All businesses need to grow, and trade contracting businesses are no different.
In construction, though, growth is a hard thing to measure as it is happening. Construction projects are complex, and trade specialists might not have a good idea of how expensive or profitable their role in the project is until after the fact.
That’s why trade contractors growth planning and forecasting in advance are so important. Armed with historical data and a plan for the future, trades businesses put themselves in a better position to manage and direct their own growth.
Below is a brief guide to growth planning and forecasting.
The Specifics: What We Mean By Trade Contractors Growth Planning
A growth plan takes shape based on what you already know about your business — what works, what your team does best, what your market conditions are, what your competition looks like.
It’s not like a business plan, which is something you write before you start working. It’s something you devise over time as you learn more about the trade business you’re running. It’s an ongoing, up-to-date plan for how you’ll guide your business during the coming weeks and months.
A growth plan isn’t something you write once for investors then put on a shelf, Noah Parsons at LivePlan writes. It’s a living, breathing document that you’ll reference constantly to measure progress against.
Why Is Trade Contractors Growth Planning Important?
Because the conditions you’re working under are not static. The market changes, you grow into new territories, new competitors arrive, and new hires or new technologies expand your capabilities.
“Most businesses are evolving, especially in construction as technology is changing how the industry builds and does business,” Kimberly Hegeman writes at For Construction Pros. “Make sure you have an evolving business plan that can keep you on track now and for the foreseeable future.”
Against that backdrop of constant change, there are four general ways in which a business can grow, Max Freedman at Business.com writes:
- You can change your marketing strategy. This means changing the way you generate new business. You could do this by changing your pricing structure, or you could do this by shifting your focus from outbound marketing to generating referrals.
- You can grow your market. For subcontractors, this typically means expanding the territories in which they work.
- You can develop new products. This isn’t a common growth strategy for most trade contractors.
- You can expand your service offering. Example: A trade contractor that starts off as an electrical specialist and adds HVAC services as the business grows.
There’s one more path to growth, and it’s a common one for trade contractors: taking on more work. When trades businesses grow their own capacities for work by hiring more employees and making their internal processes more efficient, they position themselves to take on new and more complex jobs.
Likely, that latter path will factor into your own growth plans. Weigh that alongside the four options above to define what you imagine business growth will look like.
A Warning About Growing Too Quickly
Too much growth too quickly is a poison pill in construction.
“When construction companies pick up too many projects, they run the risk of spreading themselves too thin,” Michael Heidrick and Tim Holicky at The Hartford say. “Projects either get delayed or don’t start on time. Or the workmanship suffers as a contractor tries to move from one project to the next.”
If you do find your business overextended, it’s time to walk back some of your commitments, Robbie Reynolds at Billd writes. That might mean backing out of a job you initially said “Yes” to and finding a sub who can take over your contract. “Acknowledge that you will probably lose a customer, but it will ultimately be for the best for all parties involved,” Reynolds says.
Forecasting: How to Set Expectations for Growth
With a path for growth sketched out, you can begin to calculate how to get there, approximately how long it will take, and what you need to do to reach that goal. That’s what forecasting does.
Forecasting usually calculates one of the four following factors of business growth, the team at financial consultancy ROARK writes:
- Demand. How much interest is there for your services in the market you currently serve?
- Sales. How many contracts should you expect to land in the next six months, 12 months, 24 months, etc.?
- Cash flow. How much cash will be coming in within a specific time frame, and how much cash will be going out?
- Inventory. Less important for services-based companies, inventory forecasting helps businesses see whether they’ll have enough products on hand to fill orders. For subcontractors, this can be useful for forecasting material supplies.
So, how do you calculate any of those forecasts? By looking at your historical data and projecting forward. This is why it’s so helpful to have digital, cloud-based construction software, not spreadsheets. Accurate data that’s easy to access will make forecasting go so much more smoothly.
Here is the basic forecasting process, courtesy of Volha Belakurska at Synder:
- Find the historical construction project documents and financial statements you need. Income statements, balance sheets and cash flow statements will be especially useful here, Belakurska writes.
- Analyze the data in those documents to spot trends. For example, you could analyze year-over-year growth to see whether there is a clear pattern. If your business is 10 years old and you see a roughly 10-percent rate of growth from year to year, then you could plan for 10 percent growth in the coming year.
- Plot that data in a pro forma statement to see what happens when, say, your business grows 10 percent in a year. Ryan Lasker at The Ascent has a good example of what such a form would look like.
Two things to note at this stage. First, remember that forecasts are just models for plotting out “if/then” scenarios (e.g., “if we think demand will rise by 20 percent next year, then we should expect to win four more bids next year than we did this year”).
Second, the example above is overly simplified, and an actual forecast and pro forma statement will involve much more detail and calculation. These calculations need a sober, objective eye. That’s why Helina Patience, certified accountant and founder of the entreflow consulting group, recommends company managers not build out the forecasts themselves:
“[T]his would allow management’s own wishful/pessimistic thinking to creep into the assumptions and to be fed back to the management team. … Get help with this. The best people to create and update the forecasts based on objective insights are management accountants and financial analysts.”
The Right Tools for Planning Company Growth
The most accurate forecasts come from accurate income statements, balance sheets and cash flow statements.
That’s why we designed eSUB Cloud to not only provide strong document control and job-cost management capabilities, but also to integrate with accounting tools. Within the eSUB Cloud platform, you have all of the data you need to run accurate forecasts and make clear plans for the growth trajectory of your trades business.
To learn more, schedule a demo today.
Images used under license from Shutterstock.com.