As an owner in your construction company, or any other venture for that matter, you are ultimately an "investor." Do you take the time to plan annually and set a targeted return on investment off of which you benchmark? Considering the extreme risk taken in the construction business and the significant dollars invested, why wouldn't you?
It seems too many contractors are focused on securing more work as the means to grow the bottom line. The correlation between more work and a higher return on investment (ROI) is questionable if you don't have the systems, procedures and monitoring abilities in place to manage growth. All you may be doing is piling on risk with little return.
It's best to work backwards when planning for the year ahead. Start with your targeted ROI, then work through general and administrative costs, indirect costs and gross profit objectives to come up with the revenue needed to meet your goals.
Following is some "food for thought" as you go through the annual planning process:
? ROI: Establish this at a level that makes the risk you take acceptable. Obviously, you need to take into consideration some of the unique aspects of running a private business when doing this.
? G&A/Indirect costs: This is probably the biggest drain on profits and also the easiest one to get away from the shareholders. What are your costs? Do you review them to make sure you are operating efficiently? Do you track them versus the budget? Do you budget this at all?
? Gross profit: The gross profit target you set should be at a level that will cover any indirect costs generated while still achieving your required ROI. Is the figure you come up with realistic based on historical profits?
? Revenue: Take into consideration backlog entering the year and then back into how much additional work is needed in order to achieve your gross profit needed -- and ultimately, your ROI. Is this a realistic figure based on cash flow requirements, bonding capacity, management abilities, etc.? If you have the capacity, you may decide to take on more work than necessary. However, don't drop your margin below what you determined is needed to meet your ROI.
Submitted by Michael Strahan with Cavignac & Associates