Why do Construction Companies fail?
Running a construction Company successfully is not easy. The industry is full of risks & challenges, which can sometimes lead to failure. According to the US department of commerce, contracting & construction businesses have the highest failure rate of any other business.
1. Investment & working capital
Construction companies require huge capital to run the business. A large amount of capital is invested in fixed assets like tools, heavy equipment, vehicles, and more. Not having enough capital for investing in fixed assets is one of the reasons for the failure of construction companies. At times construction companies do not have enough working capital & reserves to overcome the expenses & unexpected losses which turn out to an increase in liabilities.
2. Cash flow
Cash flow management is another reason for the failure of construction companies. Cash flow, the cash that comes into the business (cash inflow) & goes out of the business (cash outflow) needs to be managed & recorded properly. This means to make sure you are receiving the accounts receivables on time. Keeping track of the account's payables is equally important.
A positive cash flow report allows you to pay the debts & bear the expenses. If the cash outflow of the business is more than the cash inflow it might lead to failure.
3. Business plan
A Strategic business plan is key to a successful construction company. A business plan with specific goals & objectives that are achievable is very important. Communicating the plan with the entire staff is necessary because if they are not aware of where you plan to be in the upcoming years you can never be there.
4. Rapid Growth
Construction companies often aim to grow overnight without a proper business plan, resources & manpower get imbalanced. Taking too much work, working on big projects to grow fast is the biggest mistake construction companies do. The problem arises when the construction companies do not spend time on research & planning and start working on the project.
5. Needless Expenses
Construction companies often end up incurring unnecessary expenses. Hiring more & more employees when there is no necessity is not a good decision especially for mid-scale companies. Companies should hire new employees when there is a necessity & when the company can afford it.