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Cash Flow Maximizers
Cash flow can be friend or foe. We've seen remodelers racked by lack of cash. Their focus becomes robbing Peter to pay Paul instead of running an effective business. However, if you are spending hours each week trying to make too little cash stretch to pay too many bills, let us cheer you by telling you that many remodelers make striking comebacks with the help of vigilant money management.
There are three golden rules of cash flow that all successful businesses obey. They are:
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collect early
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pay as late as you can without damaging credit - or losing a discount
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be profitable
Here are 9 proven practices for creating favorable cash flow in your business -- by setting up contract draws that favor your company and collecting your money smartly.
Optimize Contract Draws
Few businesses have the cash flow potential of remodeling. In our
business, you are able to collect a downpayment and are able to
use that amount to fund your job costs. It's not unusual for a remodeler
with a million dollar annual volume to have $60,000-90,000 of unearned
client money on hand.
1. Whatever your system for staging client payments, be sure that it keeps you reliably ahead of job costs until the very last draw.
2. Always word draws to become due "upon start of" a phase rather than "completion of" and you will maximize your cash and minimize your arguments with the customer. In doing this, you do not have to change the timing of the draw. For instance, you can substitute "upon start of trim" for "upon completion of drywall." You are simply trying to make the draws less open to conflicting interpretation.
3. Collect a first draw that is fair to the buyer but gives you as much leverage as possible. Review any applicable state law. Often remodelers ask for 20-30% down with mid-size jobs, 50% with small jobs. If the job is particularly material-heavy, consider a larger first draw. For instance, remodelers will typically collect 50% of the contract before commencement in kitchen remodelings to compensate for the large volume of special materials that must be ordered.
4. Create two draws from the final draw - the first is substantial completion (when the space is ready for occupancy) and a smaller draw upon completion of the punchlist. If there is some material on backorder or some few punchlist items that must wait, many remodelers let the client hold 200% of the value of those items until they are accomplished.
5. Be a Smart Collector. Hand deliver invoices and personally pick up checks. Over a one-year period, this practice can make major inroads on cash flow problems. When doing business-to-business work such as commercial work or insurance reconstruction, find out at contract signing who will approve bills and pay them -- and ask about the firm's payment procedures. Different offices may have to approve an invoice before it is paid. An invoice may need two or three signatures. Find out the client's preferred system and work within it to obtain prompt payment.
6. Charge extras like change orders and overages on selection allowances asap.
7. Change orders can be collected upon signing by the homeowner. Selections that exceed the allowance can be billed as soon as you know the final amount.
8. Close out jobs smartly and quickly. The final bill is the most likely draw to be held by a homeowner. When you are slow finishing, they have no reason to be prompt in payment.
9. Make bill collecting a person-to-person effort . Do not just print and mail additional invoices. Phone, discuss, and meet the customer in person to settle any confusion, questions or problems quickly. Collection experts know that every day a payment is late, collection becomes more uncertain.
And remember the bottom line. If your company is unprofitable,
more cash will be spent than is earned. Cash flow will simply get
tighter and tighter. Profitability is the ultimate solution to squeaky
tight cash. However, all successful remodelers must manage cash
flow to their advantage.
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Official Charity of 2008
Remodelers Advantage Inc.
535 Main Street, Suite 211
Laurel, MD 20707
ofc: 301-490-5620
fax: 301-498-6869
Info@RemodelersAdvantage.com