Looking ahead and understanding what is coming is the best way to make sure a business is successful. The only way to make a budget and stick to it is when a financial forecast is created. The problem is that the construction business is not very consistent. There are often gaps in between jobs.
Creating a budget when it isn’t known how much money will be coming in is simply not going to work. Creating a financial forecast in the construction industry is essential to future success and growth.
In this article, we will go over how a construction business can create a budget forecast.
Go to the past
To understand the future sometimes it pays to look back at the past. This is because there are usually patterns that can be ascertained. In the construction industry, there are a lot of outside factors that determine when the jobs come. For instance, government contracts come around at certain times of the year when they get the new budget.
Usually, work coincides with these types of events. The way to do it is to use an accounting integration system for construction companies to see how work was taken on in the past.
Then, try to extrapolate based on the data given by the program. There will likely be patterns that can be applied to the future. The first step of budgeting comes from knowing what will happen later on.
Stay ahead of the financing curve
It is a fact of life that there will be budget gaps at some point for every construction company. Very often when these gaps occur, financing is needed to get through the period. If the gap coincides with the need to purchase new equipment then this needs to be understood well ahead of time.
In that circumstance, the financing will need to be done on time to ensure the equipment needed is purchased and ready to go on time. Forecasting allows the company to see ahead and know roughly how long they have before the money is needed.
Understand the direct vs indirect costs
The two types of expenses for a project are direct and indirect. The direct costs are very obvious and easy to calculate. For instance, direct labor costs are not just the labor employees’ wages but also the payroll taxes, union benefits, and workers’ compensation.
Less obvious to calculate are the indirect costs of the project such as ongoing expenses whether there is a project or not. These types of costs are administrative, safety programs, and equipment maintenance.
To be able to properly budget for a project, the actual cost of each employee has to be determined. Indirect costs are easy to overlook when creating the budget and often lead to shortfalls and cashflow issues.
Review forecasts often
Just like a weather forecast, financial outlooks change as the date for the project approaches. It is wise to review the forecasts regularly to see if they have stayed on target or not.
Have a contingency plan in effect for the budget in case the forecast is off due to changes outside the scope of the company.