The reason drawing up a plan is often put off by contracting SME business owners is that they say they don't have all the information. This is true to a point — you cannot predict the future accurately — but you can make educated guesses. Four financial forecasts are required to survive, and monitoring against them enables the strategies and plans that will deliver growth and long-term success.
1. Planning for Your Exit: A Long-Term Perspective (reviewed annually)
An owner's exit plan — whether a sale, merger, succession, or winding up the business having extracted profits along the way — depends on the business's financial health and growth trajectory. Potential buyers or successors will scrutinise your revenue trends and cost management, making accurate forecasting essential. A strong, data-driven record of stable or increasing profits enhances your business's valuation. If your aim is to extract profits and eventually close, you need to be sure you are on target to build a pension pot large enough to accommodate your desired lifestyle.
2. Adapting to a Shifting Market (reviewed annually, or more frequently after major events)
The construction market is constantly evolving, shaped by economic policy, technological advances, and demand trends. Accurate revenue and overhead forecasting is your compass. By analysing trends, you can shift direction towards profitable sectors or adjust pricing strategies to maintain competitiveness.
3. Overhead Forecasting (reviewed quarterly)
Overheads are costs incurred in finding work and running the business, even if it had no work on site. These include fixed commitments such as long-term leases or equipment financing, and variable costs including marketing, recruitment, estimating, bank charges, and insurance.
An accurate overhead projection helps you determine the baseline revenue requirements that must be covered by project works before turning a profit. The overhead is spread across projects by adding a percentage to the expected project income.
4. Revenue Forecasting (reviewed monthly)
Revenue projections start with understanding your pipeline, broken into: secured contracts with known payment terms; probable contracts where you are 90% sure they will convert; and possible contracts being tendered, weighted for the number on the tender list. These can be known as your SP&P (Secured, Probables and Possibles).
Using Forecasts to Calculate Mark-Up
To achieve breakeven — and ideally exceed it — use your revenue and overhead forecasts to calculate the required mark-up on project estimates:
- Determine your annual overhead: total all fixed and variable costs projected for the year.
- Estimate your revenue capacity: sum the total project revenue you expect to generate from your SP&P pipeline.
- Calculate the overhead recovery percentage by dividing total overhead by projected revenue. For example, if overheads are £100,000 and projected revenue is £1,000,000, you must add 10% to every estimate just to break even.
The mark-up should be added to any estimate to achieve breakeven, then profit added to turn the estimate into a tender. The art of tendering is to add the maximum profit the market will bear and still win. Benchmarking tender wins and losses enables you to find that ceiling.
Conclusion
Forecasting isn't just about predicting — it's about preparing. By understanding revenue potential, controlling overheads, and benchmarking mark-ups against the market, you can thrive in today's shifting market and position your business for a successful future.
