Most of the transactions that are carried out in the construction industry are made immediately and not always thought out. Because of this, many contractors face problems in managing finances. The main goal of a business is to make a profit, but the traps that we will now describe can cause an irreparable blow with negative consequences for market players.
One of the most widespread methods to do away with the financial challenges and misconceptions in reporting your accounting specialists is the accrual approach. This is a popular strategy to avoid imperfections in all the financial documentation of your building company.
The accrual method is that profits and expenses are recorded as they occur, immediately after the transaction. Since there may be delays in payments and delivery of necessary goods, it is recommended to use construction estimation software (read here), which will facilitate and make your financial management more efficient, as well as help you make the right and prompt decision.
4 Dangerous Financial Management Traps in Construction to Take into Account
Also, there are other four efficient ways to skip challenges and traps through your financial management improvements. Take a closer look at the most common problems and solutions to do away with these sharp questions and issues for general contractors. Note that subcontractors can use these hacks as well.
Your financial health will stay in a normal condition almost in any situation with digital-friendly workflows, automated reporting, the accrual method of budget planning through high-quality estimating software, and costing programs integrated into your ecosystem. Plus, use the following four recommendations for your business and higher profitability of projects.
1 – Making the Wrong Assessment
Every business needs an appraisal. Every trade, contract, or action must be evaluated in terms of profit and risk. Incorrect evaluation can fail the work of controlling finances. Often, errors in estimates, costing, and other reporting documentation occur due to the lack of constant cost calculations, as well as incorrect application of the new cost for the purchased goods.
A good idea is to improve your estimating with the help of digital tools. Assess your costs and other critically important statistics correctly with the help of the best-matching software for contractors and subcontractors.
2 – Insecurity of Your Rights
Today in the construction industry there is a practice of delaying payments. There are situations when the client cannot pay the specified amount on time or refuses the services altogether. Then the law on pledge comes into effect, which protects all the stakeholders:
- On-site workers, etc.
However, to be able to benefit from such a law, companies must adhere to all requirements regarding collateral, in the established lines and order. You can lose the right to a deposit in case of omission or incorrect notification of the client.
3 – Change Order Comes with Incorrect Documents
Every construction project has a change order. Often they are not planned, accompanied by documentation that is not always correctly filled out or not filled out at all. This can lead to the fact that the contractor will perform work for which no one will pay, or they will pay all the costs at his own expense and, as a result, he will not receive a profit.
Paperless document flow is the way to avoid imperfections in the documentation and incorrect data entries that bring more risks in the context of your financial management. Try to switch from paper documents to digital-friendly and cloud-based ones.
4 – Improper Control Over Financial Management
The profit from the project is always received by the company at the end of the construction of the facility. Most contractors are at great risk of this because their liquidity is associated with only one project. Working on a new project requires investments for the previous project. You can get out of this situation with the help of the first installment, taking into account all ongoing projects, as well as a clear payment schedule for the results of their implementation.
To keep your finances in order, it is enough to avoid these traps, and not ignore possible risks that can lead to negative consequences. Take the time to eradicate harmful practices and establish a new culture of finance so that your profits grow and financial stability appears.