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3 Financial Strategies for a More Scalable Construction Business

Posted by Shawn McCadden on Tue, Feb 07,2017 @ 05:00 AM

3 Financial Strategies for a More Scalable Construction Business

Scaling a construction companyAs 2017 dawns, the outlook for the construction industry is optimistic. Despite setbacks experienced during the Great Recession, the industry is set to add 790,400 jobs over the decade of 2014 to 2024, accounting for the majority of new jobs in the goods-producing sector. Real output will grow 2.8 percent annually during this period. In 2017, total U.S. construction starts will increase 5 percent, reaching $713 billion, anticipates Dodge Data & Analytics.

For contractors, this is great news, but it also presents the challenge of scaling up to meet growing demand. Scaling up requires not only hiring more workers and buying more material, but also adjusting your financial strategy to cover your increased overhead expenses without hurting your cash flow and profits. Here are three financial strategies for successfully scaling up in 2017.

 

Scale up Revenue while Scaling Down Costs and Expenses

A scalable remodeling business model is designed to allow you to increase revenue while holding both job costs and overhead expenses down. To be scalable, your financial plan should aim for gross profit margins of 40 percent or more (minimum of a 1.67 markup).

Scaling a remodeling companyTo achieve this level of gross profit margin, one fundamental strategy is increasing your revenue. The key to increasing your revenue is improving your marketing and sales. One of the most efficient ways to improve your marketing is by improving your positioning through a better unique selling proposition (USP): a brief statement that summarizes what you offer customers that your competition doesn’t.

To refine your USP, narrow down your ideal target market. For instance, is there a certain neighborhood or a certain type of building that would be more profitable to specialize in? Research what your target market is most seeking in a construction contractor. For example, are they price shoppers or are quality or service bigger priorities for them? Craft your USP to emphasize what your target market most values and make sure all your marketing material reflects your new USP.

Along with increasing your revenue, the other half of keeping a high profit margin is keeping expenses low. Many construction businesses fail because they can’t cover the cost of overhead. Finding ways to reduce the money you must pay for running your business is key to minimizing your expenses. Taking the time to research different organizational charts, industry best practices, project management methods, business management software and employee compensation strategies based on performance.   Investing in these areas now can help your business reduce overhead through efficiency of operations as well as economy of scale as the business grows.

 

Maintain Efficiency through Automation

3D Automation for remodelersAnother effective strategy to lower job costs is automation. Automation can help you lower the costs of materials by helping you plan more precisely to avoid unnecessary waste. J.E. Dunn has partnered with Autodesk and Microsoft to develop Lens, a cloud-based software tool that combines 3-D virtual modeling with instantly-calculated cost estimates for each component of your building project.

Although not common yet in residential remodeling, another way automation can help cut materials costs and waste is by using 3-D printing. 3-D printing allows you to select from a wider range of cost-efficient materials, while speeding up the building process. Last year, Chinese company Huashang Tengda was able to assemble a 3-D-printed house in just 45 days.  Remember, many said nail guns would never catch on!

 

Keep Costs and Expenses Down with Outsourcing

Outsourcing for remodeling contractorsOutsourcing is another proven way to cut labor costs both in the field as well as the office. Many successful large companies outside our industry have used outsourcing effectively to streamline their labor expenses. For instance, Google relies heavily on revenue from pay-per-click advertisers who pay to have their results featured in search engine rankings. Maintaining its advertising revenue requires a large sales support team, which Google has outsourced. Amway is another company that outsources its sales, relying on a distributor model to promote direct sales.  In our industry many contractors already outsource activities such as design, engineering, building permit procurement, sales, lead intake and prequalification, RRP demo, specialty trades and even general carpentry.

As these examples illustrate, you can outsource functions that are part of your core business if it is more efficient to delegate them to specialists than to maintain in-house talent. For instance, there is no need to pay for the expense of in-house 3-D drafting when you can easily outsource it. With the right plan and system you can also easily outsource routine peripheral functions such as bookkeeping and payroll.

 

Topics: Margin and Markup, Technology for Remodelers, Success Strategies, Cash Flow, Marketing, Guest Blogs, Marketing Considerations, Prequalifying

12 Hard Questions: Do You Own a Remodeling Business or a Job?

Posted by Shawn McCadden on Fri, Dec 02,2016 @ 05:00 AM

These 12 Hard Questions Can Help You Decide if You Own a Remodeling Business or a Low Paying Job

Contractor or construction business ownerAre you pretending to be a remodeling business owner but in reality you are actually just a "job owner"?  The questions below are tough and may make you feel real bad about yourself depending on how you answer them. But that’s not why I assembled them. Don’t kid yourself. If you are not cut out to be a business owner recognize that reality now. Don’t wait until you lose you all your money, your home and maybe even your family.  If being in business is not your calling keep in mind the industry is desperate for good employees.  Real remodeling business owners offer good jobs with great pay and benefits.  Answering these questions might just be the best thing you do for yourself this year.

 

  1. Are you one of about 85% of remodeling business owners who have no clue regarding how to calculate your required markup and gross profit margin (WAG)?
  2. Are you one of those business owners who uses a convoluted scheme for marking up different things at different markups even though you have no idea whether you are buying or selling jobs (WAG)?
  3. Remodeling Business accessmentAre you one of those business owners who doesn't know the difference between markup and margin, or worse you think they mean the same thing (WAG)?
  4. Are you one of about 80% who do marketing without a marketing plan?
  5. Are you one of those business owners who has no idea whether you made or lost money until your taxes are done in March or April by your “historian accountant” (WAG)?
  6. Are you constantly getting tax filing extensions because your books are a mess and or because you don't have the money to pay the taxes you were surprised to find out you owe (WAG)?
  7. Is your business up to its eyeballs in debt and you have no idea how or why you got there, or how you will ever get it paid off (WAG)?
  8. Are you, or will you be, one of the 52% of Americans ages 62-65 who have less than $25K saved for retirement?
  9. If you divided your total pay Wage plus net profits) by the number of hours you worked this past year are some or all of your employees making more per hour than you?
  10. Are you able to still say you’re still in business because of your wife’s job and health care plan?
  11. Do you brag that you do no marketing and totally rely on referrals but at the same time complain about the jobs and customers you get?
  12. If you answered yes to most or all of the above are you ready to do something about it?

 download free business assessment worksheet

 

Topics: Business Financials, Margin and Markup, Careers in Construction, Retirement Planning, Cash Flow, Marketing, Business Considerations, Taxes

Essential Business Hacks for Independent Contractors

Posted by Shawn McCadden on Mon, Oct 05,2015 @ 05:30 AM

Essential Business Hacks for Independent Contractors

Man_at_Laptop_talking_on_phone-wr-1Over 10 million Americans are independent contractors, according to the most recent estimates by the U.S. Department of Labor. Whether that means you do freelance work or have started your own company and hope to employ many people yourself one day, most independent contractors have one thing in common: they are learning as they go.


Here are some tried and true tips to help you navigate the time, energy and, most importantly, money-sucking pitfalls of entrepreneurship, so you can actually appreciate the joys of working for yourself:


Get Eco-Friendly

Your customers will love you for getting eco-friendly and so will your bank account. Eliminate paper from your processes as much as possible. Having everything digital makes your business run faster and smoother and saves you money and time down the line.

If you travel for work and your vehicle is not the most fuel efficient, you’re throwing money out the window every month, as well as contributing to smog and pollution. But that doesn’t mean you have to invest in an expensive electric car to save precious startup money. Check out the EPA’s new SmartWay certification for a list of budget-friendly vehicles that reduce carbon emissions and have saved drivers over $16.8 billion in fuel costs since 2004.


Buy in Bulk and Ahead of Time

Office supplies for contractorsFrom office supplies to packing materials, the biggest waste of time and energy is buying things you knew you would need at the last minute and paying full retail price. If you’re a retailer, seek out wholesale options and buy in bulk for the maximum discount. Look into a Costco membership for any and all office supplies. Office furniture can also be found at the local thrift store, furniture rental company or hotel furniture liquidators for pennies on the dollar.


Don’t Let Cash Flow Stop You

You are bound to have cash flow issues at some point. The thrill of working for yourself can quickly become the anxiety of "why on Earth did I think I could stand not knowing how much money I was going to be making each month?" Your bills may be fixed, but your income is not, so saving money prior to striking out on your own and during the startup process is crucial. It’s impossible to foresee all the hidden costs that are sure to crop in the beginning, so you need a little cushion.

SBA Loans for contractorsBut not even a lack of cash flow can stop you these days. With the popularity of crowdfunding, job placement services and Craigslist, there are outlets everywhere for the hard working, resourceful, independent contractor. Leave no stone unturned and check to see if you qualify for any small business loans or grants from the SBA.


Leverage Free Technology

Marketing yourself doesn’t have to cost you a fortune, but beware of companies looking to take advantage of unwitting new contractors. There are a lot of lead referral services out there that boast thousands of job postings for everything from nannies to graphic designers. Often they pull the old bait and switch move: you spend hours creating a profile for their sites, adding product pictures, reviews, references and certifications only for them to ask for a credit card and a hefty fee when you’re about to hit submit. You don’t want all that work to go to waste, so you plunk down your credit card against your better judgment and pay for a month (or three) of leads that, honestly, may not even exist.

The good news is you really can market yourself for free. Research your competitors and find out what social media outlets they’re using. Take notes and improve upon their tactics to stand apart from the crowd. Many SEO experts recommend using five or less social media sites and keeping your focus on original, quality content. And don’t discount the power of LinkedIn for finding and connecting with the top names in your industry; it’s like the Facebook of finance.

 

Stacy EdenGuest Blogger:  Stacy Eden is a Phoenix, Arizona native with a passion for art, power tools, and historical significance. She draws inspiration from classic cars, ancient mythological sculptures and jewelry designers such as Delfina Delettrez, Shaun Leane, and Dior Jewellery creative director Victoire de Castellane.

Topics: Business Financials, Starting a Business, Free Stuff, Cash Flow, Marketing Ideas, Guest Blogs

Why Building a Backlog of Work Could Cost Some Contractors a Lot of Money

Posted by Shawn McCadden on Tue, Feb 10,2015 @ 08:44 AM

Why Building a Backlog of Work Could Cost Some Contractors a Lot of Money

Why contractors lose moneyBuilders, remodelers and lumber dealers often get in trouble with lumber framing packages by overlooking the obvious…the volatile lumber market. Most contractors and lumber dealers do not have the luxury of pricing a job today, signing it tomorrow and buying the required materials the next day. By the time a job is priced, signed and the lumber gets delivered to the jobsite 30, 60 or even 90 or more days may have passed and lumber prices may have changed as much as 20%. At the Estimating Workshops I offer this concern comes up quite often and attendees often share how their profits are affected as a result.

 

An educated guess is much better than a Wild Ass Guess!

Matt Layman is the publisher of The Layman’s Lumber Guide. I met Matt through LinkedIn. His expertise is forecasting “when” lumber market pricing will change. Having and using the information he assembles through his research can help contractors and lumber dealers price future jobs involving framing materials with precision.

 

According to Matt lumber prices are reported twice weekly.

Framing_lumber-wrHe says some weeks do not change at all. However he also points out that 70% of the time they do change by an average 2.5% each week or 10% per month.   Based on those realities a contractor who estimates a framing package using today’s lumber costs at $10,000 may end actually paying over $13,000 for that same package 90 days later. For those of you who understand how margins and markups work, not only will the contractor have lost the $3300 due to price increases, but also the gross profit margin on that difference. At a 50% markup that’s another $1650 of gross profit that could have been included in the sell price to help cover overhead and profit.

If as a contractor you buy a lot of framing materials you may want to consider subscribing to Matt’s monthly publication called the Lumber Market Blueprint. I also think lumber dealers serving contractors could share this information with their customers on a regular basis. Doing so would be a great service that could help differentiate them in the marketplace.

 

Lumber Market Blueprint

The image above is an excerpt from the February issue of Matt’s Lumber Market Blueprint. Notice that the information not only includes his predictions for the next 30, 60 and 90 days, he also offers some insight as to why he makes his predictions. I suggest by knowing the why’s behind his predictions you can consider your own pricing adjustments if for any reason conditions change dramatically during the month.

 

I appreciate Matt allowing me to share this information with you.

If you are a contractor do any of your lumber dealers share this kind of info with you?   If so, it would be great if you shared the name of the dealer with us as well as an example about how the information has helped you.

 

Topics: Job Costing Considerations, LBM Related Topics, LBM Dealer Topics, Estimating, Cash Flow, Production Considerations, Estimating Considerations, Keeping More Money, Business Planning, Plans and Specifications

Seven Ways Contractors Can Get Paid Faster

Posted by Shawn McCadden on Sun, Mar 16,2014 @ 06:00 AM

Seven Ways Contractors Can Get Paid Faster 

How Contractors Can Get Paid Faster

 

Wouldn’t it be great if you always had the ability to pay your bills on time? 

Even better if you could pay them early when a discount is offered for doing so?  

To improve cash flow at your construction business consider these seven strategies to help you collect project related payments from your customers much faster.


  1. First, during the sales process, discuss upfront in a businesslike manner your desire to finance the project with their money.   Let them know your cost of doing business, and therefore the cost of their project, will be much higher if you have to finance the job using your business’ line of credit rather than their money to pay for their project as it progresses.  

  2. Collecting construction project payments on timeWhen creating a project’s payment schedule use project milestones to determine when payments will become due.  If when doing your estimate you list your tasks and related costs for each task in critical path order, you can then add up the marked up cost of each milestone’s tasks to make sure the amount collected for each payment will adequately finance each phase of the project.   Then, add a little extra money to create a cushion of safety (front loading).

  3. When writing up those payment schedules make payments due for example “When ready to start drywall” rather than “At start of drywall”.   This way you will have the money you need before you start a phase to pay for that phase.   By using this wording, if you are having problems, you can delay returning to the project if your customer doesn’t give you the money when it’s due.  Be sure to explain how this works to your customers while they are still prospects and before they sign your agreement!

  4. Make it company policy (in your contract) and indicate in your payment schedule that the final payment is due at substantial completion.  This is the point at which the project can be used for its intended purpose.   So even if you are waiting on the customer to provide the kitchen cabinet door pulls as the last item to wrap things up, you can still call the project substantially complete, invoice your customer for the balance due and expect the final payment.

  5. When a construction warranty beginsAlso make it company policy that your contractor’s warranty starts at substantial completion of the project.  Clarify however that no warranty work will be completed until the final project balance has been paid in full.

  6. Make sure you bill your clients as soon as the job is substantially complete.   Experienced contractors have learned that if you take two weeks to bill your customers; they will assume they have at least two more weeks to pay you.

  7. In your contract, and on your invoices, let customers know when interest charges will start on late payments.  If for example they have a 30 day grace period to make payment on a final invoice, and they make their payment late, will the interest due start at the 30 day mark, or start back on the original date of the invoice?   If interest will start at the date of invoicing customers will be more likely to pay within the 30 days grace period.  Again, be sure to explain how this works to your customers while they are still prospects and before they sign your agreement!

 

Being proactive will help contractors collect project payments on time

For some business owners dealing with and or talking about money with clients and prospects is scary.   When I discuss this subject with them many tell me they don’t want to alienate their customers. This certainly can be a valid concern.  However, if you discuss your policies related to making progress and final payments before you let them sign your contract, and you do it in a professional manner and tone, most good customers will toe the line.  There is definitely a difference between being aggressive versus being firm and sincere with purpose.  After all, the best results for the contractor as well as the homeowner come when there is a mutually beneficial relationship.

 

Topics: Contracts, Financial Related Topics, Cash Flow, Customer Relations

Why Contractors Should Get A Line Of Credit When They Don’t Need One

Posted by Shawn McCadden on Thu, Jan 09,2014 @ 08:27 AM

Why Contractors Should Get A Line Of Credit When They Don’t Need One

Melanie Hodgdon, Business Systems Management

 

 

Guest Blogger: Melanie Hodgdon is a Certified QuickBooks ProAdvisor who has been providing financial analysis and QuickBooks training for contractors since 1994. She’s the co-author of A Simple Guide to Turning a Profit as a Contractor.  Melanie and Shawn often coordinate their efforts when helping remodelers develop financial systems for their businesses so they serve the contractor, not just their accountant.


Contractor cash flow


A line of credit can be your cash flow insurance

I recently had a conversation with a client who, after an incredibly profitable startup a couple of years ago, encountered a perfect storm of difficulties and recently found himself facing a severe cash flow crunch. This is one of those things that happens in any industry, and seems particularly prevalent among construction and remodeling companies


The problem is sort of like health insurance.

Contractor Line of CreditWhen you’re young and in perfect health, it seems stupid to waste money on insurance. There are so many more important (and fun) things to buy: trucks, tools, additional personnel; the list is endless. I remember when I fell off my roof, my life didn’t flash before my eyes, but I did have a very clear sequence of thoughts.

  1. I hope the cat isn’t lying where I’m going to land (he wasn’t)
  2. This is SO going to hurt (it did)
  3. I really, really wish I had insurance (I didn’t)

 

Back to the cash flow issue.

The point is that when everything is going great and you have oodles of cash, it seems stupid to waste time setting up a line of credit. However, that’s exactly when you should apply: when you don’t need it.

Once you need a line of credit (or, more accurately, once you admit to yourself that you need it), the chances are pretty good that your Balance Sheet will look pretty bad, and it’s your Balance Sheet that creditors want to look at.


Working with your lender

Getting a line of credit as a contractor

 

Your bank is actually less interested in your income or even your profit figures; what matters is the extent to which you’re able to pay off debt, and the degree to which your company is running on credit. We’ll look at the critical numbers in a follow-up blog. In the meantime, one of the things that saved my client from being turned down by the bank was that he had an excellent relationship with the bank staff, who went to bat for him. While things were going well, he’d made a point of sharing his successes with key personnel. They knew he was a hard worker with a solid business plan and a track record of success, and this personal knowledge allowed them to see past the current bad-looking financials.


 

Here is a summary of steps to help contractors secure a line of credit

  1. Contractor balance sheetLearn more about your Balance Sheet, the often under-utilized and misunderstood financial report that can spell success or failure
  2. Make a point of getting to know your bank personnel, particularly your loan officers; this can up your chances of approval by lifting you from anonymity
  3. Apply and get approval for a line of credit when your books look good, when you have plenty of cash, you’ve paid down debt, and you don’t need credit

 

 

 

Topics: Business Financials, Success Strategies, Financial Related Topics, Cash Flow, Guest Blogs

Payment Schedules That Create And Protect Cash Flow

Posted by Shawn McCadden on Sun, Jan 06,2013 @ 06:00 AM

A Simple Strategy For Payment Schedules That Create And Protect Cash Flow

Poor cash flow

 

Contractors are forever complaining that they don’t have adequate cash flow when producing projects.  More times than not they blame this on their customers, citing that the customer is holding back or delaying progress payments.   If a contractor keeps working without getting paid he or she has no one to blame but themselves.

Consider these questions. 

Will Delta Airlines let you pay after you land?  Will Dell Computer let you pay for a custom computer after it’s built?   Of course they won’t!  So why do contractors find themselves financing projects for their customers and then end up waiting and even begging for their money?

Protect your cash flow before you sell the job!

On February 26th, as part of a six workshop program, I’ll be leading a strategic estimating and proposal creation workshop for contractors titled: Know What You’re Selling Before You Sell It!”   One of the topics I’ll be covering in that workshop is how to write a project payment schedule that creates and protects cash flow.  I’ll also be explaining how that same payment schedule, if explain correctly to a prospect, will help a contractor sell the job.

Shawn Mccadden Seminar

Below is a brief summary of how to do it and what I will be sharing more about with the attendees.   The attendees will then be encouraged to try the strategy when estimating and selling their next project.  They can then come to the free lunch and learn session scheduled before each next workshop for help with any questions or challenges they experience implementing the new strategy.

 

10 Steps to create and protect cash flow:

  1. Estimate all tasks in critical path order (same order you would actually build the project)
  2. Group tasks to establish easily definable (for the contractor and the property owner) project and payment milestones
  3. Add up all direct costs the business will incur between milestones and include overhead and profit
  4. Establish payment amounts based on the total cost of the milestone (Including overhead and profit) plus add some money to each to maintain frontloading for safety (you’ll make up for the frontloading when establishing the final payment)
  5. Word payment schedules so each payment will be due prior to the start of each milestone
  6. Protecting cash flowCollect the money needed to finance all of a milestone’s tasks before you start it (don’t be Wimpy on this!)
  7. Get a significant amount of the outstanding balance at the second to last payment
  8. Make sure the project cannot be used for its intended purpose until after the second to last payment is received.
  9. Make the final payment due on “Substantial Completion”
  10. Make sure the final payment is far less than your expected net profit but a comfortable amount for your prospect

 

Topics: Business Financials, Contracts, Success Strategies, Financial Related Topics, Cash Flow

Two Ways Remodelers Can Predict and Measure Good Cash Flow

Posted by Shawn McCadden on Fri, Sep 14,2012 @ 06:00 AM

 

Judith Miller

 

 

 

Guest Blogger: Judith Miller has worked with remodelers nearly 30 years; she writes for Remodeling Magazine, facilitates for Remodelers Advantage and consults with remodelers around the country with particular focus on the importance of good financials!  Visit her website at www.remodelservices.com

 

Two Ways To Predict and Measure Good Cash Flow

In his excellent blog post on cash flow, Shawn mentioned direct costs, overhead and net profit as all potentially contributing to good cash flow.  And, as he so rightly pointed out, the potential for good cash flow begins with accurate pricing for the job.  Shawn also mentioned the importance of working on ‘accrual’ accounting rather than cash.  When you’ve got these important elements of good construction accounting in place, you can lay out a couple metrics which will be useful in understanding cash flow.

First, get all your costs in the right place on the Profit/Loss:

Income = revenue from construction projects

Direct Costs = expenses, including ALL labor (even that production manager who doesn’t keep a time card) AND associated labor burden, related to jobs for which you receive the income.  Don’t include work on your own house or you Mom’s in this category because you’ll skew (and screw) the numbers.

Overhead = all costs it takes to run an office, including a construction office, but not related to jobs – those costs go into Direct.  This includes marketing expenses, rent, office supplies, professional fees, owner and admin salaries and related burden, general insurance – not liability or workers comp which go into Direct.

(List of Typical Accounting Terms and Definitions)

 

Second, establish a good system for job cost analysis

 A good system for job cost analysis lays out the true estimated cost of the job – no SWAGs or ‘guesstimates’ – and allows you to post costs against the estimate as they are incurred.  Remember that a cost is incurred WHEN THE WORK IS DONE not when the bill is received.

 

Third, reliable reports are accurate, complete and timely

Prior to calculating these metrics, be sure to review all reports for reliability. 

 

Now you’re ready to develop these two useful metrics:

slippage1: Slippage/Grippage:  this metric calculates the difference between your estimated gross profit and the produced gross profit.  Slippage is negative, grippage is positive.    This is of critical importance because if you’ve got slippage either your estimating is wrong or your production is not working up to expected efficiency.  And if you’ve got grippage, you might be leaving money on the table from estimating too high.  Control of production allows for profits which can then be managed to ensure good cash flow.
    • The calculation is: Estimated gross profit margin MINUS Produced gross profit margin
    • The goal should be no more than 2 percentage points slippage – or grippage.

slippage vs grippage

AR Turnover2: AR/AP Turnover Net: this metric calculates the difference between the number of days it takes to RECEIVE your cash from customer’s invoices (AR Turnover) and to PAY your customer’s expenses (AP Turnover).  If you receive money from your customers in 10 days and pay your expenses in 15, you’d have 5 days “float” – a good thing!  However, if the reverse is true, you might have to borrow to pay the bills.

The calculation is three part:

 AP/AR Turnover calculation

Once your accounting system is set up correctly, information is entered accurately, timely and consistently, you’ll be able to see where the money comes from, where it goes and how to control the all important cash flow!  This is a set of gears which all work together to produce profits and protects cash!

 

Topics: Business Financials, Job Costing Considerations, Financial Related Topics, Earning More Money, Cash Flow, Guest Blogs, Estimating Considerations, Business Planning, Definitions

How Remodelers Can Make More Money; If They Have Good Cash Flow

Posted by Shawn McCadden on Wed, Jun 27,2012 @ 05:00 AM

How Remodelers Can Make More Money; If They Have Good Cash Flow

Making more money as a remodeler

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

Cash flow for remodelersIf 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!

Networking for remodelersBefore 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!

 

 

Topics: Business Financials, Success Strategies, Financial Related Topics, Retirement Planning, Earning More Money, Cash Flow

Don’t Confuse Bad Cash Flow With Under-Pricing

Posted by Shawn McCadden on Tue, Mar 27,2012 @ 05:00 AM

Don’t Confuse Bad Cash Flow With Under-Pricing

Cash Flow for remodelers

 

 

 

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.

cash flow problemsPaying 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. 

 

Topics: Margin and Markup, Financial Related Topics, Cash Flow, Estimating Considerations, Definitions