John Kenney, CPRC, CEO, Cotney Consulting Group
Last month, in part one of my article, Financial Management for Your Roofing Business, we focused on financial management as a whole and what makes the roofing and construction industry financial management unique to other sectors of businesses.
Roofing companies are different from most other companies. Because of this, the principles of financial management applied in other businesses must be modified for roofing companies or they will not function well. Our industry has specific challenges and problems not faced by other sectors. In this article, we will explain the four areas of responsibility in financial management.
Accounting for Financial Resources
As a financial manager, you are responsible for tracking (accounting for) how the company’s financial resources are used, which include:
■ Project and general overhead costs are accurately tracked through the accounting system.
■ Ensure that proper construction accounting methods and systems have been set up and are functioning correctly.
■ Project cost completions for the individual projects and ensure that unbilled committed costs – costs the company has committed to pay but has not received a bill for – are included in these projections.
■ Determine whether the individual projects are over or underbilled.
■ Prepare all required financial statements.
■ Review the financial statements to ensure that the company’s financial structure is aligned with industry standards.
Because of the unique characteristics of construction and roofing companies, some key differences exist between our industry’s accounting systems and financial statements for other industries. Before you can understand how to read a roofing company’s financial statements or how these costs are tracked and managed, the financial manager must understand how construction accounting systems operate. Financial managers must review the accounting reports
for errors, including improperly billed or omitted costs, to ensure that the necessary corrections are made.
Analysis of financial statements will help the financial manager and the owner identify problems before they become a crisis. A crisis, such as realizing that your company will not be able to pay its bills in the upcoming months, can be life-threatening to your company.
Managing Costs and Profits
Financial managers are responsible for managing the company’s costs and earning a profit for the stakeholders. They rely heavily on the reports from the accounting system to manage these costs. Managing the company’s expenses and profits include the following duties:
■ Controlling project costs.
■ Monitoring project and company profitability.
■ Setting labor burden markups.
■ Developing and tracking general overhead budgets.
■ Determining the minimum profit margin for use in estimating.
■ Analyzing your company’s profitability and making the necessary changes to improve profitability.
■ Monitoring the profitability of different customers and recommending modifications required to improve profitability.
Financial managers need specific skills to determine project success and to identify problem areas. They then can provide accurate information to the Project Manager, Superintendent or other stakeholders who need to know how their projects are doing.
Many profitable roofing companies fail because they run out of cash and cannot pay their bills. Managing the cash flow of your company is essential and is the financial manager’s responsibility. These duties include:
■ Matching in-house labor and subcontractors to the cash available for use on projects.
■ Ensuring your company has sufficient cash to take on additional projects.
■ Preparing income tax projections for your company.
■ Preparing and updating cash flow projections for your company.
■ Arranging for the financing needs of your company.
Cash is the lifeblood of your company and cash flow projections ensure your company has sufficient money for the upcoming year. Cash flow projections are prepared by projecting the revenues and expenses for your company by combining the cash flows from individual projects. You then combine the projected revenues, project costs, general and overhead administrative budget and forecasted income taxes with your available money to determine the company’s cash needs. If you find insufficient funds, you will have time to arrange the necessary financing to provide the required cash needs.
Financial managers are also responsible for selecting financial option alternatives. These decisions include:
■ Selecting which equipment to purchase and when.
■ Deciding to invest your company’s limited resources in which area of your business.
Many financial tools are available to analyze the alternatives quantitatively. It is difficult to determine which option is best without some measurable method. Understanding these skills is necessary for any financial manager deciding where to invest limited capital. Income taxes can also influence the choice of financial decisions. Income taxes can make different financial alternatives preferable and should be part of your formula when weighing financial alternatives.
To sum it up, a roofing company is a risky venture. Every year, many roofing companies go out of business. Operating a successful roofing company requires a specialized set of financial management skills because of the unique nature of our industry. Unlike other industries, the roofing industry faces several challenges, including:
■ Projects are unique and often one of a kind.
■ Projects are different and located in various geographical locations.
■ Handling progress payments and retainage.
■ Projects use in-house labor or subcontractors to complete.
This article is intended to provide the information necessary to develop the financial management skills you require to become a successful roofing company owner or manager.
John Kenney, CPRC has over 45 years of experience in the roofing industry. He started his career by working as a roofing apprentice at a family business in the Northeast and worked his way up to operating multiple Top 100 Roofing Contractors. As CEO, John is intimately familiar with all aspects of roofing production, estimating and operations. During his tenure in the industry, John ran business units associated with delivering excellent workmanship and unparalleled customer service while ensuring his company’s strong net profits before joining Cotney Consulting Group. If you would like any further information on this or another subject, you can contact John at
jkenney@cotneyconsulting.com.
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