools, training, pension, profit, sharing, and other benefits you offer. Another personnel cost to consider is the price of planned subcontractors or temporary field employees.
You’ll need to calculate the total cost of the equipment necessary to complete a project. You should include the purchase costs, financing payments, interest, insurance, maintenance fees, tires, fuel, and repairs.
Your CPA can set up financial reports to track these expenses and crunch the numbers to help you understand the real cost of each job and prepare better job estimate statements.
Many construction companies create project estimates based on guesswork or attempt to be more competitive than other companies. Without knowing exactly what you need to be profitable, the risk this strategy poses could be enough to ruin the business. Once you’ve projected your operating costs, including uncontrollable variables such as supplies and materials, you will be able to draft informed project estimates that ensure profitability.
Profit Margins and Equity Numbers
Every successful business needs to know how much their company is worth to set reasonable goals. Your company’s equity is the sum of your total assets minus your total liabilities. A business CPA can help you determine your equity by pulling your business bank account statements, calculating your liabilities, evaluating your cash flow, and balancing all total assets with these figures. Once you know the worth of your company, you can set some realistic growth goals.
Tracking and Reporting
A major reason why construction companies are not as profitable as they could be is the lack of tracking and accurate reporting of their finances. The missing information is commonly the result of focusing on other business areas rather than purposely avoiding the finances. This is where working with a business accounting firm that specializes in the construction and trades industries can help your company’s finances stay on track.
Small business owners can benefit from the expertise of a CPA for several reasons, including tracking and monitoring financial statements, balancing accounts receivable and accounts payable, and producing detailed financial reports. These details can help inform critical business decisions, such as expansion or project proposal rates.
Business Accounting in Edmonton
Schwan & Associates is an Edmonton accounting firm focused on helping businesses manage their books. We give our clients the ability to have more control and maximize profitability. Contact our CPAs to learn more about how we can help your construction company get on track for a profitable year