How often have we heard of Construction companies failing followed by the statement, “why”? The businesses are often expanding, have a number of projects on the go, and seem to be doing well. However, the Construction industry is often so project-focused that Owners don’t check in on the integration of projects into the overall accounting systems and profit and loss results.
Often companies have grown organically, and the Business Owner may be an excellent builder, but is not good at running a business. They use the same project management system they started with – it worked well in the beginning, why won’t it work well now? But often the project management system is an excel spreadsheet that has been developed over the years and stands alone without integrating across to the financial data. No matter how good the excel spreadsheet is, if it is not matching up to the financial records there is no one “set of truths”.
If the spreadsheet does not include all the costs of the jobs, such as overhead recovery, asset depreciation cost recovery, office administration expenses and other indirect costs, the profitability of the individual projects may be overstated and the quantum of the profits does not cover the indirect costs. For example, one project lasts a month and shows $20,000 being made after all direct labour and product costs, but the monthly cost of running the business is $25,000 so the business makes a $5,000 loss during the month.
Monthly management reports are also an import component of running the business, as these reports (best prepared on a cash and accrual basis) will provide the monthly results that shows how well the business performed to budget and the monthly surplus. They are also a good benchmark to measure the success of the project reporting system side by side, as the management accounts capture all the financial information, and become the Master Data.
When there are two systems operating then there can be room for error. An integrated system that provides project profitability that also links back into the accounting and management systems, means that same data is being used to produce those reports rather than being replicated. In a simple example, if you take one invoice for $10,000 that is entered into the accounting system for three projects, and then when being replicated into the excel project system, one of those costs get missed, the profitability can be affected. Decisions are made on wrong information, and the outcome can be disastrous.
Successful businesses do not grow and thrive on luck, they do so through good decisions based on strong, reliable and timely information. If you ever hear yourself say “how did it go?” your next question should be “how do we change?” as an integrated financial system will be providing the information as you go and alerting the business owner to potential problems. Disconnected systems do not work.