Better Financials Open the Door to New Opportunities in Residential Construction

Growth in the residential construction market is stuck between a rock and a hard place. On one hand, there’s a quantifiable housing crisis–which means demand is high. But on the other, trade tariffs and the supply chain squeeze are making the cost of materials sky-high and availability unpredictable.

These challenges are further compounded by an increasing level of unpredictability in weather patterns, labor shortages, and increased competition for land. These challenges translate to added costs, pricing out growth for small to mid-sized residential construction companies.

At kept.pro, we helped a multi-family residential construction company beat the odds to achieve sustainable growth in a complex market through accounting fundamentals and expert financial guidance.

As a result, they were able to better communicate the financial stability of their company, helping them become more competitive in larger bids. Here’s a closer look at how we helped improve the company’s finances.

Cash Accounting & Other Common Challenges for SMBs

Many small businesses operate with limited resources, leaving business owners and general administrative support to handle the finances. These companies also tend to rely on cash basis accounting for simplicity.

This construction firm was no exception. They were utilizing a single bookkeeper and accounting on a cash basis. As a result, they were struggling to see which projects were profitable and whether or not they were making or losing money over a given period.

They lacked visibility into key performance indicators like:

• Overall Project Profitability
• Which Project Managers are Effective
• Which Projects are Estimated Correctly
• Financial Burden of Change Orders
• Labor Utilization and Productivity
  

Accounting on a cash basis doesn’t match expenses with revenue in the same period, making it difficult to see what’s actually occurring. On paper, this method shows big swings from profits to losses on a monthly basis–which feels more like a roller coaster than a business.

Looking for better visibility, the company engaged a low-cost fractional Chief Financial Officer (CFO) provider to oversee financial management and advice. However, after failing to improve their financial position, the company sought out better expertise.

Addressing Hidden Challenges in Variable Revenue Cycles

The biggest challenge for this construction company was gaining control over inherently variable revenue cycles. Due to the nature of construction, which often involves material shortages, weather delays, and rework–all inevitably factoring into downtime and added expenses, this was a significant hurdle.

In one month, the company received a large milestone payment for work that had been completed in the previous month. However, when the payment was received, the company also had fewer working days, which appeared as lower labor costs. This combination resulted in a 90% profit for the given month.

The very next month, the company increased labor and, without the milestone payment, posted a steep loss. In reality, those numbers (good or bad) were not accurate in either month. This scenario was common.

On large, multi-year projects, this pattern would skew the financial data for entire quarters–or years. The company desperately needed better data to see what was actually occurring and to help them better understand how much money they were making.

That’s where kept.pro entered the equation. We partnered with the construction firm to transition their accounting system from cash to accrual in order to provide the detail and visibility they needed.

Creating Accounting Systems that Fit the Company

Strong financial management begins with a foundation of accurate data. Before we could transition the company to an accrual-based accounting system, we needed to address data pipeline challenges.

The company used BuilderTrend, a construction management platform, to collect and store operational data. Starting here, kept.pro used our Quickbooks Online (QBO) expertise to assess, repair, and validate the technology integration between the operational software and the accounting software.

Next, we began to define processes and create systems, transitioning the day-to-day bookkeeping work to an accrual-based accounting method. During this process, we developed job costing capabilities for better reporting, including:

• Profitability by Job
• Gross Margin by Job
• Cost Variance by Project
• Work In Progress (WIP) Reporting

Finally, kept.pro led the construction company through its first financial statements compilation. This was a pivotal step in communicating the financial strength of the company to external stakeholders, especially in the bidding process.

Accelerating Growth Through Accurate, Complete & Timely Financial Management

Accurate, complete, and timely financials helped this construction company develop a credit relationship with a bank. The access to a line of debt helped the company smooth out the natural peaks and valleys in big construction contracts to stabilize cash flow and begin to build accurate projections.

Additionally, the company used the job costing capabilities developed in our systems and processes phase to adjust its estimating rubric when bidding on future jobs. This helped the company ensure that they were pursuing profitable contracts from the start with enough margin for the added costs and delays that are commonly associated with construction projects.

The company’s growth was further supported by a stronger bidding process and clearer communication on the company’s financial strengths. This helped project owners and lenders better understand the company’s ability to support and complete large projects, resulting in a higher bid-win ratio.

kept.pro has helped dozens of growing companies uncover hidden truths in their financials and address gaps in their accounting systems to fuel growth. Learn more about how we can help you get your accounting and finance systems on the right track today.