While roughly half of all small businesses fail within just five years, the statistics are much worse for construction companies, with only 36.4 percent ever reaching their fifth year of business. In fact, of all industries, construction has the lowest success rate, and here's why.
If you guessed money was part of the problem, you guessed correctly. Steady cash flow is essential for any small business. Unfortunately, construction companies just don't have it.
In most industries, customers adhere to 30-day payment terms. This typically isn’t the case in construction. The general contractor pays their subs when they get paid, and the money trickles down the line. It's not uncommon to see 90 to 120 days of past-due receivables.
Combine that with another cash management problem: job costs. Not only are you paying overhead while you're waiting for cash, but you're also buying materials, paying for labor, and racking up travel expenses while you wait.
Often, cash management problems happen quickly. One day you're doing business, and then your suppliers have suddenly cut you off for nonpayment, and you can't finish a job. To avoid this problem, put your suppliers on payment schedules with payment automation software. This helps streamline payments for better cash flow management.
Expansion isn't always a good thing, especially if it happens too soon. Small construction companies often want to bid on every job, taking any work that comes their way. This can be a huge mistake. In the beginning, it's much better to focus on small jobs that require little expense upfront before taking on the big jobs later.
If you do need to expand quickly, technology can help you stay organized and productive. For example, you might use software to help automate receivables, billing, or accounts payable, which leaves employees free to focus on other tasks. As you grow, cloud-based software can grow with you, allowing your employees to do more with fewer resources.
Low profit margins often go hand-in-hand with fast expansion and cash flow problems. You want to bid low enough to get the job, but you should always know your bottom number and stick to it. Don't be afraid to lose an opportunity because your bid was too high. Instead, be selective about the work you take on, even if it means skipping some bid opportunities or naming a number that you know won't win. It's much better to have five well paying jobs than 15 that barely pay the bills.
While growing a construction company is stressful, it can also be very profitable. You can beat the odds if you focus on your cash flow, avoid taking every job that comes your way, and never settle for low profits.