My dad is a general contractor in Hong Kong. My brother works for him as a project manager.
My dad loves to share with me how much business he has completed in the last year. He loves to talk about the top line, revenue.
Revenue, he does very well. He did over CAD$8million of business.
Some businesses’ net margin (after deducting all the expenses) can be as low as 2%.
Top line really doesn’t mean a lot without looking at the bottom line.
My brother, who acts as the project manager, is on the ground managing a number of these projects for him. My dad has a couple more project managers working on other projects.
While I was in Hong Kong, my brother mentioned a few times how some projects did not make them any money. Sometimes they’re in the dark regarding how they’re doing from a number perspective.
If you don’t know my dad, I’ve written about him in this blog post before. Check it out here.
It is my dad’s goal to pass on this business to my brother…one day, but my dad makes almost all the bids, based on his experience, or his best guesstimate. ?
So when my brother told me that he thinks some projects are losing $$$, I’m not surprised.
As an accountant, I couldn’t help but asked him, “do you use any software to keep track of job costing?”
My brother stared at me blankly. His response, “I don’t think the administrative staff at the office would be willing to do that!”
Tip#1 Select the most appropriate accounting, job costing, payroll and timesheet services
If I were their accountant, the first thing I would recommend them to do is to start using the simple off the shelf accounting software to track their income and expenses.
I would also recommend a couple of other job costing software that allows you to track expenses more accurately.
These job costing apps allow you to allocate the income and expenses to the corresponding projects. Hence, it allows the contractors to see which project is more profitable.
Similarly important is ensuring your payroll is efficiently managed. Making sure that your staff are paid correctly, on time, and within the law can seem overwhelming and so a lot of businesses outsource their payroll to an expert payroll service such as Cloudpay. Just the other day, one of my friends told me “We run a small business, and we use Cloudpay for our payroll. It has changed the way we do things and given us so much more time to work on other responsibilities!”. To learn more about outsourcing your payroll, check out cloudpay.net.
Next, a timesheet app should also be used by the subcontractors so the general contractors, i.e. my dad and my brother, would have a better idea on how much labour is put into each project. A construction time tracking application could be the sort of solution that brings records, tracking and payroll into the modern age.
Similar to the job costing software, the timesheet app would allow you to track labour cost/time spent on each project. It might not have the details of the tracking the time spent particularly on each small task, but it would have a better idea. I’ve also heard that a timesheet can help us to know how many hours we are working and shows us how much money we should be earning during that time. Another contractor recommended to me that I should have a look at this timesheet software from Deputy if I wanted to use a timesheet schedule that actually worked. I may have to look into this at some point.
Timesheets app can be synced to your accounting software and/or your job costing software. This allows you to have a bird’s view in terms of how much you have spent and the profitability of each project.
Tip#2 Review your budget to actual analysis at the end of each project
Once the job is completed, a budget to actual analysis should be prepared to debrief each project.
When I was preparing to write our Chartered Accountancy exams, we did a lot of old cases. The biggest tip I got from writing the exam was planning and debriefing.
Debriefing helps you understand what you have done right so you can give yourself a thumbs up (we should always celebrate success).
Debriefing also gives you a realistic picture, a real case study of what has gone wrong. You can then learn from them and avoid making the same mistakes again.
If you lost money on the certain type of projects, maybe these are the projects you should not be working on. Maybe you need to increase the amount of your bid to increase profitability.
The key here is to debrief and makes improvements from there.
My brother’s biggest complaint is that my dad wouldn’t listen to his feedback. Nothing is more powerful than showing real numbers and doing analysis from there.
Tip#3 Project cash flow analysis and prepare for plan B accordingly
Cash flow is one of the biggest pain points my dad’s business has.
His business primarily focuses on schools, hospitals and banks.
The amount involved in each project is higher. Milestones are pre-set at a different stage of the projects before progress payments can be released.
Sometimes, a few small tasks can hold up the entire payments.
Yet, you still have a large amount of payroll waiting for you.
Cash flow forecast does not necessarily solve all of these problems for you. But with a cash flow forecast, you have a realistic picture of what you would need to keep the business running.
You can then plan accordingly. To my dad’s business, it may mean tapping into his existing business line of credit. It may also mean borrowing from friends and families.
It may also mean, he needs to plan and keeps more $$$ as a reserve fund in the business.
Advanced tip: Identify your most profitable types of projects and make them your niche!
My dad’s 61 this year. He’s still in great shape but his long-term plan is to pass on this business to my brother.
My brother joined the businesses for a few years already. He didn’t have the particular schooling for it but he learns everything on the job.
While my brother is getting a handle of everything slowly but gradually, my dad notices that my brother can manage a certain type of projects particularly well.
From what we have discussed above, with the use of different apps and regularly debrief each completed project, it’s easy to see if the numbers reflect my brother’s performance.
If this type of projects is the one producing higher profit, why not making it one of your niches?
The key here is to identify a pattern of success from all the analysis done above. Repeat the success and make that your profitable niche.
This will make transitioning your business from one generation to another so much easier. If your plan is to sell instead, having a niche, i.e. repeatable business successes with a proven system, will get you much higher prices.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant