Breakthrough Academy’s 4 expert tips to help builders gain financial clarity and control

When you’re running off your feet trying to keep up with an onslaught of jobs, subs and clients it’s easy to assume your business must be rocking.

But do you know it for a fact?

Busy-ness doesn’t necessarily equate to a flourishing business, and once you finally look at your numbers, you may be surprised to discover you’ve been carrying a false sense of success.

But managing your company’s finances is key to being a good leader and setting your company on a path to substantial growth.

At Breakthrough Academy, a consulting company that helps builders take their business to the next level, we work with industry professionals to bring our customers the best of the best information, training and educational opportunities.

The advice in this post comes straight from the masters – accountants who work specifically with the trades and home builders who’ve been there, nailed that. And if terms like cash flow cycles, profit margins and overhead expenses make your head hurt, don’t worry. We’ll lay them out along the way.

1. Make sure you’re using the right accounting

Sometimes even owners don’t fully grasp how operationally complex construction businesses are. There are multiple active sites to manage, supply chain struggles and weather shifts to contend with, subcontractors and vendors with unique payment structures, not to mention equipment, insurance and licenses that need to be purchased and maintained.

But you can see how juggling cash flow cycles for both projects and overhead costs means that construction and trade businesses require special attention when it comes to accounting.

Tax versus management accounting

If you’ve been operating for a while now, you probably have an accountant or bookkeeper in place. But are they presenting you with tax accounting or management accounting?

Let’s dig into the difference:

Tax accounting

Tax accounting is the process of preparing financial statements and tax returns for individuals or businesses in compliance with tax laws and regulations. It focuses on managing finances in a way that minimizes tax liabilities while still adhering to legal requirements. This includes calculating taxable income, determining allowable deductions and credits and ensuring accurate reporting to tax authorities. Tax accountants often stay updated on changes in tax laws to help their clients optimize their tax situations and avoid penalties or audits.

Management accounting

Management accounting, also known as managerial accounting, is the process of generating financial information and analyses to assist management in making informed business decisions. Unlike financial accounting, which primarily focuses on reporting historical financial performance to external stakeholders, management accounting is oriented towards providing internal stakeholders, such as managers and executives, with timely and relevant financial data for decision-making purposes.

All accountants should know the difference. What matters is which type they put in front of you. There’s a reason why most accountants are consumed with taxes. You don’t mess with the tax man. Or woman. Don’t mess with either.

According to Leeroy Beeby, co-founder of Check The Level, an accounting firm dedicated to supporting builders, the problem with tax accounting is that it puts undue pressure on you to know your way around balance sheets, cash flow reports and profit and loss (P&L) statements.

Those documents are primarily designed to give the government a sense of how you’re performing from a tax perspective. Management accounting, on the other hand, shows numbers that are more related to your operational performance in order to help you make better business decisions.

Your accounting firm can then provide you with straightforward management financials and translate them to tax-ese for the government.

Has your accountant asked which departments your staff are in?

If not, your gross profit is likely overstated. Payroll often gets lumped into overhead, but in contracting businesses, field labor and office staff costs shouldn’t be handled the same way.

Want to dive deeper into a solid financial system you can implement to take your construction business to the next level? Watch this Financial Secrets web class as your guide.

The class is jam-packed with financial secrets, like the ones that Charlie Bethell knows all too well, that catapulted his company, Plus Construction, from a piddly 3% net profit margin to a stable 15.4% in four years (two years earlier than he planned).

2. Your business must match your budget

Ugh. Budgets … yeah, we get it.

You inherently know you need a budget – the way you know you should eat more veggies – but you might be among the 75% of builders who don’t have a formalized budget.

We can’t help you with the veggies, but here are a few reasons why having a budget is important:

✅ Purpose: Budgets are fundamental to running a profitable business, and if a business isn’t profitable, it isn’t serving its purpose.

✅ Strategy: Budgets are intrinsically linked to strategic planning in construction, and it’s virtually impossible to navigate properly without one. If you’ve got a budget … you’ve got a plan.

✅ Decisiveness: Making decisions is a business owner’s main responsibility, and budgets allow you to be more decisive since you’ll know what you have the dough to do.

✅ Recruiting: Want to hire more team members and pay them well so they stick around? Having a budget can help with that.

✅ Leadership: Budgets will also help you develop and learn from your mistakes. You’ll have data to rely on instead of only listening to your gut.

✅ Destiny: It might sound crazy, but we know hundreds of builders that can attest to the power of putting an annual financial plan into action.

Much like the accounting approach itself, your budget will be far more effective if you customize it. Which you can totally do.

Own your chart of accounts

When it comes to the financial management of your trades company, there’s no escaping P&Ls completely. (Sorry.) However, it’s in your power to structure them in a way that best suits your construction business.

P&Ls are based on a chart of accounts – basically a list of categories – that fall into one of three main buckets:

• Revenue: All the ways you generate income for your construction business.

• Variable costs: Project-related spending, including onsite labor, materials and subs.

• Fixed costs: Overhead expenses like software and office staff, that stay relatively steady month-to-month.

Within those groupings, you can call the accounts whatever you want.

To learn more about the nuances around structuring a chart of accounts as a builder, listen to the enduring insights from business guru and Breakthrough Academy co-founder, Igor Trninic, in Episode 14 of the “Contractor Evolution” podcast.

Are you mixing your business and personal expenses?

As you progress into the world of experienced financial management, you’ll want to be sure to separate your business and personal finances. This means not using personal assets for work purposes and avoiding the use of personal credit cards for business expenses.

Money doesn’t have to be complicated. To help you out, we’ve got a budgeting template for construction businesses available free to download here.

Take it from Iain Kent, owner of Eagleview Construction. He prioritized budgeting and grew the company’s revenue by a whopping 218% in four years working with Breakthrough Academy and Buildertrend’s construction management software.

3. Know if you’re coming out on top

Okay, you’ve got a budget. You’re tracking your expenses. You can see how you’re doing. But how do you know if it’s good or not? What does “good” even look like?

You need profit margin benchmarks.

There are two ways to look at these:

• Gross profit margin: This metric shows how much money you’re making before overhead costs. If you sell and produce a job for $100,000, and it costs your business $60,000 to complete it, you’ve made $40,000 or 40% gross profit.

• Net profit margin: This percentage metric shows how much you’re making relative to your total costs – overhead, project … the whole shebang.

Both have their uses, but for now, we’ll focus on net profit margins. For beginners, a good rule of thumb is to aim for a net profit margin of around 10%. In reality, most land somewhere between -2% and 4%.

But these numbers will differ slightly depending on the trade. For example, in construction you can shoot for a higher net profit, like 12% or 15% because of the healthy gross margins available and lighter overhead burden compared to other industries.

Do you know where your profit centers are?

It’s not uncommon for home builders to misjudge where they’re really generating their profits. For example, many builders mistakenly think they make their money on big-ticket new construction contracts, when in fact it’s run-of-the-mill residential remodels that pad their bottom line. The point is, you don’t know until you measure.

4. Learn from the failures

After your first year of creating and following a budget, we’re going to save you the agony and just tell you what’s going to happen.

You’re going to bomb.

Simple as that. You won’t meet your budget. And – deep breath – it’s absolutely fine.

Not every cent has to be matched. At this point, you want to track and gather data, so you know what you’re spending and where.

You will get more accurate. Stick with it. Like installing crown moldings with tight corners. Budgeting is a skill. It takes practice to get it just right.

It’s time to fix your financials

Use these guidelines to keep your budget on track.

Look to your past, to plan your future

Putting a budget together is much easier when you have your previous year’s financials to work from. If you’re just starting out, it’s fine to use an estimated revenue.

Beware shiny objects

These are “fun” purchases, like a fancy new truck or that new Grayco sprayer, that can blow up your budget. It’s important to know the difference between a budgeted investment and an impulse buy. Budgeting for an investment delivers an ROI, and the other does not. Before buying, ask yourself, “Was I thinking about this a month ago?” If not, it’s a shiny object. 

Beware your overhead

Team salaries, shop expenses and vehicles are fixed costs that must be paid whether or not you’ve got money coming in. They can easily creep up if you’re not careful, so you’ll still want to keep an eye on them.

Work backwards

Come up with an accurate revenue plan by figuring out your average job size, how many jobs you need, and how that equates to the number of estimates you’ll need to close.

Embrace accurate job costing

Job costing is a more advanced method of tracking your finances, and it can seriously amp up your visibility into aspects of your business, such as how efficiently it’s operating.

Review it regularly

There’s no point in putting the effort into creating a budget if you’re never going to use it. Monthly, quarterly and annual financial reviews are a must to ensure you’re on track. And if you’re not? Adjust as needed.

It’s your business, and you owe it to yourself and your team to understand your financial picture. While no one expects you to become a CPA overnight, these concepts are well within your capability.

And remember … the numbers are simply meant to guide your plan, not cloud your vision. As any good builder knows – measure twice, cut once.

You’ve got this.

Want to discover how Breakthrough Academy builders have achieved an average 69% increase in NET profit within 12 months? Watch this Financial Secrets web class.

Take your construction business to the next level

Get in touch with Breakthrough Academy’s assessment specialists to learn more about their consulting services. They’ll help you put your plan into action through tailored business coaching just for builders. This is your opportunity to upgrade of your operations and align your processes, people and profit to maintain a clear path to continued business growth.

Looking for a single source of truth for budgeting and managing financials for your construction business?

Pair the financial control guidelines in this blog with Buildertrend’s full lineup of financial tools and services. By combining Breakthrough Academy’s systems and Buildertrend’s construction tech, you’ve got everything you need to make your strategic business plan a reality.