You are running the company against an empty account
Zero is not zero. If you do not know your New Zero, a balance above zero tells you nothing.
Most owners run the business by looking at the bank. The trouble is that the bottom of the account is not the bottom of the business. Three to six months of fully burdened operating expenses is the floor a construction company has to hold, because you fund labor, material and mobilization before anybody pays you, and retainage sits out there for months after the work is done. Until that number is worked out, every decision about hiring, buying or paying down debt is being made against a figure that means nothing.
Three moves, in order
Step 07: Monthly cadence
Weekly bookkeeping, cost to complete, and one CEO report, on the same days every month.
Other problems step 07 solves
Other things that go wrong
What owners ask
How much working capital does a construction company need?
Zero is not zero. If you do not know your New Zero, a balance above zero tells you nothing. Most owners run the business by looking at the bank. The trouble is that the bottom of the account is not the bottom of the business. Three to six months of fully burdened operating expenses is the floor a construction company has to hold, because you fund labor, material and mobilization before anybody pays you, and retainage sits out there for months after the work is done. Until that number is worked out, every decision about hiring, buying or paying down debt is being made against a figure that means nothing.
Which part of the system fixes this?
The step is number 07, monthly cadence. Weekly bookkeeping, cost to complete, and one CEO report, on the same days every month. It's drawn from chapter 7 of CONTROL: The Construction Financial Operating System.
Is this normal for my trade?
Across the 48 trades that publish a figure, net profit at $1M–$5M averages 7% before taxes. If you're well under that and this page describes your month, the two are usually the same story. The published average tells you where the pack sits, and your own job costing tells you where you sit, which is the number that pays payroll.
Where do I start?
Work out your fully burdened monthly operating cost, with real labor burden in it rather than the payroll line off the P&L.
Can I fix this without touching anything else?
You can try, and it doesn't hold. Step 07 depends on step 03, overhead calculation and step 04, estimating system and step 05, software and bookkeeping alignment and step 06, project management. Install it ahead of those and it produces numbers nobody trusts, which is worse than the problem you started with.
Wrote CONTROL, the 8 step system these figures sit inside. More about the author.