6 Tips on Creating a Budget for your Construction Business

6 Tips on Creating a Budget for your Construction Business

Does your construction company have an annual budget? Owning and operating a construction business is not easy and requires expertise in your craft, as well as in-depth knowledge of your company’s finances. According to data from IBISWorld reports, one of the top success factors for a construction company is effective cost controls and budgeting.

A budget:

  • Supports planning and financial goals
  • Assists with managing your money
  • Helps keep costs under control
  • Aids with the decision-making process

Here are six tips to help you create and maintain a budget for your construction business:

1. Develop or refine your business plan.

Your budget is a financial representation of your business plan. Creating a budget should not be attempted until you have a developed and refined business plan.

2. Look at the market.

You should regularly monitor construction industry trends and your business market(s). You should also study local economic projections and census data. A rise in population and a thriving economy may lead to increased residential and commercial building spending. After studying your market trends, connect this with your business plan to develop a realistic idea of potential revenue.

3. Evaluate your expenses.

The next step is to evaluate your expenses:

  • Start with your direct costs, which are expenses related to a specific project and include materials, labor and subcontractor services.
  • Next, assess your monthly fixed costs like rent and salaries.
  • Finally, review how your remaining costs vary month to month.

This will help determine cash flow needs at various times throughout the year.

4. Determine if your rates are reasonable.

Once you have evaluated your revenue potential and your actual expenses, you will need to determine the amount of revenue needed to pay your expenses while also leaving enough to show a profit at year end. Your project rates may need to be adjusted accordingly.

5. Create a spreadsheet.

Organize this information in a spreadsheet or online budgeting software. Choose a tool that is convenient and easy for you to continue to use going forward.

6. Track your progress.

Compare actual results against your budget and adjust your budgeted numbers as needed. You should review your income statement and cash flow statement monthly.  These reports can be created by your internal accountant or CPA firm, and should be shared with other members of your management team.

Maintaining a realistic budget will allow you to make informed business decisions that will lead to continued success. Use these tips to create a budget and keep your financial progress on-track as your year unfolds. Need help? Our Construction & Real Estate Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. Contact us today to learn business strategies that will help you grow and save you money.

Expense Creep – 3 Simple Steps to Improve Business Profitability

Expense Creep – 3 Simple Steps to Improve Business Profitability

As a time goes by, normal expenses for a business tend to “creep up” and begin to erode a portion of profits. Has this happened to you and your business?

3 simple steps to improve the profitability of your business:

1. Identify general ledger expenses as one of the following:

  • Discretionary. These are expenses that could be eliminated and it would not directly affect the operations of the business.
    • Examples – Entertainment/tickets, sponsorships and 401(k) match.
  • Controllable. These are expenses monitored by management and can be controlled to increase profitability. 
    • Examples – Supplies, office related expenses and labor. 

Management of these expenses is an important area to examine for expense creep.

  • Non-controllable Expenses. All remaining expenses should be classified in this bucket. They are not discretionary and cannot be controlled by management.

2. Now that you have properly identified expenses, we recommend examining each of the discretionary expenses and determining if the incurrence is adding value to the business. If not, consider either eliminating or reducing the expense amount moving forward.

3. Finally, you should review each of the controllable expenses. Identify what is the appropriate amount or percentage each expense should maintain. We recommend creating a system to monitor and report expenses and compare them to the pre-determined goal.

“What gets measured gets managed, and what gets managed gets improved.”

This simple exercise is a very effective way for your business to better manage expenses and reduce the effect of expense creep. If you would like assistance implementing a program such as this, please contact a Smith Schafer professional.

Valuation: The Market Value Formula

Valuation: The Market Value Formula

The words “Business Value” or “Business Valuation” by themselves hold more than a singular definition. The complexity of business valuations, make it challenging to fully grasp what is involved in the process of valuing a company. There are three main approaches when establishing a value for a company:

  1. Asset
  2. Income
  3. Market

KEY FACTORS TO USING THE MARKET APPROACH

The market approach involves finding comparable sale transactions for other businesses in the same industry or finding comparable publicly traded companies to compare to the subject company. Below are important components to be included when using this business valuation approach.

Identifying an Industry

Valuation analysts will start by determining the industry the business operates in. Understanding exactly what industry is critical to utilizing this method. Research begins by gaining a complete understanding of the business, the customers, products, markets and competitors. After this information is collected, the next step is to identify the business NAICS and SIC codes. There are many generalized industries, including construction, wholesale, manufacturing, or information technology, but the valuation analysts will determine the correct industry classification within these broad industries. Finding the industry is important to utilizing the correct comparable information. 

Market Research & Comparable Companies

A significant amount of time is spent on market research and finding comparable companies. Valuation analysts start by using the business NAICS and SIC codes to search databases for comparable sales transactions.

Note: A common misconception is using this method is similar to a real estate appraisal. The misconception is, if a house is sold in the same general area, is a similar size, has comparable features and built around the same time it should have the same value. This may hold true for real estate, but businesses are more difficult when trying to compare.

Once the valuation analysts have a group of comparable companies, they research the transactions to determine if they truly are comparable. Most analysts will narrow the sample of businesses to five or 10 and conduct in-depth research on those businesses.

Multiples

When pulling together a group of similar businesses from a databases, zero in on the multiples of sales, earnings, or cash flow to develop an average multiple applying to business financial information. From the comparable transactions, valuation analysts will develop ratios of sales to selling price, cash flow to selling price, or earnings to selling price. If using comparable public companies in the analysis, look at the ratios published in annual reports, such  price to earnings. Use the average price earnings ratio to calculate a value of the business by applying ration to the  net income. It is important to emphasize this method can only be used if there is an adequate sample size.


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There are many reasons a company may want or need a business valuation, including negotiating a merger or business sale, estate and gift tax planning, considering new shareholders, attempting to resolve partner or other liability disputes, determining shareholder equity or even marital dissolution. A business valuation may also be useful for strategic planning and bench-marking purposes. Whatever purpose the valuation is fulfilling, it is vital to engage experienced professionals who will take a comprehensive view of all the company’s investments.

Free Download: Bookkeeping Class Presentation

Free Download: Bookkeeping Class Presentation

We teamed up with CEDA to offer a free bookkeeping class to local businesses on August 6, 2019! Smith Schafer Principal, Trisha White, discussed:

  1. Why bookkeeping is important
  2. Choosing software
  3. Basics of hiring employees
  4. Budgeting and why it’s important
  5. Accounting methods (cash vs accrual)

Enter your email below to download your copy of the presentation.

How is the Tax Reform Affecting the Hospitality Industry?

How is the Tax Reform Affecting the Hospitality Industry?

The Tax Cuts and Jobs Act (TCJA) brought significant changes for many businesses and individuals, including an overall cut in tax rates. Those in the hospitality industry have been generally optimistic about the changes, expecting both an increase in consumer spending and the ability to invest in people, technology, development and other improvements in their businesses because of anticipated lower tax liability. Specific provisions in the tax law affect the hospitality industry more than others. To help hospitality businesses understand these provisions, we have provided a summary of following five applicable changes:

  1. Pass-Through Entity Deduction
  2. Bonus Depreciation & Section 179 Expensing
  3. Meals, Entertainment and Fringe Benefits
  4. Interest Deduction Limitations
  5. Excess Business Losses

1. Pass-Through Entity Deduction

Under the tax reform bill, C Corporations benefitted largely from the reduction of the corporate tax rate. The Qualified Business Deductions, i.e. 20% deduction, was passed to create more incentive for pass-through entities. Qualifying pass-through entities will receive a 20% deduction on pass-through income for tax years beginning after 12/31/17 and expiring in 2025 (with potential caps for some). The deduction potentially benefits hospitality industry business owners with the exception of management companies providing professional service and consulting to businesses.

2. Bonus Depreciation & Section 179 Expensing

Property and equipment play a major role in a hospitality business’ operations. Depreciation and immediate expensing options help businesses utilize property and equipment to reduce taxable income. The tax reform bill helped refine the rules for immediate expensing, referred to as “Bonus Depreciation” and “Section 179 Expensing”.

  • Under the updated bonus depreciation rules, assets placed in service after September 27, 2017 have no limit to the amount that can be expensed. Prior to the new law, Bonus Depreciation was limited to 50 percent of the cost of new property. Now bonus depreciation can be used on new and used purchases. The new law eliminates the separate categories of qualified leasehold improvement property, qualified restaurant property and retail improvement property and consolidates into one category: qualified improvement property (QIP). This has important consequences to real property placed in service after 12/31/2017 and whether 100% bonus depreciation applies. The ability to expense 100% of eligible property and equipment creates a tax benefit that is likely to encourage more capital spending, potentially enabling more remodels in the hospitality industry.  The amount allowed to be expensed is set be phased out over the next couple of years.
Placed in Service Year Allowable Expensing
After September 27, 2017 – Dec. 31, 2022 100%
2023 80%
2024 60%
2025 40%
2026 20%
2027 0%
  • New section 179 expensing rules eased restrictions that were imposed on the special deduction. The new law increases the phase-out limits significantly and includes costs of property placed in service that are incurred to improve a structure, such as:
    • Roofs
    • Heating, ventilation, and air-conditioning property
    • Fire protection and alarm systems
    • Security systems

Special deduction for most types of real estate components, except for those mention above, are still disallowed. Additionally, you still must have taxable income in order to qualify for the Section 179 expensing. The following chart illustrates the maximum section 179 expensing allowed and the beginning deduction phase-out threshold

Tax Year Maximum Deduction
Allowed
Beginning Deduction
Phase-out
2017 (old law)$510,000 $2,030,00
2018 (new law) $1,000,000 $2,500,000
2019+ $1,000,000 (Plus Inflation) $2,500,000 (Plus Inflation)

3. Business Meals, Entertainment & Employee Fringe Benefits

The TCJA removes all deductions for entertainment, amusement and recreation, and for membership dues at any club organized for business, pleasure, recreation or another social purpose that are paid or incurred after December 31, 2017. Furthermore, the law limits the deductibility of the costs of food and beverages provided to employees through eating facilities, as well as de minimis food and beverages at the workplace that are employer-provided. Under previous rules, companies could deduct 50% for a variety of expenses, such as client meals, event tickets, charitable event tickets and membership fees. Disallowed entertainment and meal deductions apply even for expenses directly related to the active conduct of a taxpayer’s trade or business. However, there are exceptions to this limitation that allow for certain employee events to be deductible.

Additionally, the law disallows employer deduction for the cost of providing commuting transportation to employees, except if the transportation was necessary for the employee’s safety. The TCJA law also eliminated employer deductions for qualified employee transportation fringe benefits, such as parking allowances and mass transit passes. This will cause businesses to decide if they will continue to pay for nondeductible fringe benefits, or instead pass the tax burden to their employees by including the amount in taxable wages.

4. Interest Deduction Limitations

The deduction for net interest expenses incurred by a business is now be limited to 30% of its adjusted taxable income – or earnings before interest, taxes, depreciation and amortization. Businesses with average annual gross receipts of $25 million or less are exempt from the limit. This new rule will generally impact highly indebted companies the most.

5. Excess Business Losses

For tax years beginning after December 31, 2017 and before 2026, excess business loss of a taxpayer other than a C corporation is limited. Net business loss of $250,000 (or $500,000 in the case of a joint return) will not be deductible in the current year. However, an excess business loss is treated as part of the taxpayer’s net operating loss and can be carried forward to subsequent years.

Questions?

The tax reform bill is impacting the hospitality industry in several ways, many of which are positive, including projected higher spending on travel and leisure activities due to a lower corporate tax rate, lower rate for pass-through entities and expanded expensing rules. Yet some changes may have unforeseen consequences. If you have questions about these changes or tax planning strategies in light of the reform, or need assistance with an audit, tax or accounting issue, Smith Schafer can help.