Many surveys and reports show that nearly half of all new construction companies close their doors within the first five years of opening them. When we speak with contractors who failed, most say it was due to a lack of cash flow. It was pretty obvious, yet when questioned, all of them said they were "Blind-Sided" and were not aware they were running out of cash until it was too late.

There is a point when a contracting company starts to fail, and nothing short of a massive cash infusion can stop it, and a domino effect begins, which is when a series of similar or related events occur as a direct and inevitable result of one initial event.

Planning is essential to give your business the best chances for success. Planning means anticipating challenges and developing ways to successfully address them, so they don't upset your startup.

Reasons Why Contractor Startups Fail And How To Avoid Them

Here are three reasons why contractor startups fail and ways you can avoid them.

Lack of market demand

Before spending your time, money, and energy starting a construction business, make sure there's a need for it. You need to have a market to make money. That means there needs to be enough people who need your product or service and are willing to pay money to buy or use it. Without that, you won't be able to cover your costs or earn enough to survive.

Some ways you can identify need:

Look for competition. If no one else is offering the service, there's a chance there's no market for it. That might not initially stop you from moving forward, but if no one already offers your product or service—or anything close to it—you'll have to do more to prove there's a market.

Conduct market research. Studies and interviews help determine whether people in your target market agree with you that there is a need for your offering and that they would pay for it.

Lack of expertise

Entrepreneurs might be tempted to partner with or hire their friends or family—people they genuinely like and would work well with. That doesn't always translate to success, however. For your business to succeed, you need specific expertise and people whose skills complement yours.

It would be best if you also had people willing to discuss your decisions with you and ensure there's a business case for each decision you make. Someone with a differing perspective provides a vital way to double-check whether your choices are best in the long-term for your business or whether other options are available.

Ensure you hire people with balanced competencies. If your roofing business involves installing solar panels, you might need a technical expert to ensure the technology runs smoothly. You'll likely also need a financial expert to help you with bookkeeping and possibly a manager to oversee employees.

Hiring people you like is fine, but make sure your team also has the skills to manage your business successfully.

Lack of finances

You need money to produce your services and ensure all employees are paid, including you. It's not enough to know how much money you need month-to-month; you need to forecast your development cycle, how inventory moves through your supply chain and variations in seasonal income.

If your construction business doesn't earn as much in the first few months as you predicted, you'll need to bring in more money quickly to save your business.

Lack of cash holds up material deliveries, which causes labor to be idle and continue costing money, and then payroll checks bounce, and your construction workers take your tools and equipment to the pawn shop to get paid that way, and the contracting company spirals down to its end.

One accounting tip that could help your new contracting business is opening three business checking accounts.

If you were to ask contractors about the big mistakes they made when they started, they wished they had kept their business and personal expenses completely separate. Not only does it make day-to-day contractor bookkeeping easier, but it also makes monthly, quarterly, and annual tax preparation smoother.

Checking Account 01 - Your primary checking account should not have any credit or debit cards attached to it. All money is deposited into this account, and you make transfers into the other two versions as needed.

Checking Account 02 - The payroll checking account should have just enough money to cover payroll with perhaps a tiny cushion of $100. You can transfer funds into this account as needed from your primary account without needing paper checks. This limits exposure to payroll fraud, and this account should not have any credit or debit cards attached to it.

Checking Account 03 - Petty Cash checking account with $500 +/- this account should have debit cards that work like credit cards attached to it for making small purchases in the field; if you want to provide your foreman and forewomen with a debit card to be used as a credit card you can. You can transfer funds into this account as needed from your primary account without needing paper checks. NEVER give out the PIN.

Final thoughts

Develop your business plan. Focus on the best areas to innovate or improve. By planning, being strategic with whom you hire, ensuring a market for your offerings, and with construction bookkeeping and accounting done right, you can significantly improve your odds of success. Know that in time your company will become legendary to such a degree that your clients will be raving fans, and referrals will be part of your marketing strategy.

About The Author:

Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com

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