597: Construction Business Cost Control Methods

Contractors are notorious for leveraging tomorrow’s money to pay yesterday’s bills…” robbing Peter to pay Paul.” We can look around and justify the practice, and yet we know deep down that it is a dangerous line to walk; a bit like an expensive game of musical chairs.  Eventually, the music does stop… or at least pauses. The most dynamic way to prepare for any event moving forward, whether it be growth, recession, boom, or bust, is to know your numbers. As you know your numbers, you also know there are two primary ways to affect cash availability in your contracting business; increase revenue and/or decrease expenses. Actually, I like to think it a better practice to increase revenue and manage expenses.   If you want to grow, you will likely have to spend more for that growth in the form of hiring, or increased investment in tools or resources to generate and deliver on that growth.   Here are a few methods for controlling costs in your Construction business. First, stop spending on things that don’t align with your mission. Construction businesses will usually have access to large sums of receivables at any given time and if not carefully and subdivided at the time that receivable comes in the door, you will start paying Peter what should be Paul’s. Many times what Peter wants are just that…wants.  Using the cash as downpayment to leverage debt onto a new big shiny truck, the fancy office, or perks that make us seem just a little bigger than we actually are. That leads to what is a better decision; to watch your dollars closely. Every single construction client we have, subdivides their bank accounts into at least six accounts following closely the model set forth by Mike Michalowicz in his important book Profit First. When that dollar is subdivided by pre-defined percentage (not by hunch), it naturally resists being used for anything other than what it was intended.   If that dollar is not subdivided, it is easier for that dollar to hide and slip out as payment for something that does not align with the mission or values of the business.   A third way to control costs in a construction business is to be mindful of tax opportunities. There are elements in any tax code that promote the movement and utility of money towards certain activities that stimulate economic growth. Many times, elements of the tax code are value-adds to business owners if they are intentional and thoughtful in their planning. Request more from your CPA.  They are smart people who are worth far more to your business than just an annual tax return.  A thoughtful CPA will lay out some basic opportunities for you to conduct legitimate transactions and deductions with your resources in order to gain tax benefits. For advanced planning, it may not be a bad investment to hire a Tax Strategist as well for higher-level tax planning.   Finally, pay attention to your compensation models and structures.  The common method we have found for construction owners to compensate employees is to make it up as they go. For an additional 30 minutes of thoughtful work and modeling on a simple spreadsheet, you can create a compensation model that is mindful of your cash flow, your growth, and the opportunities that lie ahead. Too often we bow to the market around us, or to hostage demands in compensation instead of first asking our business what it can afford and what it needs.   The easy choice is to read this article, close it out and keep doing what you are doing.  The hard choice is to read this article and begin taking action working ON your construction company by being mindful of your costs…and your revenue.   You can do this…if you make the time!