The remodeling industry has a growing problem on its hands that must be addressed immediately.
Cash Carries the Load
A sales downturn can kill a remodeling business, but Legacy Custom Builders puts prudent planning and disciplined cash management to work just for such times
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Rosie Romero runs one of the most profitable and recognizable remodeling firms in Arizona, but last year a drop-off in sales revenue threatened the company’s long-term plans for growth. Romero had geared up for expansion by hiring experienced remodelers into key positions and by enlarging his office facilities. The increased overhead was necessary for the company to move to a higher revenue level. Sales in 1998 had risen to $6 million, and Romero was setting sights on even higher volume.
The hit came last year, when sales dropped to $3.5 million. That kind of drop would have sunken many remodeling firms, but Romero had begun planning for such an emergency 12 years prior. Last year, the plan paid off.
When Romero started his business, he decided to start a cash reserves account. "We determined from the get-go that every revenue check would be split," Romero says. "Five percent would go into the savings account. For a $1000 check, $50 goes into the savings account, and $950 goes into the checking account."
Romero currently carries a balance of about $350,000 in cash reserves, he says. "That one tip is instrumental," he says. "That practice has probably advanced this company farther and made us more money than any other single thing."
The cash fund allows Romero to do things a cash-strapped company could not. He was able to hire good people when they became available, even before he needed them. He quadrupled his credit lines. It let him take advantage of buying opportunities, such as equipment for sale when other companies closed down.
It also enables the company to build profits. "We are able to tell our trades that we’ll pay them within 2 weeks," he says. "We can negotiate aggressively with my subs for discounts, because they know they’ll be paid. We also cash discount every vendor account we have. [That savings] drops to the bottom line like a rock."
The cash came in especially handy last year. Romero’s plans for 1999 were set on achieving revenues of $7 million. Office space had been obtained, hiring completed, and training implemented. It turned out to be "a horrible year."
"We had established a spending plan based on $7 million in volume, including capital improvements that we didn’t want to stop," Romero says. "[The slide] ate into our retained earnings, but it didn’t impact our performance regarding retained earnings.
"We left [the cash] untouched, but we were able to use it to negotiate lines of credit with the bank," Romero says. "We were able to negotiate a large enough line that we never missed a beat. We didn’t lay anybody off. All the people we’d spent years training are still here."
The year caused a severe cash drain, which was funded through the credit line, but Legacy still made its targeted net profit, Romero says. And it brought them safely into 2000. "By the end of March," Romero says, "we will have sold what we sold all of last year."
Romero says a cash reserve is "the one tip I could give a company owner and tell them it’s the one thing they can start doing tomorrow and in a year it will change the way you do business." For Romero, it’s enabled him to grow Legacy 100-percent debt free.
"I couldn’t encourage people more," he says. "It’s so simple to do. Watch it grow and use it as you need it."
Rod Sutton is the Editor-in-Chief for Professional Remodler. Please email him with any comments or questions regarding his column.