Setting financial goals in construction

Achieving financial success begins with the end in mind. If you don’t know where you’re going as a business, you’ll likely end up somewhere you don’t want to be. For this reason, contractors must set financial goals to light a clear path forward for their future.

Thinking about finances one year, two years, or even five years from now can seem like a daunting task. When jobs are in full swing, they can become all-consuming. It’s hard enough managing finances for the current job, and looking too far into the future may not seem like a good use of time.

Ironically this is the precise reason that contractors need financial goals. When you know exactly where you want to be in five years, you can afford to put all of your time and effort into your current job. You won’t have to worry about the future because you’ve already planned for it.

The biggest challenge here should not be aiming too high but not setting the bar high enough. The mere act of remaining in business is not an acceptable financial goal. Running a construction business is not a pass/fail game. Every decision should be made with the intent of supporting or working towards specific goals.

Special thanks to Tonya Shulte, founder of The Profit Constructors, for sharing her decades worth of industry experience as a top construction accountant. In collaboration with her, we put together the major insights needed for contractors to create realistic and achievable financial goals for business in the construction industry.

Any business owner starts out not thinking as much as they could or should about the accounting side.

Tonya Schulte
Owner, The Profit Constructors

How to start

Make finances a priority

it is very common for new business owners of any industry to ignore the accounting side of things. Especially when just starting out, there is an endless amount of things to think about, and accounting often finds itself neglected. This is only natural, but you don’t want this to snowball into a situation where there is no way out. If you are starting from the ground level, then start by placing financial review and analysis as a primary business priority.

Seek help from financial experts

Get a leg up on understanding financial concepts by hiring a good advisor who can help set you down the right path. Find someone with the experience and expertise you need to make better decisions.

However, construction accounting is much more niche than other industries, for this reason, you must vet potential advisors by asking qualifying questions such as:

Has this person increased profitability.
Have they helped bring to your attention reports that can help scale.
Do they understand advanced construction concepts.

What to know before creating your first goal

Identify industry standards

This will depend on your specialty trade. For example, a home builder will have a much lower net profit goal than a plumber (where margins will be more challenging). Talk to other contractors in your trade/area. Try to understand what their financial goals are, if any. Try to identify what the baseline goals are for your industry:

What is the average price that contractors are charging in your area?
What is the average profit margin?
What is the average cost of a standard job?

The more you can lean on other tradespeople that are in your industry, the more you can grow and improve your business acumen. Having regular conversations with more experienced contractors in your trade can help you find ways to avoid certain financial mishaps by learning from the experience of others.

Find a good peer group. The more that you can lean on other people in your industry and hear about what they have done and are doing can help you find creative ways to avoid certain financial delays by having good peers around you. Those peers will help you understand your numbers.

Tonya Schulte
Owner, The Profit Constructors

Choose a business model

Do you want to be higher-end or lower-end? This is also known as premium pricing vs. economy pricing. A premium pricing strategy means higher prices, but a lower sales volume is needed to hit profitability goals. If you take the opposite approach and lower prices (economy pricing), you may get more jobs, but a higher sales volume will be needed. Both are viable options, but once picked, business owners must stay in that lane.

How many goals should you have?

Start by thinking about what a five-year goal would look like for your business. This can be tough to drill down, but try envisioning where or what you would like your life to be in 5 years:

Do you want to be able to take a 5-week vacation every year?
Would you like to be doing less fieldwork? Less administrative work?
Do you want to grow your team?
Do you want to expand the services you provide or start tackling bigger jobs?
Do you want to have the business in a position that is attractive to investors or buyers?
Do you want more time with family?

Break down the 5-year goal into yearly goals: With a long-term vision in place, you can now set an annual goal that will help you get closer to reaching your long-term goal. This can look like:

Gross revenue to equal $X by the end of the year
COGS percentage set at X%
Net profit to equal $X by the end of the year (based on industry standards and 5-year vision)

Who should be involved?

Have open books and communication whenever you can. From a business owner’s perspective, staying transparent with your team on why you are making the decisions that you are can lift a huge weight off your shoulders. When you can back up your decisions with numbers, the entire company can feel confident in moving forward with your vision.

Everyone can and should be involved in goal setting.
Create incentives and ensure everyone is aware and active in achieving yearly goals.
Push goals down the company hierarchy and create mini-goals for employees or managers.

Common mistakes to avoid

Lack of financial literacy

Any steps taken to advance your financial literacy will yield huge benefits in your understanding and application of financial strategies. Actively pursue to further educate yourself and lean on a financial advisor to better understand these concepts.

Forgetting to account for labor burden

Understanding all the ins and outs of burden costs is never easy, but it must be done. From FICA to state unemployment tax to health and dental benefits to retirement contribution to workers’ comp–the list goes on.

So how can you find this information? Look first to your payroll reports. This document will be your guide in understanding the various labor burdens, taxes, and fees that are associated with payroll. It will prove invaluable in helping you make sense of the complexities of accounting for labor burden.

Knowing and understanding labor burden is crucial for accurately tracking finances. If you built your labor burden model incorrectly, all reports and numbers will be drastically inaccurate. Ensure labor burden is correct and consistently evaluated.

How to measure financial success

Keep a close eye on savings

As money is used more strategically, you should start to see savings pile up slowly but surely. If savings are continuing to increase at a steady pace, this is a tried and true sign of proper money management.

Have regular check-ins

Check-in on your goals on a consistent basis. If you are on track, understand what you are doing well and make note of what is working. If not – why? Look to evaluate what is causing you to fall short of your goals so you can address and fix any problems early on so you can get back on track quickly.

When you start to understand your numbers better, you can sleep better at night.

Tonya Schulte
Owner, The Profit Constructors

Final thoughts

How to set up financial goals for business in the construction industry:

Understand industry standards to set realistic goals.
Make finances a priority and seek help from financial advisors.
Choose a business model and set yearly goals that work towards a 5-year goal.
Involve team members in setting goals and incentivize them.
Educate yourself on financial terms and concepts.
Account for labor burden in financial reporting.
Measure financial success through savings and regular check-ins.

For more actionable tips and insights for taking control of your construction company’s finances, be sure to regularly check in on our blog for best practices in the industry and how to run and grow a construction business efficiently.

Tonya Shulte