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Cash Flow Analysis

A sidebar to 'Project Spotlight: Too Close for Comfort'

May 6, 1999
Professional Remodeler

Ordinarily, Rick Duval collects a hefty down payment and generous progress payments tied to completion of strategic production phases during the job. "We try to set these things so we have a payment every month," he says. The financial plan for the Springer addition was based, Duval says, on a down payment of $15,000 in June, a progress payment of $12,000 at drywall completion in July, another $12,000 due after the tile floor was laid in August and a smaller, final payment due at project completion.

Budget History

Roofing shingles: Owens Corning Initial estimate: $45,000 Final estimate: $43,201 Change orders: $120 Add-ons: $210 In-floor heat: $1,275 Floor insulation: $268 Lighting and wiring: $592 Fan switch and doorknob: $91 Ceramic tile: $194 Reductions: $120 Backfilling: $200 Total change orders: $2,220 Credits: $190 Permit and electrical: $216 Final price of job: $45,205 Cost to produce: $32,753 Gross profit: $12,452 Gross profit: 28% Net profit: -1.4%

But the drywall wasn’t installed in July because Duval’s drywall man quit. By the end of the month, Duval had forked out nearly $20,000 for labor, subcontractors and materials with nothing but the down payment to carry him. His cash flow dropped into the red to the tune of almost $5,000.

"We usually have a weekly cash flow report on each job," Duval says. "It’s unusual to have negative cash flow." But when the cash flow is negative, "a red flag goes up." Duval then asks: Is there anything we can do to turn the problem around? The solution would have been to get the drywall on quicker, Duval says. But that was not possible.

As soon as the drywall was done in early August, Duval’s cash flow on the project bounced back to a positive $3,883. A delay in tile installation pushed the next progress payment into late September. The final $4,780 arrived three months after the project had been finished, when the Springers settled a dispute with the HVAC subcontractor over carpet damage. "It wasn’t good for cash flow to wait for that," says Duval.

The weight of production problems sank profits on the Springer job. Duval had expected job costs to come in at $30,600. The drywall and tile installation delays plus other snags -- including changes in the roof design and an unbudgeted cost for in-floor heating prep -- drove costs to $32,753. After accounting for overhead, Duval was chagrined to see that net profit had bottomed out at a negative 1.4 percent.

Also See:

Too Close for Comfort

Customer Comments

© 2008, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.

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