Don’t Confuse Bad Cash Flow With Under-Pricing
First, it’s important to define what cash flow is.
Good cash flow is the ability to pay your bills on time because you have collected enough money from your customers in advance of having to pay those bills.
It’s called cash flow because the money flows in to cover bills and only flows out if and when you can pay them. Therefore, to have good cash flow, you need to know how much you need to collect and by when.
Bad cash flow or cash flow problems happen when the business fails to collect enough money at each progress payment and or doesn’t bill and or collect the money from customers ahead of when it is needed. The key here is that the money used to pay those bills comes from your customers, not from other sources.
Good cash flow for remodelers happens on purpose
If you don’t charge enough money for the jobs you sell you will experience what seems like cash flow problems. The difference in this case is that you will never be able to pay your bills using just the money collected from customers because you have under priced your work and there will never be enough money coming in to cover what needs to go out.
When this happens, it should not be referred to as bad cash flow. The problem isn’t with flow. It should be referred to as buying rather than selling jobs.
Paying the bills for yesterday’s project using the deposit money from a job you haven’t started yet may seem to solve the cash flow problem; however it only temporarily puts off the eventual reality that you are buying jobs instead of selling them. Due to the recession many contractors discovered this reality when the new job deposits dried up and there was no money in the bank to pay the bills for work already completed.
To avoid under pricing what you sell you need to know what it costs your business to do business. First, you must properly estimate what it costs to produce a project. Second, you need to know what your business’ overhead and profit costs are (I assume profit as a cost of doing business) for a certain volume of sales so you can determine what markup to use on estimated costs so you can get to the right selling price. Without knowing this information, when you quote a price to a prospect, you are probably using what is referred to as a WAG, a Wild Ass Guess!
Bad cash flow is sure to follow.