How forecasting can help improve your bottom line

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Construction companies are always looking to set themselves apart. To succeed in today’s climate, smarter forecasting can change the game.

Construction companies are always looking for ways to set themselves apart from the competition. To succeed in today’s climate of fierce competition and razor-thin margins, you need to be forward-thinking in your management style.

Traditional approaches to business visibility (e.g., reporting, monitoring, and analyzing) are important and can help you gain insight into what has already happened and what is happening now, but having a solid understanding of what might happen in the future can help give you that competitive advantage.

Start by making forecasting an integral part of your business planning cycle. Your business planning cycle should look something like this:

  1. Analyze Data
    Consider information about company performance, your projects, the economy, and the marketplace.
  2. Identify trends
    Take note of patterns in your performance, marketplace trends, and other key indicators (such as material and labor costs).
  3. Forecast performance
    Apply your findings to predict how your business/projects will perform in key areas.
  4. Plan and budget
    Use forecasts to plan for the future (“Should we hire more workers?”) and to help scope projects (“Do we have the funds to cover cash outflows?”).
  5. Execute
    Act decisively based on your plans but prepare to make course corrections, as needed.

Be sure to forecast at both the business and project levels as well as for external forces. At the business level, your forecasts help you develop your budgets, establish a vision for the future, and create benchmarks to measure and reward performance. Use predictive indicators such as customer satisfaction, sales pipeline, and accounts receivable turnover to help you create your forecasts.

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Business forecasts to consider include backlog, new contract awards, direct and indirect costs, cash flow, net profits before taxes, gross margin, and revenue. Review your forecasts and examine any areas that show a significant change.

For example, be leery of forecasts that have your gross margin making a big leap. Costs that are high today will likely remain so in the future. When forecasting revenue, embrace your aspirations and build at least one set of projections with aggressive assumptions. Of course, you’ll also want to put together a contingency plan in case actual results fall below projections. It’s usually a good strategy to plan for the worst but project for the best.

Each project must be controlled carefully from beginning to end. Forecasting plays a vital role in identifying potential problem areas—after all, how can you know when a project gets off course unless you first understand the destination? Successful contractors are systematic with their project forecasts, typically requiring finance and operations to work together to provide monthly project forecasts.

Construction forecasts typically rely on accurate and timely input from field management for information such as percent complete and units in place. From these indicators, you can derive a forecast variance and make adjustments. To improve the timeliness of this data, companies are increasingly providing mobile access so field personnel can record project progress from the job site. Key project areas to forecast include net profit, cash flow, cost to complete, and equipment resources.

In addition to making projections regarding internal business performance, it’s important to consider how external factors will impact your organization. For construction businesses, these external driving forces typically fall into five categories: economic, political, social, technological, and environmental. Some questions to consider include:

  • Economic: How are financial markets performing?
  • Political: What new regulations are on the horizon? Where are taxes headed? How will government spending affect available work?
  • Social: How will an aging population and the effects of the pandemic change the type of buildings and services in demand?
  • Technological: How will innovations in mobile, cloud, and BIM impact the industry?
  • Environmental: In what new directions will the “green” movement pull the industry?

Without a crystal ball, the best way for construction executives to understand these forces is to use a method called scenario planning. According to the Journal of Accountancy, scenario planning is focused on answering three questions: 1) What could happen? 2) What would be the impact on our strategies, plans, and budgets? 3) How should we respond?

As with most business strategies, scenario planning is only as effective as the actions you take. Be prepared: develop a playbook to respond to various triggers identified during the planning process. This allows you to take proactive steps quickly and strategically, protecting—and potentially helping—your bottom line.