Forecasting and the Construction Firm: How to do it and why you should bother

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Forecasting and the Construction Firm: How to do it and why you should bother

Table of Contents

What is forecasting and how is it used? ............................................................... 3

Forecasting can help construction companies large and small ............................ 4

A few tips regarding forecasting, and using software to help ............................... 4

Conclusion .......................................................................................................... 5

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What is forecasting and how is it used?

With the construction industry unwinding itself from the earlier holding pattern and looking to the future, many firms will be devising strategies for building their business. But planning budgets and thinking about potential expansion down the road are hard to do if a company doesn’t know what its current financial standing is.

Forecasting helps answer questions, such as whether offering discounts is a feasible option, if the company is in a place to accept new projects and where it may be “from a break-even standpoint”.1

Typically, a CFO would be able to use forecasting to answer these questions, but the task is extremely helpful even in smaller organizations. From multinational corporations to local independent companies, employees have to fulfill multiple responsibilities, including creating business reports on the state of the company.

“Many owners are satisfied to see money coming in, bills being paid, checks clearing the bank and the accountant preparing the company’s tax return,” notes Gregg Steinberg, president of International Profit Associates.1 “In addition, most owners are wrapped up in day-to-day operations and don’t have time to look at the company’s long-term growth and stability; however, this approach leaves valuable money on the table.”

An added benefit of forecasting is that it can give you more insight into cash flow, catching potential snags in profits and other problems that can affect the business down the line. In an industry like construction, where the funding for one project often comes from the revenue of another, maintaining a steady and reliable stream of cash is vital to survival.

The firm will have no hope of growing if it is only treading water. It needs tools to help it critically analyze its current position and devise strategies for advancing in its market. This is where business forecasting software can help.

As Ken Kaufman, the president and CFO of CFOwise, notes, forecasting can be a valuable undertaking for any enterprise, especially those that have “less predictable revenue streams and cost containment efforts,” such as construction firms.2 When developing the forecast and the corresponding budget, be sure that the outlook takes into account variable factors and is regularly updated-things can change fast in the construction industry.

While at first glance, construction forecasting may seem similar to project estimating, the two fields are actually quite different. Estimations are typically related to a specific project, and take into consideration resource costs, the amount of work required and the total expense.3 Construction forecasting looks at factors outside and inside of the company, including economic conditions, the demand for services, the performance of competitors in your region, the availability of skilled labor and a host of other components.

1 http://www.constructionexec.com/Issues/August_2008/Special_Section3.aspx

2 http://www.openforum.com/articles/why-you-should-reconsider-your-business-forecasting-strategy

3 http://www.misronet.com/estimating.htm

Forecasting and the Construction Firm: How to do it and why you should bother

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Forecasting can help construction companies large and small

Since construction projects often extend for months or even years, it’s vital to know exactly how a job will impact the rest of the business and to note if it has the potential to affect other work or parts of the company.

In addition to improving the profitability of a construction firm’s projects, adopting a forecasting system can increase collaboration across the organization, since everyone involved in making important decisions will have access to the same information, ensuring they are all coming to the discussion equipped with the same facts and figures.

Construction Executive magazine notes when each party engaged in a particular project knows exactly how it is progressing, they are able to make better judgments about whether deadlines are realistic or what budget rearranging must be done.4

More businesses are using forecasting software and automating their processes.5 According to Michael Fauscette of the International Data Corporation, many organizations are spending more money on the technology that can help them work smarter with the resources they have rather than on hiring employees who will enable them to work more at a higher cost. Spending on automation software has climbed 26 percent, he notes, and is becoming more popular in service sectors.

Companies are also turning to forecasting software and other solutions in order to determine how they can increase their productivity.

“Companies have come to the realization that technology, particularly software, can be a competitive advantage and serve to level playing fields between large, medium and small companies,” Fauscette notes.5 “Through technology, companies can significantly increase productivity, lower costs, engage new markets, innovate on business models and products, etc.”

A few tips regarding forecasting, and using software to help

Sometimes, a cost-conscious company will try to avoid additional expenses by using a basic spreadsheet for its forecasting process. However, this short-term solution can actually create more problems than it solves in the long run. Generic spreadsheets fail to provide the kind of context necessary to see how future costs and other factors-such as inflation, taxes and material price increases-will affect your finances and operations. With software that works in tandem with accounting and management solutions, you can optimize your forecasting while also getting an edge on the competition.

By adopting a forecasting system that meshes the project management and financial divisions through software integration, firms can make the entire process made much more efficient and can

4 http://www.constructionexec.com/Issues/September_2008/Special_Section2.aspx

5 http://community.nasdaq.com/News/2011-11/software-spending-and-the-economy.aspx?storyid=100786

Forecasting and the Construction Firm: How to do it and why you should bother

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obtain insight, according to Construction Executive.4 This will allow everyone to quickly work the conclusions into their daily responsibilities and start achieving the desired results.

If you do use spreadsheets, you open up the chances of an error occurring, because multiple people are entering information at different entry points.4 Those mistakes can go undetected for a long time, if they are caught at all, and that method of forecasting also takes up valuable time.

Before starting to forecast, it will be necessary to gather some information, such as historical data on the costs of past projects, as well as the relationship between variables outside of your control and of the company. those you determine (market demand vs. productivity).6 When undertaking your forecasting project, focus on labor costs, incoming revenue and material expenses. Keep an eye on a few key areas, such as increases in wages, commodity prices, prior sales and important contracts that are starting or wrapping up.6 Once you have a forecast for what the coming months will bring, you can go about creating a budget. When your business’ success relies on the whims of consumers looking to build a new house or a local company’s decision to expand, being able to quickly adjust your forecast and update your budget for the year can be a vital asset.

“The rolling forecast is a powerful, forward-looking solution to help entrepreneurs spot key trends, make critical pivots and maximize their performance and results,” Kaufman concludes.2

Conclusion

Charging blindly into the future is not a solid business model, as many people learned in the years after the housing bubble burst. By basing expansion and other major decisions on hard data, and forecasting the effects that current conditions will have in the future, construction companies in particular can plan for growth in a way that identifies and plans for any risks.

There’s no crystal ball to let you know where your construction firm and the industry as a whole will be in the next year or further into the future. But with forecasting software, you can better manage cash flow and make decisions that may insulate your business from major economic shocks.

2 http://www.openforum.com/articles/why-you-should-reconsider-your-business-forecasting-strategy

4 http://www.constructionexec.com/Issues/September_2008/Special_Section2.aspx

6 http://www.misronet.com/estimating.htm

Forecasting and the Construction Firm: How to do it and why you should bother

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