Many small companies literally live from hand-to-mouth, receiving money from one project and spending it on another, with no idea how profitable they are, or whether they have made money on a project or not. Their only clue to their overall profitability is their bank account, but unfortunately, some owners mix their personal business accounts, so even this is a poor barometer. The poor financial management sometimes means that contractors continue to undertake projects which aren’t profitable. In addition, they are often unable to claim back monies they are entitled to from the tax authorities.
Larger companies generally have sound financial systems in place which are easy to operate and can give cost updates in real-time for every project. Unfortunately, every system is only as good as the operators and the quality of the information that goes into the system. There are some systems that are complex and provide lots of detailed information that is not used by most contractors.
Some construction companies use systems that are more appropriate for other industries, while others use systems that were more appropriate to a time when they were smaller, and they’ve outgrown them now.
Even when there are adequate financial systems in place many business owners and managers don’t understand some of the basic accounting principles which cause them to make inappropriate choices or expensive mistakes. It’s therefore important that business owners and managers understand the systems the company is using and that they also have a basic understanding of accounting principles.
Just as important is to ensure that the system is operated correctly across all divisions and facets of the company.
Contractors need to be disciplined in their approach to project and company finances. Deviations from set procedures can quickly result in uncertainty amongst staff, financial mismanagement, loss of financial control, and even bankruptcy.
It is important for contractors to be financially conservative since the contracting environment is continually changing with unexpected events happening when least expected, such as clients being unable to pay, contracts being canceled, accidents, disruptive weather events, or a shortage of work. Contractors who have stretched their financial resources might be unable to cope with these challenges.