{"id":5087,"date":"2022-01-12T16:54:11","date_gmt":"2022-01-12T16:54:11","guid":{"rendered":"https:\/\/www.sanaglobalprojects.com\/?p=5087"},"modified":"2022-02-04T20:39:00","modified_gmt":"2022-02-04T20:39:00","slug":"why-construction-companies-fail","status":"publish","type":"post","link":"https:\/\/www.sanaglobalprojects.com\/construction-knowledge-base\/why-construction-companies-fail\/","title":{"rendered":"Why Construction Companies Fail"},"content":{"rendered":"
Construction is similar to any other business in that it requires a good product or service, motivated employees, and a healthy customer base to succeed. However, success in the construction industry is far more difficult than in most other fields. According to <\/span>Census Bureau data<\/span><\/a>, construction businesses failed at nearly 1.5 times the rate of businesses in other industries over the last ten years.<\/span><\/p>\n Why are contractors and suppliers so vulnerable to going bankrupt? Construction companies almost always fail for the same reason: cash flow.<\/span><\/p>\n <\/p>\n Many construction professionals make the mistake of believing that profit is the key to success. Isn’t it true that as long as revenue exceeds expenses, the company is safe from bankruptcy? Unfortunately, this is incorrect, and this erroneous belief has driven many businesses out of business. It’s a classic business paradox; profit is required for a construction company to grow, but it isn’t enough to keep it alive.\u00a0<\/span><\/p>\n This is because revenue and profit are mostly “paper” measures that appear on your income statement but don’t tell you how much money you have in the bank. You can run the most profitable construction company<\/a> in the world, but if you don’t have enough cash to pay your bills, you’ll be forced to seek additional financing (if you can find it) or declare bankruptcy.\u00a0<\/span><\/p>\n <\/p>\n According to a <\/span>PwC report<\/span><\/a>, the average DSO (days of sales outstanding) for most companies in 2018 was 83 days. Accounts are marked as “receivable” for nearly three months before being paid. The company still has bills to pay during those three months. While you wait for payment, you can’t put off supplier invoices, employee paychecks, rent, and other overhead costs. <\/span><\/p>\n The structure of the payment chain is one of the main reasons for slow payments in construction.\u00a0<\/span>On construction projects, money flows like a waterfall, starting with the property owner and trickling down each level until it reaches the subs and suppliers at the bottom of the chain. <\/span>The higher the level of separation between your company and the checkbook; for example, the property owner or a project’s lender. <\/span><\/p>\n The longer you’ll have to wait for payment \u2014 the greater the risk to your cash flow. <\/span>Slow payments are frequently caused by factors that are completely within the contractor’s control. <\/span>The credit and collection practices used by a construction company will have a significant impact on their ability to get paid on time and improve their cash flow.<\/span><\/p>\n Unfortunately, many contractors are their own worst enemies, as their poor collection practices encourage customers to pay late.\u00a0<\/span><\/p>\n <\/p>\n Accounting best practices can provide a snapshot of a company’s health and aid contractors in identifying financial issues while they’re still manageable. Construction companies<\/a> have special accounting requirements: they must track cash flow for each project, as well as manage significant overhead costs. Inaccurate books will conceal cash flow issues that need to be addressed. <\/span><\/p>\n Many businesses fail despite good accounting practices because they do not read the reports correctly.\u00a0<\/span>Business owners are frequently seduced by their profits on paper, failing to pay attention to the financial statements that will make or break a construction firm’s bottom line. The construction industry is, in many ways, one of the most innovative industries in the world. <\/span><\/p>\n However, many construction companies are stuck in the last century when it comes to back-office processes, relying heavily on paper documents for everything from purchase orders to scheduling to actual payments.\u00a0<\/span>Construction companies can already use technology<\/a> and software to track payments, exchange documents, and spot problems in real-time. <\/span><\/p>\n Companies that rely solely on paper processes may not realize their payment is late until several days after it was supposed to arrive in the mail, especially now that the USPS has announced plans to delay construction documents even more.<\/span><\/p>\n <\/p>\n While there are a variety of reasons why construction companies fail, they almost always revolve around cash flow. Contractors and suppliers must prioritize good cash management practices and keep a close eye on the money flowing in and out of their business to succeed in this industry.<\/span><\/p>\n <\/p>\n Adopting tried-and-true payment practices is perhaps the most important thing construction companies can do to avoid cash flow issues sinking their business. This includes knowing the payment laws that protect construction companies, prequalifying customers before signing on to a project, and following up on outstanding invoices on a regular basis. <\/span><\/p>\n However, sending preliminary notices on each project is one of the simplest ways to avoid the cash flow issues associated with slow payment.\u00a0<\/span><\/p>\n <\/p>\n While construction firms use a variety of financial statements, the cash flow statement and cash flow projection report are two of the most important tips for safeguarding your bottom line and avoiding business failure. <\/span>These two statements work together to help you identify current financial issues and budget for future projects. <\/span><\/p>\n Furthermore, you can use several accounting reports to track your collection rates on both past projects and ongoing jobs.<\/span><\/p>\n <\/p>\n Contractors have a variety of financing options, but the best one for you will depend on what you need the money for. Traditional bank loans<\/a> or lines of credit may be appropriate for some construction businesses, but they are typically limited to those with CPA-prepared financial statements. <\/span><\/p>\nCashflow: Construction\u2019s #1 Problem<\/b><\/h2>\n
The Effects of Late Payments on Construction Companies<\/b><\/h2>\n
How Poor Accounting Process Play a Role in the Failure of Construction Companies<\/b><\/h2>\n
Tips For Avoiding Bankruptcy In The Construction Industry<\/b><\/h2>\n
1. Take steps to get paid more quickly.<\/b><\/h3>\n
2. Pay attention to the right financial statements<\/b><\/h3>\n
3. Make better financial decisions.<\/b><\/h3>\n