Cash flow woes, multi-state regulations, new tax obligations, more scrutiny from the IRS…
…and we’re just getting started.
Growing your construction business comes with a long list of financial growing pains. It can feel like you’re a start-up all over again: high risk, high reward, and so many things to learn. It can be exciting and overwhelming (and, sometimes, just overwhelming).
Here are a few tips that will help protect your business as you grow:
Stop playing “catch-up” and get proactive with your cash flow management.
As your revenue grows, so will your expenses. This makes your cash flow situation increasingly complicated and potentially risky. Without proper planning, you could be heading toward a cash flow crisis. (See: Cash Flow Crisis: The Wrecking Ball of the Construction Business)
The only real solution is to plan ahead. Sit down with a financial professional, someone with experience in the construction industry, and create a comprehensive cash flow forecast. It should incorporate all of your current and upcoming projects while accounting for the timing of payments and receipts, as well as unexpected expenses. Since your financial situation is dynamic, you and your advisor will continually update and analyze your plan, while comparing past projections with actual values to test accuracy.
Once you have a plan, you are ready to create a more intelligent budget that will protect your growing business from whatever comes its way.
Get to know your new tax bracket.
As you grow, you may shift into a new bracket of the federal tax code. This may change the method you use to report your earnings, and it could also entitle you to certain benefits. Speaking of which…
Stay tuned for new tax credits.
Your business is changing, and you may be entitled to credits that were not available before. Don’t leave any money on the table.
Keep track of your presence in multiple states.
Growing construction firms typically develop a “nexus” (a presence) in multiple states. When that occurs, you will have to manage tax obligations in each one. Each state has different rules, so filing can become even more complex as you expand your reach.
Be consistent with your accounting (because the IRS is watching).
Depending on your revenues – your construction business will report earnings one of two ways. The first is “cash accounting.” In this method, you report cash receipts as income (when you receive them) and expenses (when you pay them). The second is “accrual accounting,” when you report income and expenses in the year-earned and the year-occurred, respectively.
The accrual method is broken down into two sub-categories… and, well, it gets pretty complicated. The bottom line is: As a growing business, you need to get organized and be consistent with your finances, because the IRS expects “consistent treatment of income and expenses from year to year.” (And it’s best to keep the IRS happy.)
Partner with a professional who knows construction (or, better yet, a whole team of us).
At Klein Hall, we know the construction industry. Our team of financial professionals have decades of experience in your field – we even have a Certified Construction Industry Financial Professional (CCIFP®) on staff – and we know what it takes for growing businesses to succeed.
Partner with us, and we will help you navigate periods of growth with cash flow forecasts, budgeting, advisory, assurance and more.