The list of reasons why contractors fail in business is endless, but right at the top of that list would be a whole slew of issues relating to finances. It often spells disaster for contractors when they can’t recognize what their real costs of doing business are, and they fail to charge an appropriate price for services delivered.
This is one reason that it’s absolutely essential to establish a sound financial budget for your contracting business. Only by doing so can you expect to manage your money optimally, improve your decision-making, manage costs more effectively, and catch problems before they become business killers. Here are some tips for smart budgeting that will help you get there.
Calculate costs before revenues
Anticipating incoming revenue for any given period is difficult, unless you’re only considering a month or two out. On the other hand, anticipating costs is far easier, so you should plan costs out for a year at a time, based on what you’re able to spend monthly. Once you’ve established a benchmark for what you can afford to spend during each time period, you’ll be able to plan for how much revenue is actually needed to cover those costs.
Planning your direct costs
In the first phase of your planning, you should calculate costs directly associated with contracting projects you know you’ll be completing. For instance, all labor and materials would be included here, along with any equipment rentals or extra labor you have to hire on. It’s important that you account for true costs here, and not just the obvious and available numbers. The cost of hiring a worker for example, is not truly a simple $15 per hour expense – there will actually be a number of other costs piled on top of that. You’ll also have to pay for health insurance, Workmen’s Compensation, unemployment tax, Social Security, and maybe even overtime.
These are fixed costs that you can count on, pretty much every single time frame of the year. A good example of such costs are any rents you have to pay, telephone service, marketing costs, payroll, and all costs associated with running your office.
Costs which are variable
Variable costs include such expenses as travel which is necessary to maintain or grow the business, as well as all costs associated with repairs to vehicles or the maintenance of those vehicles, salesperson commissions, and you should even factor in unexpected costs.
When you reach the point where all the expenses you calculated for any given time frame are covered by incoming revenue for that same period, you will have reached the point of breaking even. Most contracting businesses require several years to achieve this kind of stability and equilibrium, but once you get there, you’ll be in a position to make a few tweaks to either costs or revenue, in order to begin realizing a profit. After a sustained period of profitability, you would then be in a position to experience real business growth.