Financial Planning for Professional Builders: Key Insights

Posted on Jan 14, 2025 in Business Administration and Innovation Management

Financial Planning for Professional Builders

Consultants for a Builder’s Financial Plan

Here are four consultants a professional builder may consult to establish a business financial plan:

  1. Accountant: Ensures that companies and organizations operate efficiently by assessing their financial records.
  2. Bookkeeper: Maintains accurate financial records by tracking income and expenditure, ensuring the company or individual stays within budget.
  3. Business Plan Writer: Creates a well-written and professional business plan.
  4. Finance Partner/Lender: Once the business plan is clearly defined, the builder may need a financial partner or lender in the early stages of their business.

Financial Information Provided by Consultants

Here are six types of financial information the aforementioned consultants might provide:

  1. Tax: Strategies to legally reduce your tax bill.
  2. Record Keeping: Methods to maintain accurate records, such as keeping receipts.
  3. Income/Expenditure: Advice on how to track income and expenses.
  4. Obtaining Finance: Guidance on securing capital.
  5. Lead Generating Avenues: Strategies on how and where to market yourself and your business.
  6. Expenses: Techniques to reduce business expenses.

Understanding Cash Flow Estimates

A cash flow estimate is a critical step in assessing a builder’s business. It projects future cash flows, considering growth, income, and profit margins. Simply put, it’s an analysis of income versus expenditure over a specific period.

Assessing the Cash Flow Estimate

The following people associated with the business may be asked to assess the cash flow estimate:

  1. Money Lender: They need assurance that repayments, plus interest, can be made.
  2. Money Partner: They need to ensure they are making their share of the profit.

Business Relationships with Financial Backers

The relationship between business operators and their financial backers varies. With a bank, the relationship may be more formal and focused on numbers. With a personal investor, there might be a stronger emphasis on loyalty and personal connection, though financial performance remains crucial. In either case, a contract is essential.

Defining Business Capital

Business capital refers to the financial assets needed for a business to produce the goods or services it offers to its customers.

Tax Obligations for Building Companies

Here are three tax obligations that a building company will likely have:

  1. Income Tax: Tax paid to the government on the business’s earnings throughout the financial year.
  2. Capital Gains Tax: Tax paid on profits from selling assets, such as real estate.
  3. GST: Goods and Services Tax levied on most goods and services sold for domestic consumption.

Understanding BAS

A Business Activity Statement (BAS) is a form submitted to the Australian Taxation Office (ATO) that reports Goods and Services Tax (GST) in the business operation.

Ensuring Funds for BAS Payments

One method to ensure provisions for the next BAS payment is to maintain a separate bank account specifically for this purpose.

Establishing a Credit Policy

A builder should establish a clear credit policy outlining the company’s approach to extending terms to customers and collecting overdue accounts. This includes setting payment terms and outlining procedures for dealing with delinquent accounts.

Potential Problems with Credit Arrangements

  • Clients may fail to pay on time, leading to cash flow issues.
  • Collecting outstanding funds from delinquent accounts can be time-consuming and expensive.

Key Performance Indicators (KPIs) for Builders

Here are two KPIs a builder will use to monitor their financial performance:

  1. Cost Versus Budget: Comparing actual costs against the planned budget.
  2. Number of Incidents/Accidents: Tracking safety performance, which can impact financial performance.

Communicating the Business Plan

After completing a business plan, the builder will communicate it to those who need to know about it. The plan should remain internal and confidential.