Construction firms can foster long-term sustainability and gain a competitive edge through strategic financial planning. By gaining an understanding of its current financial position, influence of external factors, and internal capabilities, a company can develop its blueprint for financial growth.
Evaluate Current Financial Position
To derive an effective process towards meeting desired objectives, a company should first assess its current financial position. This process involves analyzing past financial statements to understand revenue trends, expense patterns, and profitability as well as evaluating current assets, liabilities, equity and cash flow to identify strengths and weaknesses. Examining Key Performance Indicators (KPIs) is another effective method of measuring and tracking financial performance. The table below summarizes several relevant KPIs for construction firms and their importance:
KPI | Importance |
|---|---|
Gross Profit Margin | Indicates the efficiency of project execution and cost management |
Net Profit Margin | Reflects overall profitability and financial health |
Cash Flow | Essential for maintaining liquidity and ensuring the ability to meet financial obligations |
Change Order Rate | High rates may indicate issues with project scope definition or client communication |
Current Ratio | Measures the ability of a company to cover its short-term obligations with its short-terms assets |
Job Cost Variance | Helps identify discrepancies and areas for improvement in estimating and budgeting |
Backlog | Indicates future revenue and workload, aiding in capacity planning |
Equipment Utilization Rate | Indicates efficiency in equipment management and helps minimize costs |
The understanding and ongoing evaluation of relevant financial metrics and current financial position provides valuable insight into a company’s financial trajectory. This knowledge enables owners and management to make informed and timely business decisions while also developing and updating strategies that align with short-term and long-term financial goals.
Management should also perform trend analysis which offers insights into the factors driving financial performance. This comprehensive assessment of a company’s current financial position and underlying drivers establishes a solid foundation for effective financial modeling. A clear grasp of current financial metrics and trends allows for more accurate projections and enhances the reliability of the financial models informing strategic planning and risk management.
Develop Financial Models
A vital component of strategic financial planning is performing scenario analysis. This proactive process allows companies to explore how various changes in assumptions–such as project costs, delays, or economic shifts–could impact financial outcomes. By forecasting best and worst-case scenarios and reviewing the financial models reflective of these potential outcomes, a company can derive effective strategies to navigate potential challenges. It is important to keep in mind industry trends and internal capabilities while developing financial models to ensure realistic expectations of projected outcomes. The valuable insights gained from this analysis empower decision-makers to make informed choices about project selection, investment opportunities, and resource allocation. Regularly updating financial models as new data and market conditions emerge ensures that companies remain agile and ready to seize opportunities for growth.
Strategic financial planning offers several advantages and it is never too late to get started. Involving owners, management, and project managers in these processes assists in developing a collective understanding of financial performance metrics and encourages a collaborative effort in monitoring and achieving financial goals. Crow Shields Bailey provides assistance with strategic financial planning. Please let us know if our team of skilled professionals can be of service.
Savanna Wood
Senior Accountant
Audits of construction contractors, manufacturing and distribution companies, and employee benefit plans. Review and compilation services for non-public companies.