4 Steps to Help Your Remodeling Business Become “Cash-Smart”

Cash outflows for a typical remodeling business include payroll, job cost payables (subcontractors and suppliers) and overhead. Use these cash outflows to determine how much cash you need. First, figure out how much cash your business spends on a weekly basis. We alternate payroll and payable weeks and find that payroll weeks are heavier cash weeks. Second, know which of your cash outflows are variable and which are fixed because you'll have to be ready to cover fixed outflows regardless of the size of your business (i.e. rent, interest expense, etc.). The good news is that most of your cash outflows are likely relatively variable — you have the ability to reduce or increase them as your business changes (i.e. payroll, subcontractors, suppliers, etc.). Third, use this historical information combined with your forward-looking business plan to develop weekly cash collection projections for the business as well as for each of your team members. If the weekly cash collection projection is not realistic, revisit your forward-looking business plan and adjust your variable expenses in the plan as well as in real life until the projections are realistic.

Knowing how much cash you have sounds easy — just look at your bank statement. Wrong. Most of us get paid before we experience the costs to execute the contract. As a result, our bank account typically overstates how much cash we truly have, and understanding this distinction is critical to survival. Start with the cash you have (in the bank, in your jeans, etc.) and subtract unpaid bills from subcontractors and suppliers for work they have done. Also subtract “overbillings” on your percentage of completion report (also known as the work in progress or WIP report). Overbillings is cash a client has paid you but which you have not yet earned. For instance, when you sell a project, you might get a 15 percent deposit (say it's $15,000), but in truth you do not “earn” that cash until you have completed 15 percent of the project. As a result, that deposit represents overbillings of $15,000. It's cash that is not truly yours but that is in your bank account.

Collecting cash is a team sport. When the project is initially put together, the draw schedule should relate to the timing of outgoing cash on the project, and each draw should be due “upon start of…” When the project is underway, give clients advanced warning of upcoming draws so that you can collect payments timely. Finally, everyone on your team should know how much they need to collect every week in addition to the overall business need. If you do this, it will give you a way to motivate, to monitor and to support your team as effectively as possible.

In 2009 cash is king. Sounds cold next to family, friends, faith, health, hunting, fishing and our craft — but without cash all of these other, more soulful elements suffer. Embrace cash because you owe it to yourself, to your family, to your team, to your clients and to your business.

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