Low interest rates and a hot housing market mean significant opportunities for professionals in the commercial and residential remodeling industry. Yet, maintaining cash flow can prove to be far more challenging than marketing your services, winning jobs, or completing them on time and on budget.
While the remodeling industry is inherently exposed to macroeconomic factors you can neither predict nor control, there are industry-best practices you can implement into your remodeling business to ensure your cash flow doesn’t suffer or put you at risk of financial instability.
Here are a few tips to help you manage your remodeling business’s cash flow:
Don’t use your cash flow as a financing tool. Remodeling business owners and contractors commonly use their anticipated cash flow from future jobs, or money from personal savings, as a way to finance current projects. While it’s a low-cost form of financing, it requires that you bear significant financial exposure to downturns in the market or an unexpected drop in business.
Cash flow can help your business survive in terms of decreased demand, if it’s liquid and accessible. Instead of using your cash as a financing tool, consider other alternative financing options such as low-cost merchant cash advances, or equipment-based asset financing options that give you affordable access to the amount of cash you need to do your work.
Establish appropriate deposit and billing cadences. If a client hires you and then files bankruptcy or decides it isn’t going to complete the project, you may have no way to collect the amount of money you’ve invested into materials, labor, equipment and similar supplies without taking legal action.
Protect your assets proactively with definitive client policies and processes: Some remodeling businesses require an upfront deposit of up to 50 percent of the total job amount before work begins. Once the job is underway, bill for specific percentages of the total amount due at various points in the project.
Expedite invoicing and payment collection. Issue invoices electronically to reduce hard costs, expedite the amount of time it takes to prepare and send them, and simplify the process of sending payment reminders. Include your payment policies with invoices, which may include “due upon receipt” or “net10” terms. If you don’t accept credit cards, consider doing so. You may pay a small fee for the service, but it could mean invoices get paid much sooner than they would otherwise.
Get familiar with accounting basics. Accounting experts in the remodeling industry say percentage of completion accounting is critical for all remodeling business owners to use and monitor, as it has a direct impact on cash flow. Invest in software that makes this figure easy to calculate (you’ll essentially divide costs to date by total estimated costs to arrive at the percentage complete for each job). Monitor the percentages for all your jobs consistently so you’re not faced with surprise cash flow shortages when a job’s timeline or budget changes.
Create a backup plan. At minimum, develop four to six weeks of rolling cash flow projections so you have a real-time understanding of your business’s financing standing. Aim to have six months of cash flow reserves (based on your operating expenses) saved in a liquid and interest-bearing deposit account that you can access in case of emergency.
Analyze your sales cycles. Major remodeling projects may come with a bigger dollar amount, but smaller jobs may require that you invest far less time and resources to quote, complete, bill and collect payment. Monitor your business’s timelines for turning job quotes into active projects. Analyze your project schedules weekly to determine when factors such as seasonality, demand or economic trends may demand that you diversify your workload in order to maintain optimal cash flow.
Cash flow management may be a challenging aspect of owning a remodeling business, but it isn’t a task that requires you to stay in a reactive mode. Implement these best practices to build a financially stable remodeling business that will thrive.
For more information about managing cash flow, check out 5 Best Practices To Help Manage Your Small Business Cash Flow.
Tim Roach is a co-founder of Lendr, a provider of merchant cash advances for small to midsize businesses. Roach holds a B.S. in Finance from Linfield College, and served in the United States Navy at Seal Team One. Before joining Lendr, Roach founded Oak Street Trading, a proprietary trading firm, in 2002.