Growth is usually viewed as a positive sign for a construction company. More projects, a growing backlog and expansion into new markets can all point to a business moving in the right direction.

But growth can also put pressure on a company’s financial systems.

A contractor can be profitable on paper while still experiencing cash flow constraints. More projects can make job costing more complicated. Additional employees and equipment can increase overhead. And processes that worked when the company was smaller may not provide leadership with the same level of visibility as the business expands.

Before pursuing the next stage of growth, construction leaders should consider whether the financial side of the business is prepared to support it.

Look Beyond Revenue Growth

More revenue doesn’t automatically mean better financial performance.

As project volume increases, leadership should understand what is happening to margins at both the company and job level.

Questions worth asking include:

• Which types of projects are generating the strongest margins?
• Are actual job costs tracking with estimates?
• How are overhead costs changing as the company grows?
• Is labor burden being allocated appropriately?
• Are certain projects or customers consuming more resources than expected?

Accurate job costing can help answer these questions.

When direct and indirect costs are properly captured, contractors can better understand which work is contributing to profitability and use that information when estimating and evaluating future projects.

Pay Attention to Cash Flow

Construction companies can experience cash flow pressure even during profitable periods.

Payroll, materials, equipment and subcontractor costs may need to be paid well before the company collects from a customer. Retainage, billing schedules and slow collections can create additional timing differences.

As project volume grows, those differences can become more significant.

A company considering expansion should evaluate whether it has enough working capital to support additional work and whether its cash flow forecasts account for the timing of project-related expenses and collections.

Growth requires resources. Understanding when cash enters and leaves the business can help management determine how much growth the company can comfortably support.

Make Sure Overhead Keeps Pace

Growth usually comes with additional costs.

A construction company may need more administrative employees, vehicles, equipment, technology, office space or management resources as it expands.

Those expenses may be necessary, but leadership should understand how they affect the company’s overall cost structure.

Accurately allocating overhead and labor burden can provide a clearer picture of the true cost of completing a project. It can also help contractors determine whether pricing and estimating practices continue to support desired margins.

Evaluate Your Financial Reporting

As a construction company becomes more complex, leadership may need more sophisticated financial information.

Basic financial statements provide an important foundation, but management may also benefit from regularly reviewing information such as:

• Work-in-progress schedules
• Backlog
• Job profitability
• Cash flow
• Accounts receivable
• Overbillings and underbillings
• Labor and overhead trends

The goal is not to create more reports simply for the sake of reporting.

The goal is to make sure leadership has useful information when decisions need to be made.

Think About Growth Before It Happens

Financial planning is most useful before the company commits to significant expansion.

Before entering a new market, taking on substantially larger projects, hiring additional employees or making a major equipment investment, consider how the decision will affect cash flow, overhead, taxes and profitability.

Growth can create tremendous opportunities for construction companies. It can also magnify weaknesses in financial processes that were easier to manage when the company was smaller.

Taking time to evaluate the financial foundation of the business can help leadership determine not only whether the company can grow, but how to manage that growth responsibly.

HCJ CPAs & Advisors works with construction companies throughout different stages of growth, helping owners and leadership teams evaluate financial reporting, job costs, tax planning and other financial considerations affecting the business.