Jeremy Nichols, CPA, left, and Rich Friedland, CFP®, Moss Adams

Jeremy Nichols, CPA, left, and Rich Friedland, CFP®, Moss Adams

It’s important for owners both to initially consider and then continue assessing their company’s ideal size as the business environment changes.

While some growth can be anticipated, bringing with it additional profitability and success, unexpected growth can at times be challenging. If owners aren’t prepared to handle this type of growth, it could end up costing their business money.

There are many ways to quantify the size of a business, and in the construction industry, gross revenue is often used to measure size. Using this metric, this article discusses ways to help owners prepare a more sustainable growth plan and deal with the unexpected.

Challenges

There are major costs and other challenges to consider when planning to grow a business. The following questions can help guide the decision-making process.

Is there enough business or work in the local or regional area to support desired revenue growth?

Consider upcoming projects and where they may be located. If they’re outside the local area, consider these additional costs:

• Travel and lodging

• Additional compensation

• Vehicle usage and fuel

• Temporary workforce

Should a new location be opened?

There are advantages to establishing an office in a new location, such as:

• Providing a local space for employees, customers, vendors, and subcontractors to meet

• Enhancing company visibility

The costs of additional office space and overhead can be a significant burden, however, especially when starting a new location. Specific costs could include the following:

• Rent and utilities

• Maintenance

• Computers and IT support

• Under utilization of local workforce—especially before the location has a full workload

To quickly quantify the volume of work needed to offset the additional overhead burden, divide the total amount of additional cost by the company’s gross margin.

For example, a new office location may cost $500,000 per year to operate while a conservative estimate of the gross margin generated from contracts in the area is 15%. By dividing total cost by gross margin, it’s determined that approximately $3.3 million in revenue would need to be generated to offset the cost of the new location.

What level of profitability can the business sustain?

If growth requires taking on larger contracts, a company will need to assess its ability to properly manage and oversee them. Larger contracts can each have a more significant impact to a company’s profitability and cash flow than smaller jobs management may be more familiar with. It’s also important to consider the increased risk of being able to complete contracts efficiently while working in a new location with additional customers and a new workforce.

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