6 Basics Of Construction Finance Management
Construction projects are typically complex and more detailed than other projects. Thus, they require better financial and time management to ensure proper utilization of resources and accountability.
The process of construction financial management involves planning, organizing, and controlling financial resources used in the project. These features help you avoid delays and complete the project within the estimated time.
Below are six basics of construction finance management:
- Basic Accounting Terms In Construction
You can manage your finances successfully with a good understanding of the terms below:
- Cashflow: Having enough cash on hand allows you to cater to everyday construction bills, for instance, paying salaries to your laborers.
- Gross Revenue: It refers to the total amount of money accrued from your construction services. It includes profits and expenses.
- Break-Even: The break-even point is where your expenses equal your gross revenue. In other words, it’s when you start running your project with fewer costs than your anticipated revenue.
- Net Profit: It’s the difference between your total revenue and expenses. You can tell if you’re making profits or losses from your net profits.
- Sales: Your construction company can benefit from selling services such as engineering and consulting.
Understanding these terms helps you prepare the requisite financial reports.
- Construction Finance Management Skills
Construction finance management may prove tedious and time-consuming if you attempt to handle everything solely. The most guaranteed tactic is to hire dedicated staff to assist with finance-related tasks. Some crucial staff members you must hire include a chief financial officer (CFO), project manager, quantity surveyor, and finance manager.
Perhaps you might wonder: what does a CFO of a construction company do? To set the record straight, a CFO primarily analyzes your current financial strategies, crafts feasible solutions to minimize financial constraints, and ensures you comply with local laws. Ultimately, they help lower the overall financial risks of your construction projects.
- Construction Finance Management Tools
When carrying out tasks related to construction financial management, it’s essential to use up-to-date software and tools. They make work easier and ensure you don’t run your business on inaccurate figures.
Utilizing enterprise resource planning (ERP), a typical component of construction financial management, will help you generate reliable reports. The two primary ERP tools on the market are Oracle and SAP. You may want to check out an Oracle ERP vs SAP comparison for more insights into their features and benefits.
Remember, your project has some estimated time targets you need to meet. Thus, using such tools ensures you don’t spend more time than is necessary organizing your finances.
Another fundamental construction finance component is taxes. They may vary depending on different states, and you can’t evade them. Besides building licenses and permits, other construction-related taxes include the following:
- Construction Industry Scheme (CIS) is compulsory if you’re a contractor.
- Corporation tax
- Land rates
- Council tax
- Stamp duty land tax
It would help if you didn’t try to avoid paying the relevant taxes since this will put you in trouble with the government. You’ll also pay more legal fees as punishment for your actions.
- Construction Cost Estimation
One way to figure out the cost of construction is by estimating. This process includes forecasting the actual cost of building the structure through quantity takeoff, wherein you carry out a detailed measurement of materials and labor needed to complete a project. It helps avoid starting a project and stalling midway due to a lack of finances.
Appropriate construction cost estimation is essential for both the contractor and the client. You avoid losing money, and the client avoids paying too much. Meanwhile, throughout the project, you’ll have to do cost control, which entails adjusting the initial estimates. Material prices may not turn out as anticipated, especially with inflation.
Thus, adjustments are necessary throughout the project. In most cases, the goal is to reduce the cost incurred during construction. Using this strategy, accountants can minimize overspending, returning the project to its baseline.
- Separate Your Personal And Business Finances
Separating your personal and business finances is best when running a construction company. It helps set a good credit history. Moreover, separating your personal and business finances enables you to manage your finances effectively. Also, it’s a good practice if you want to set internal financial guidelines.
Effective construction finance management helps minimize resource wastage, ensuring every project becomes profitable. It starts by hiring the right people and acquiring cutting-edge tools for the job. This way, you’ll effectively eliminate the threat of mismanaging your finances. Moreover, you can complete projects within the proposed budget and timelines, an essential bit of client satisfaction.