Before awarding credit, lenders demand detailed budgets, including cash flow forecasts. They want realistic projections, not unfounded profit and revenue estimates. Cash flow projections are an important element for lenders because they show how you plan to repay the money.
Even if your construction firm doesn't need credit, a well thought-out budget, including cash flow projections, is important for the ongoing operation of your business. For some construction projections, surety companies look closely at budgets before issuing the bond needed. Additionally, by preparing an effective annual budget and comparing it to your actual financial performance, you can find certain situations that need to be addressed.
For example, a construction firm that expects $5 million in new projects in the first half of the year, but is awarded only half of that amount in contracts, need to review its bidding procedures. Perhaps the company needs to tighten up its bidding process, have someone review the work of the estimator before bids are submitted, and review other internal procedures to get more work.
Upon review of the actual performance, you may find expenses that are out of line and you want to look at instituting controls, safeguards -- and perhaps even institute a bonus system for those responsible for controlling the job.
Effective budgeting requires knowledge of the technical aspects of the construction industry -- as well as experience with projections, job costing, bonding and a host of related financial matters.