How to Stay Profitable: Cash Flow Lessons from a Tough Industry

Running a construction company is one of the most challenging businesses around. Constantly rising materials costs, labor shortages and a raft of regulations (not to mention picky clients) keep construction business owners on their toes. But there’s a lot that small business owners in all industries can learn from these entrepreneurs about how to stay profitable, according to an in-depth job costing survey commissioned by QuickBooks and TSheets.

Job costing, or estimating all of the costs related to a project, is key to maintaining profitability and generating accurate quotes for customers. It’s not just construction companies that can benefit from job costing; project-based businesses such as consulting companies, and even manufacturers, can use the technique.

Risks of poor or no job costing

Generating accurate estimates is essential to keeping your business thriving and profitable. One-fourth of respondents in the survey say just two or three inaccurate estimates could tank their business. If you’re not job costing, you could be facing these risks:

• Your cash flow suffers. If you don’t know when the biggest expenses of your project will hit and when to expect payment, you won’t be able to maintain sufficient cash flow.
• You won’t make enough profit. Accurate job costing ensures that you make enough profit to keep your business going. Inaccurate job costing can leave you nearly empty-handed. While 63% of survey respondents manage to get very close or exact estimates, 29% admit they usually end up with less profit than they estimated.
• You’ll have trouble getting the resources you need. Underestimating labor needs is a big problem for the construction industry. However, it can affect almost any business. For example, a marketing company that underestimates the resources needed for a client project might not be able to hire a freelance graphic designer in time or within the budget.

How companies handle job costing

Just 7.51% of respondents say they “wing it” and estimate job costs in their head without writing anything down. Most construction companies are more methodical. However, more than one-fourth still track job costing on paper by hand, while about 20% use spreadsheets.

Using a spreadsheet is a little better than paper, but you’ll get the best results by using software specifically for job costing or accounting software that includes a job costing function. Ideally, you want software with a mobile app so employees in the field (such as construction workers or salespeople) can easily review and update the information.

Only 58.41% of respondents do cost estimates for every project. However, those who do cost estimates for every project are more likely to finish projects more quickly and to feel more confident in their estimates. As with anything else, the more often you do job costing estimates, the better you get at doing them and the more accurate they will be.

Survey respondents say labor costs are the hardest to estimate. That’s a problem because labor is the biggest expense in the construction industry—and in many industries. Carefully tracking employee time is vital to improving the accuracy of your job costing.

How to stay profitable by tracking your costs

Once you’ve created your job costing estimate, keeping track of the actual cost of the project is just as important. More than half of construction companies in the survey track project cost without using any software. I don’t have to tell you that relying on people to update information on paper leaves many opportunities for error. People forget, they make mistakes and they end up reconstructing data from memory. Without the right data, the accuracy of future job costing estimates is at risk.

Just about every industry has specific software you can use to track project costs. Look for one that fits your clients, projects and employees. For instance, if you provide consulting services where employees visit clients’ offices, look for a mobile app so employees can track time on their phones. If your employees work in small increments, look for software that lets them track time in 10- or 15-minute chunks.

Don’t just track your project costs: Pay attention to them. Survey respondents who review expenditures or costs daily are more likely to keep their projects on budget.

Risky business

Job costing can be especially helpful when you’re taking on a new client. Almost 2 in 5 (38%) of survey respondents say new clients are the most financially risky category of job to take on. Long projects and large projects are also viewed as risky.

When you’re preparing estimates for a project in one of these categories, breaking it into stages can help reduce some of your risk. For example, you can build in contingencies that will trigger extra payments, such as more hours than estimated. You can track actual cost against projected costs, review your costs at the end of each stage of the project, and revise your pricing if necessary. Requiring payment upfront and payment at various stages of the project will also help keep your cash flowing when dealing with a long project, a big project or a new client who’s still an unknown quantity.

There’s a lot every small business owner can learn from construction companies about how to estimate costs, maintain healthy profit margins and continually improve their business processes.