How to accurately project revenue as a contractor
Written by Randy Blount
January 16, 2022
There are three critical financial management skills you and your dirt world business need to master: budgeting (which includes job costing), cash flow management, and projecting revenue. Your budget is the framework against which you can judge your progress, whether that means managing your cash flow or driving your revenue projections.
For Blount, talking about projecting revenue naturally leads to another topic about which he’s passionate: profitability. Companies in the construction industry consistently talk about how much revenue they do. You’re a $100 million company? That’s great, but “If you’re not making money, it doesn’t mean a lot,” said Blount. “Remember that profitability is more important.”
Learning to project your monthly revenue.
Yes, you have to manage revenue. Both budgets and hiring depend on it. And you need to be estimating what your revenue’s going to be.
Depending on the size of your business — and the duration of your typical projects — you’ll have a different view. If your larger projects last a year consistently, then you can look out across 12 months of revenue for your projections.
As Blount noted, “The reason that's important, is usually you can establish metrics based off of projecting revenue.”
With midsize and smaller projects, projecting three to six months out may be the most you can do accurately. However, the process for projecting revenue is the same: What projects do we have? Based on the schedule(s) we’ve created, what should we complete? And be sure to review your projections — and measure them against your revenue — on a monthly basis.
With a projections process in place, you can add metrics into your analysis. One metric Blount used was staffing: What was their employee count and what was their revenue? They looked, on a monthly basis, at revenue versus staffing to identify consistent ranges. They also looked at profitability in certain scenarios, to learn that billing between $25,000 and $35,000 per employee per month is where they wanted to be.
The right range will be specific to your business. “If you do more pipe, maybe you have more material, maybe the number’s bigger, or, if you do more structures,” said Blount. “Maybe the number is smaller. You're gonna have to evaluate your own data.”
The not so hidden benefits of projecting revenue.
Knowing the billing per employee that will make your business profitable can help with the hiring process. Having projected your revenue into the future, your operations teams can be proactive: If you have 85 workers now and see a project three months from now that needs 100+, it’s time to reach out and find those workers before the work arrives. Get onto social media. Generate some traffic to your website to attract workers to the positions you’ll need to fill. There also may be projects you can close out, to free up additional staffing.
“So, forecasting revenue is not just about ‘What's the number going to be?’ but it's how you plan for the people,” said Blount. “And when you're able to plan, just like on a project — planning a project makes you successful — planning the business makes you successful.”
Another area of your business accounting that benefits from revenue projections is determining your overhead costs. Once you’ve estimated your revenue, you can start looking at costs that aren’t related to the job, such as office and other expenses. This gives you an overhead percentage to use in bids you submit.
As Blount summarized, “Understanding and forecasting revenue is how you work on the business.”
If you run a smaller business, because revenue projections may not be as robust, or may not extend very far into the future, you may think projecting revenue is not that important: Let’s just get the work we can get. However, you could still find yourself in the position of needing 100+ workers in a hurry and not being able to get them.
Seeing potential increases in revenue — before they happen — affects other areas of your financial management as well. As Blount asked, “If our revenue spikes this much, how much receivables are going to be out there?” Or you may need to sit down with your banker “and figure out how today we're ready with a line of credit to cover this project, because it's going to happen.”
Help your banker want to help you by having a budget and showing projected revenue. “This company is thinking ahead. They're planning, they're running their construction company, like the business it is,” Blount said.
Those who integrate revenue projections into their financial management systems and monthly routines enjoy one of two benefits: They make more money, allowing them to grow their $2 million business into a much larger one, or they can turn their $2 million business into a $2 million business that’s more profitable. Either way, you win.
Projecting revenue is not only for the business as a whole. It can be applied at the individual project level as well. It can inform your estimating and bidding processes. And it can help you better understand your staffing needs.
“So, forecasting revenue seems like it's just all about numbers,” said Blount. “But really, it's about providing you as a leader the information you need to show that you care, but you have to communicate it.
Written by Randy Blount
January 16, 2022