It doesn’t matter how good you are at performing the work for which you are hired – if you don’t manage the money coming in and going out, you will end up broke.
If you own a construction company, you’ve probably got a lot of money going out, and hopefully some money
coming in, but at the end of the day, if you don’t keep track of all that, you don’t really know if you made any money or not.
So how can you manage that?
There are several different ways. From my experience dealing with other companies as well as my own company, I can tell you that there are going to be times when get behind, when you’re going to struggle. Maybe your pay request didn’t come in when it was supposed to, and you only had a limited amount of resources there set aside to make payroll or buy fuel. Now you’ve had to use that up because your pay is running thirty, sixty days late.
Dave Ramsey is big in the world of personal finance, but he’s a pretty smart man and some of his ideas can be applied to managing your company’s finances. His envelope system can work for a construction company just like it does for personal use.
What I mean by that is when I start a new job, I make sure all accounts are accounted for, per bid item. I look at how much labor I’ve got to have, how much fuel I’ve got to have, how much equipment time I’ve got to have. If I need road trucks, I look at how many hours I’ve got to have for road trucks, and how much fuel I need for them. All of that is broken down per bid item.
It’s tough to do, and it takes time, but it’s worth it. Using a system like ProfitDig or something similar will greatly reduce the time required for this. If you don’t have some kind of automated system, then you’re going to have to sit down and do it on pen and paper or whatever works best for you.
But every month when you send your bill for a project, you’ve got to figure out how much work you have done on each bid item. Then at that point you see, “well, I’m 30% on this bid item,” or “I’m 20% on this bid item.” You’ve got to figure out how much fuel expense you have, how much equipment time, how much labor time. An easy way to do it is to set up separate checking accounts for each of these items.
There were times in my past when I have attempted to just keep up with all this information in a spreadsheet, but we kept neglecting to keep up with it properly. We figured at that point, let’s just start extra checking accounts. It’s going to cost a little bit of money for more checks and fees and such, but it’s really nothing compared to what you can lose by not keeping up with your accounts.
So we set up a trucking checking account, a fuel account and equipment account. We also had our general funds, which also served as our payroll. Then we had a money market account in which profits, or anything left over, went into.
The way we did it is I would tell somebody in the office who was going to be writing checks, “You need to take out this much for trucking, this amount for materials, this amount for fuel, this amount for labor for this month’s draw on this job.” Then she would break it down by account and whatever was left over would go into the money market account. It was an interest bearing account and the money just sat there. If we needed it that was fine, if we didn’t that was fine too.
After your initial first month or two, everything is going to offset itself. You’re going to start seeing that money build up. Take your fuel, for instance. If fuel prices go down, that’s going to help you because you estimated this job on a higher fuel cost, so that adds up. You estimated a certain amount of time for your equipment. If you run your jobsite efficiently, you can try to cut that time down. So at that point, you may be using less fuel, so your fuel account is starting to build up. You’ve got more fuel money, and you’ve got more equipment money. If you can cut your labor down, then the funds in your labor account will start to grow too.
Well, say six months down the road everything is looking good, then every time you need fuel, you have money sitting there in your fuel account, so you can pay for it no problem. If you have a flat tire on your dump truck, you have money sitting in that account to pay for it.
Everything breaks down. It’s costly. Say you have a dozer and its’ engine goes down. Well you’re going to drop ten, twelve grand to replace that engine, maybe more. But then you look into your equipment account and see that, “Hey, I’ve got $40,000 sitting in my equipment account. I don’t have to go to the bank. I ain’t got to talk to no banker. I can just write a check for that.”
It’s very important to make sure youre money goes where it needs to go. That way your general funds, or your money market account, will start to build up. You should try to leave that alone. You want your salaries to come out of your labor account and your fuel costs to come out of your fuel account.
So every month, as money comes in, rather than just depositing that into a single checking account, you divvy that money out into the separate accounts. You need to make sure you put the correct amount into each account.
Say you’re moving dirt, for instance. Say you got cut to shift. It all boils down to time because fuel is time, equipment is time, labor is time. If you’re burning X amount of gallons of fuel per hour and you’ve got twelve hundred hours figured in this one bid item, then you know how much your fuel is going to be. So whenever you bill for that month for a particular bid item, if you have billed 50% of it, then you’re saying you are 50% complete with that bid item. You can look back and see what 50% of your fuel cost was, what 50% of your trucking cost was, 50% of your labor cost. At that point it all divvies out.
That’s the amount that you’re going to separate out of this check. This doesn’t have to be a lifelong thing. This is to get you on track to show you what you need to do – how you need to run your business through what I call, like Dave Ramsey, the “envelope system.” After a few months or a year, it gets to where it’s habit. I’m not going to touch this money, I’ve got to pay for fuel, I’ve got to pay for this and that. Anything left over I’m going to stick over here and that way, it’s there if I need it. That way everything is accounted for.
This system can work for any company. If you’re already established, you may not need it. But say you are established and you’re not tracking your costs and you don’t know really what your costs are, what happens typically is your cost of living seems to always go up. You’re drawing more money out for personal use and more toys. You say to yourself “Hey, I’m going to buy this piece of equipment or I’m going to buy that piece of equipment. I need a new truck.” You see that money sitting there, so you find ways to spend it.
If you have a designated lane for your money to go – this money goes here, this money there, this money goes over here – then you are narrowed down. You get a smaller portion of that to spend. It’s an eye opener. Then you may instead say to yourself “I may not need that new pickup. I may not need that new piece of equipment right now.”
At that point, your company starts to grow. You start to get more resources. You’re not having to go borrow money to buy fuel. You don’t have to have a line of credit because you’re always tight. You can do away with all that stuff as long as you have adequate money and you’re tracking your job costs accurately and correctly. Then that eventually goes away. You could even do away with this system because at that point you’re going to know you don’t need to touch the bulk of your money.