5 Financial Traps that Roofers Face & Ways to Get Rid of Them

5 Ways Roofers Can Get Rid Of Financial Traps

The roofing industry undergoes several transactions and contracts. Sometimes contracts are drafted on the go even if the terms depart from what's contractually agreed upon. This is why roofing companies face many challenges while managing their finances. Handshake deals are not uncommon in this industry. However, ensuring that every financial decision aligns with the devised strategy can be tricky.

As a roofing business owner, you need to be meticulous about your business. If you fail to do so; you may end up losing your business to competitors. Like any other business, profitability is still the ultimate goal of most businesses, and financial pitfalls may not be evident until they have already dealt a blow to your business. It's most suitable to be mindful and intelligent!

To help, here are five financial traps you need to watch out for.

1. Heavily Dependent on Accrual Accounting

In the roofing industry, accrual accounting is one of the most popular methods. Accountants record earnings before invoices are actually paid and incur expenses before spending.

The major benefit of using this record is that it simplifies record-keeping during the planning and other primary phases. It can create a space between your actual cash position and what's on the document.

In roofing business, where pauses in payment and delivery are not unusual, relying exclusively on accrual accounting can lead to inadequate construction financial management and operational decisions.

Several roofing companies trap themselves by relying on accrual accounting to manage their expenses and payments on a project. No matter if the actual transactions have not been completed efficiently.

2. Improper Cost Estimation

For running a roofing business successfully, cost estimations play an essential role. Several deals and contracts depend on cost estimates. That's why you may come across several software solutions that help contractors and subcontractors make adequate cost estimates for their dealings.

However, incorrect estimation is also quite common in construction. It can emerge as a problem for contractors, and that includes not reviewing actual costs regularly, using outdated practices to make estimates for new projects, and more.

Price fluctuations have been extreme over the last few years, enabling you to make inaccurate estimates and favor your business profit-wise. But this can take a toll on your business. So, we suggest regularly reviewing actual costs and project finances to get a sense of the actual cost of things, but always be careful about checking prices when creating estimates and proposals.

3. Unable to Protect Lien Rights

Unfortunately, delayed payments have become common in roofing. As per the reports, in the US alone an average days' sales outstanding (DSO) umbered to  60 days in 2021, one of the longest payment cycles across the industry.

Facilitating payments within the agreed time frame is ideal to attain proper cash flow. However, at times, there are situations where the client cannot pay the owed amount on time or might even refrain from it altogether. Lien laws shield contractors, material suppliers, and other construction experts in this phase.

Many roofing contractors go for mechanic liens without realizing the fact that it works by placing a lien on the title of the project as a security during non-payments. However, to have the right to implement a mechanics lien when you are left unpaid, construction companies are tasked with sticking to pre-lien conditions in the timing and manner specified by law.

Specifically, for companies that deal with multiple projects across the sector, assuring that preliminary notices are correctly filed can be difficult, sometimes leading to the incorrect filing or missed notices. This may lead to losing your rights forever in the future when stuck in such worst circumstances.

So make sure that you protect your lien rights. Moreover, you can use reliable construction accounting software to streamline the process of safeguarding your payments and filing your notices on time and accurately.

4. Not Taking Care of Change Order Documentation

Change orders are the core component of roofing projects. They are created with proper planning, paperwork, to be precise, but sometimes never finished or sufficiently documented.

This often results in the contractor getting improper results, completing unpaid work beyond the contract, or having to pay for materials and labor costs for work that's eventually not profitable or will not be included in the project cost.

Before beginning a new project, review your existing change order process and ensure that the demanded changes or additions have been clarified with the client–including all points regarding cost and timeline.

5. Deficient Liquidity and Cash Management

As we already know that cash is king in every business industry and construction is not an exception in this regard. Contractors need to make crucial upfront financial investments to a project. The profits can only be counted if the contractor transfers the final payment. This puts contractors on a financial risk, particularly when your liquidity is stuck on a single project.

Cash is still king, especially in roofing, where many projects force or require contractors to make integral upfront financial investments into a project. The profits come only at the end of the contract when the last payment has been made. 

This puts roofing contractors at financial risk to an extent, primarily when their liquidity is attached to a single project.

This unfortunate and high-risk setup might have already been a home of comfort for contractors who have been able to make it perform for multiple projects. However, one financial crash or delayed payment can push you to make poor financial decisions such as denting relationships with suppliers, delaying payroll, or taking loans where the interest rates consume your profits

Deficient Liquidity and Cash Management

Preserve your Roofing Business Health Using the Right Technology

Avoiding these obstacles might seem easy. Still, several roofing contractors fall into the tangle and overlook these issues head-on, even when the consequences are evident in their business.

Set practices take time to deviate from, and it takes purposeful steps to create a culture of financial sanity to guarantee that your business is financially healthy and thriving. It can be difficult, but confronting truths about the state of your company earlier is better than being pushed to come to terms with the sad reality with no choice but to close doors.

Also, choosing the right roofing software can be of great help to automate crucial financial tasks and make a viable decision for your roofing business.