Because private companies don’t face the same scrutiny and reporting requirements as their public counterparts, the budgeting and forecasting process is often overlooked or underutilized by many construction companies. But, in reality, a strong financial budget and cash flow forecast should be the backbone of every decision your company makes.
For fewer budgetary surprises in 2024, follow these steps to a well-executed cash flow budgeting and forecasting process.
Planning Your Budget
Budgeting starts with planning.
The most commonly used situational analysis is SWOT, which helps business leaders evaluate strengths, weaknesses, opportunities and threats in relation to the company’s overall objectives. This can help you determine how to allocate resources, what budget items to prioritize, where to look for risks, and budgeting best practices.
It is important that your budget planning also includes a competitive market analysis. Construction advisory firms like Grassi can provide benchmarking reports that compare your company’s key performance indicators (KPIs) to that of its peers and identify improvements. Look at what competitors are doing in terms of layoffs, consolidations and other headline-making developments — there may be lessons to learn and opportunities to seize.
Forecasting Cash Flow
A contractor’s budget should cover 18 to 24 months and be paired with a fluid, cash flow model that projects 6 to 12 months of cash flow and is continually monitored throughout the year. When periods of cash constraint are identified, the contractor can take the necessary steps to identify other sources of cash or expense reduction. Times of surplus can be an opportunity to explore upgrades in technology, safety or other priority areas.
Various factors affect cash flow and should be evaluated as part of an effective plan. These include timely billing and collection procedures, disbursement procedures and project scheduling. The forecast should take into account the inevitability of change orders and consider how disputes can be identified early and resolved quickly.
Once you have established the strategy and cash flow driving your budget, you will need to decide on the method to execute it. In top-down budgeting, senior management prepares a high-level budget based on overall company objectives, which is then passed down to managers for implementation. In bottom-up budgeting, the departments prepare budgets (based on the same company objectives), and the financial team or budget committee approves or disapproves line items.
Some companies also employ a zero-based budgeting method in their bottom-up process, whereby the departments start with a “clean slate” each year in order to ensure current priorities and goals are being addressed and necessary adjustments are being made.
In particularly uncertain times, flexible budgets can be useful to plan for different scenarios. These budgets allow for adjustments as the company experiences different levels of revenue, expenses or jobs than originally expected.
Communicating the Budget
Regardless of the type of budget method you choose, one crucial factor in its effectiveness is how well you communicate it to the entire company. Having buy-in from management and all levels of employees will help to ensure the budget is understood and upheld throughout the year.
Remember to reach out to your vendors, customers, lenders and other parties if you need to communicate requests for price concessions, quality improvements, delays or any other inevitable effects of the new budget. And don’t forget that all-important call to your CPA to help you identify the critical KPIs and other data required to build the most reliable budget and forecast.
For more information, please contact Ronald Eagar, partner at Grassi Advisors and Accountants, at firstname.lastname@example.org or 516.336.2460.