Introduction
The reason drawing up a plan is often put off by contracting SME business owners, is they say they don’t have all the information. This is true to a point, as you cannot predict the future accurately, but they could make some educated guesses.
Four financial forecasts are required to survive. Monitoring against these strategies and plans which will enable 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' financial health and growth trajectory. Potential buyers or successors will scrutinize your revenue trends and cost management, making accurate forecasting essential. A strong, data-driven record of stable or increasing profits enhances your business’ valuation and attractiveness to buyers. If your aim is to extract profits along the way and close the business, then you need to be sure you are on target to achieve a pension pot which is sufficiently large to accommodate your desired lifestyle.
2. Adapting to a Shifting Market: Reviewed annually or more frequently if there is a major event.
The construction market is constantly evolving, shaped by factors like economic policy, technological advances, and demand trends. A shifting market requires agility, and accurate revenue and overhead forecasting is your compass. By analysing trends, you can alter direction to profitable sectors or adjust pricing strategies to maintain competitiveness.
3. Overhead Forecasting: Reviewed quarterly.
Overheads are costs which are incurred in finding work and any costs associated with running the business, even if it had no work on site.
Costs can be obtained from previous years and adjusted for the upcoming period.
Fixed commitments, such as long-term leases or equipment financing.
Variable costs, including marketing, recruitment, estimating costs, bank charges, insurance.
An accurate overhead projection helps you determine the baseline revenue requirements which must be covered by the project works, before turning a profit. The overhead is spread across the projects and is calculated by adding a percentage to the expected project income. The expected project income is the final forecast.
4.Revenue Forecasting: Review monthly.
Revenue projections start with understanding your pipeline of work, including:
Secured contracts with known payment terms.
Probable contracts, where you are 90% sure they will convert as negotiations are progressed
Possibles contracts, those being tendered, weighted for number on the tender list, assuming there is a desire to win at the current time.
The Secured, Probables and Possibles can be known as the SP&P. Using the revenue forecast and the expected upcoming overhead, the percentage required to be added to project estimates can be calculated to breakeven. The profit mark up then needs to be added.
Using forecasts to calculate markup to breakeven and beyond
To achieve breakeven—and ideally exceed it—use your revenue and overhead forecasts to calculate the required markup on project estimates. The method is:
Determine Annual Overhead Total all fixed and variable costs projected for the year. For instance, if your overheads are £100,000 annually, this is your starting point.
Estimate Revenue Capacity Sum the total project revenue you expect to generate, based on your forecasted pipeline. (SP&P) For example, if your projected revenue is £1million, this figure represents your sales capacity.
Calculate Overhead Recovery Percentage Divide your total overhead by the projected revenue:
£100k / £1000k = 10%
This means you must add a markup to cover overheads of 10% to breakeven.
The mark up should be added to any estimates to achieve breakeven and then profit added to turn the estimate into a tender. Anyone can add a small profit and win a project, the art of tendering is to add the maximum profit, and still win it.
Forecasting is an integral part of this process. The mark-up will change if overheads or revenue are expected to increase or decrease which will necessitate a change to the profit expectation. Benchmarking and analysing tender wins, and losses, will enable you to “find the market” and bid at the maximum profit the market will bear, and still cover your overheads.
Conclusion
Forecasting isn’t just about predicting—it’s about preparing. By understanding the revenue potential, controlling overheads, and benchmarking markups against the market, you can thrive in today’s shifting market and position your business for a successful future. Whether navigating market trends or planning your exit, the right forecasting approach ensures you remain resilient and profitable.
Should you want some more help with setting up your forecasts to help with your bidding process, contact peter.searle@ba4sc.co.uk
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