Good cash flow and profitability are two different entities and often do not coincide. Let me give you an example. Months of heavy construction volume mean you have the need for lots of cash to pay your labor and job costs. Often, draws do not keep up so while you may be earning profit you are not seeing it yet.

These months may be followed by months of low construction volume when you are not earning as much profit but are collecting last payments and draws on new work. Your bank account is flush and you feel very optimistic. If you were to chart cash-on-hand and also chart your profits, you would find their cycles are quite different.

Cash Flow Pitfalls

One of the real advantages of being in remodeling instead of some other business is your ability to collect money before the job starts. A well run remodeling company has usually overbilled the buyer until the final bill. That final payment often represents the company’s net profit. However, there are other occurrences that can rock the cash flow boat for a company. Here are just a few examples:

– Increasing volume very quickly.
– Experiencing a drop-off in new job contracts over a period of time.
– Taking a large job with draw schedules that are not favorable to the company.
– Taking jobs that have high retainage. For instance, architect supervised and commercial work often require that 10% of all draws be held until some specified time period after the job is finished.
– Leaving too much money to the end of the job to be collected and then having difficulty collecting that money.
– Investing too much money on non-liquid assets like equipment, trucks, or inventory in a warehouse.
– Moving to a new niche or diversification like Insurance Reconstruction where you often must finance the job until the end.

Running your company by reacting to the ebb and flow of cash is a very quick road to disaster. In Every Manager’s Guide to Business Finance, Robert Finney advises that “Cash flow remains important for any business of any size, because cash is the ultimate survival parameter. However, it is not the best financial measure of a business.” An accurate P & L is your window on true profits. Yet, you must be aware of cash as well. Not having enough cash at the proper time has been the death-knell to many a profitable company.

I remember consulting with a Midwest company early in my consulting career. It gave me such a vivid picture of the stranglehold poor cash flow takes on a company, that even 11 years later, I have not forgotten. The company was in a severe cash flow bind due to a string of unprofitable years. The remodeler was frantically selling jobs at or below cost in order to collect the initial draw and be able to deposit some money in his account. Hours each day were occupied with angry suppliers demanding money. These were non-productive hours and debilitating emotionally. The remodeler could buy from only certain suppliers and subs—not the best or least expensive, and not the suppliers or subs they wanted to buy from—because they had only a few accounts still open. It was a frightening situation and in spite of all we did, it was too late and, unfortunately, the company did not survive.