How Remodelers Can Make More Money; If They Have Good Cash Flow
Making more money as a remodeler
As a remodeling or Design/Build business grows, managing cash flow becomes extremely important, maybe even critical to continued operations. The business owner or manager soon becomes a money manager by default. As this happens, there may be opportunities for the business to earn more money by using the money it already has in a strategic way.
Good cash flow is an assumption of my suggestions
Many Design/Build and remodeling companies put all the money collected from sales in one checking account. The funds are then used to pay for the expenses of producing projects (direct costs) as well as the operational costs of the business (overhead). Typically businesses leave any excess of money (net profit) in the same account as well. If this is how your business is operating, meaning you actually have excess funds to contribute to profit, you have what can be referred to as good cash flow. If this isn’t happening already at your business I suggest you stop reading this blog and read this one first.
Accrual accounting can help you predict excess funds
If the business’ financial system includes the ability to predict income and expenses on a monthly basis, the cash flow needs for that month can be easily determined in advance. Any excess of cash that would normally remain in the account could also be anticipated and create an opportunity to earn additional profits. In order to actually qualify what is excess cash over and above monthly expenses, the accounting system should be run on an accrual basis, not a cash basis. By using the accrual method of accounting, expenses are recognized as they occur, even if the expense has not yet been paid for. Income is recognized when the customer is billed, even if payment has not yet been received. Income and expenses are then tracked by the exact day they are to be collected or are due respectively. By tracking the income and expenses in this way, one can easily predict the money that will be owed at a certain given time as well as how much money will be available to pay for those expenses at the time the expenses become due.
You will need a second account for your money
If your accounting system predicts you will have excess funds, consider opening a second interest-bearing account where any excess monthly funds could be deposited. The amount of interest this second account could earn depends on how long the money will stay there. Typically, the longer the commitment to leaving the money in the account without having to access it, the higher the interest rate a bank would offer. Interest rates on these account types may seem low, especially in the current market, but over the course of a year a significant amount of money you wouldn’t otherwise earn could be added to your bottom line.
I also suggest that this second account and your primary business account are with the same bank. By working with the same bank, transferring of funds between accounts can be instantaneous. There will be no need to wait for checks to clear between banks. Also, most banks now offer electronic banking using the internet. This can eliminate the need to even leave your office or the job site when making transfers between accounts. On-line banking services can be used to be sure the money is actually available in a “just in time” fashion.
A word of caution!
Before you consider using any of my suggestions, be sure they make sense for you and you understand the legal and or tax implications for you and your business. I suggest that you always be sure to consult with your accountant, tax adviser and or other appropriate counsel before trying any new strategies, including those described in this blog.
If you have been use this or a similar strategy, be sure to share your experiences in the comment section below. Other remodelers and Design/Builders looking to earn more money could benefit from what you have to offer!