Written by Luis Benitez, Founder & Owner
Luis Benitez is an experienced accounting professional with a diverse background in construction, restaurants, and retail. He founded LGB Strategic Solutions, an accounting/business strategy firm dedicated to helping business owners achieve long-term success.
Managing a construction business requires more than just skill and experience in the field. It demands sound financial management. Many construction business owners struggle with financial pitfalls that can lead to cash flow crises, legal issues, or even bankruptcy. This guide highlights five of the most common financial mistakes construction business owners make and provides actionable solutions to help you avoid them, ensuring long-term profitability and stability. Are you ready to secure and protect your financial foundation? Let’s dig in!
1. Poor cash flow management
Why cash flow management is critical
Cash flow is the lifeblood of any business, but it is particularly crucial in the construction industry, where large payments are often delayed due to project timelines, retainage, and change orders. Without a steady cash flow, businesses can struggle to pay suppliers, employees, and operational expenses, leading to financial instability.
How to improve cash flow management
Create a cash flow forecast and regularly update projections to anticipate shortages and surpluses. This will allow you to stay on top of cash flow and strategically prepare for slow seasons and market downturns. Next, negotiate payment terms with your clients. Structure contracts to include upfront payments or milestone-based billing to maintain a steady cash flow.
Use construction-specific software and business credit lines
Streamline invoicing by using construction-specific accounting software to automate and follow up on overdue payments. Accounting software like QuickBooks Online includes automated features such as payment reminders and late fee applications when invoices are past due.
Finally, consider establishing a business line of credit. Access to a line of credit can help cover temporary cash shortfalls and keep operations running smoothly.
2. Underpricing services and projects
The danger of underpricing
Many construction business owners underbid projects to win contracts, especially when starting out. While this may generate revenue initially, it can result in losses if project costs exceed revenue, leading to financial strain.
How to price services effectively
Use accurate job costing: Factor in all costs, including materials, labor, equipment, overhead, and profit margins.
Account for hidden costs: Consider unexpected expenses such as project delays, material price fluctuations, and equipment maintenance.
Benchmark against industry rates: Research competitors’ pricing and adjust your rates to remain competitive without compromising profitability.
When job costing methods are correctly implemented, your business will avoid cash pitfalls and ensure profitability, allowing it to continue growing.
3. Failing to separate business and personal finances
Why separation matters
Mixing personal and business finances creates confusion in tracking expenses, increases tax liability risks, and exposes personal assets to business liabilities. When financial records are not clearly distinguished, it becomes challenging to assess business performance accurately, leading to misinformed decisions. Failing to maintain separation can complicate tax audits and potentially lead to fines and penalties.
Steps to maintain separation
Open a dedicated business checking and savings account, along with a business credit card, for all company transactions. Set up a payroll system for yourself and establish a reasonable salary rather than withdrawing funds randomly from business accounts. Lastly, implement accounting tools like QuickBooks, Xero, or NetSuite to categorize and track business expenses separately from personal finances.
4. Ignoring tax planning and compliance
The consequences of poor tax planning
Failing to plan for taxes can result in unexpected tax bills, penalties, or audits. Construction businesses often deal with complex tax regulations, such as sales tax on materials, payroll taxes, and deductions for equipment purchases.
Effective tax strategies
Work with a trusted accountant specializing in the construction industry to navigate tax laws and maximize deductions. Take advantage of tax deductions such as Section 179 for equipment purchases, mileage deductions, and job-related expenses. Additionally, calculate and make quarterly tax payments to avoid sizable year-end tax liabilities.
Leverage the Augusta rule for tax savings
Another powerful yet often overlooked tax strategy for construction business owners is the Augusta Rule. This IRS provision allows business owners to rent their homes to their businesses for up to 14 days per year without reporting the rental income as taxable. Ensure that the rental agreement reflects fair market value rates, document meeting agendas or business activities held at the residence, and maintain proper records of transactions.
5. Not having a financial contingency plan
The risk of being unprepared
Unexpected events such as economic downturns, project cancellations, or sudden equipment failures can derail your construction business. Without a solid contingency plan, you could face significant setbacks that make long-term recovery difficult.
How to build financial resilience
Create an emergency fund: Set aside at least three to six months' worth of operating expenses.
Diversify revenue streams: Consider offering maintenance services or subcontracting to reduce reliance on large contracts.
Insure your business: Invest in general liability, workers’ compensation, and equipment insurance to protect against financial risks.
Secure your construction business’s financial future
Avoiding these common financial mistakes can mean the difference between a thriving construction business and one that struggles to stay afloat. By proactively managing cash flow, pricing projects correctly, keeping finances organized, planning for taxes, and preparing for unexpected challenges, you can set your business up for long-term financial success.
Are you ready to take control of your construction business and financial future? I aim to help business owners like you maximize their profits and secure a solid financial foundation. Contact me today for a free, no-obligation financial consultation and ensure your business remains profitable and sustainable for years to come.
Read more from Luis Benitez
Luis Benitez, Founder & Owner
Luis Benitez is a dynamic leader known for his resilience, determination, and passion for business. Migrating to the U.S. as a child, he faced immense challenges, sacrificing a “normal” teenage life to work multiple jobs while attending school. At 18, he underwent brain surgery, forcing him to put his college dreams on hold. After navigating personal financial struggles, he seized the opportunity to complete his degree while gaining hands-on experience in construction accounting. Today, he is the Owner of LGB Strategic Solutions, an accounting and business strategy firm dedicated to transforming how businesses and individuals achieve financial growth—his mission is to foster growth through insight and innovation.
