Andy Burrows — The Trades Coach — explains the multiple ‘onion-type’ layers involved in managing the financial health of your construction business.
Managing the financial health of a construction business is a lot like peeling an onion — there are multiple layers, and each one plays a critical role in ensuring profitability, stability, and long-term growth.
Budgeting is often a business skill that owners don’t want to tackle as it seems like some sort of dark art that doesn’t have relevance to day-to-day operations.
Taking a multi-layered view, from broad to narrow, is a good way to start becoming more comfortable with this important area.
A well-structured budgeting process has three main layers: a broad budget overview, an annual profit budget, and detailed project cash flow budgets.
Just as each layer of an onion builds upon the one beneath it, these budgeting components work together to create a strong financial management framework for your business.
The Outer Layer: The broad budget overview
The outer layer of an onion is like your broad budget overview — it provides a protective framework and gives you a high-level financial picture of your business.
This layer covers your company’s overall revenue goals, expense estimates, and profit targets. It helps you answer questions such as:
• How much revenue do we need to cover our expenses and generate a healthy profit?
• What is our overall, average Gross Margin target percentage that is required to maintain a stable and successful business?
• How do different scenarios look to give us a range of optimistic and pessimistic boundaries?
• Are we operating within a sustainable financial model?
At this level, you’re not getting into the granular details of individual projects but, rather, ensuring your overall business direction is sound.
Just like the outer skin of an onion protects the layers beneath it, this broad budget overview acts as a safeguard, helping you steer your company in the right direction, particularly project pricing.
The Middle Layer: The annual profit budget
Peel back the first layer, and you’ll find the annual profit budget — this is the part of budgeting that takes the broad overview and applies it to a yearly timeframe. Your annual profit budget breaks down income and expenses into a more specific structure, allowing you to track progress over time.
This layer of budgeting includes:
• Monthly revenue projections based on anticipated jobs and contracts.
• Fixed and variable costs, including wages, subbies and overheads.
• Profitability targets and break-even calculations.
The annual profit budget helps construction business owners stay on track financially by providing a detailed roadmap for the year ahead. It allows for adjustments based on market conditions, unexpected costs, or changes in demand.
It should be compared with actual results on a monthly basis to check if you are on track. Without this layer, businesses risk running into cash flow problems or missing out on growth opportunities.
The Core: Detailed project cash flow budgets
At the heart of the onion lies the most important and detailed layer — your project cash flow budgets. These budgets are specific to individual jobs, and ensure that each project is financially viable from start to finish. This is where you track:
• Upfront costs for materials, labour and subcontractors.
• Progress payments and cash inflows.
• Timing of expenses versus revenue collection.
• Profit margins on a per-project basis.
Having accurate and up-to-date project cash flow budgets allows business owners to prevent cash shortages, avoid overcommitting resources, and maintain profitability.
Without this level of detail, even a company with a solid overall budget can run into financial trouble due to poor cash flow management on individual projects.
Bringing it all together
Like an onion, these budgeting layers are interconnected. The broad budget overview sets the stage for financial success, the annual profit budget refines the strategy, and detailed project cash flow budgets ensure that day-to-day operations align with the bigger financial picture.
Construction business owners who master these three layers can make informed decisions, anticipate financial challenges, and maintain a steady flow of income throughout the year.
By peeling back each layer and understanding its importance, you create a strong, resilient business that can withstand economic fluctuations and industry challenges.
For help in building a multi-layered, no-tears budgeting process for your business, email me at [email protected] and we can discuss a solution that fits best.
