The remodeling industry has a growing problem on its hands that must be addressed immediately.
Cash Flow Analysis
Outline details the ins and outs of one commercial remodel's cash problems.
With five to seven good-size remodeling jobs going on at any one time, and most of them at a fixed price, cash flow has never been a problem, Hopkins & Porter treasurer Ellie Denker says. She was surprised to see the Professional Remodeler analysis revealing that the Salon Chez Margot project dipped into red ink in November and December 1996. "I’ve never actually analyzed jobs this way," she says.
She uses an accrual system of cost accounting. Expenses are logged in when bills arrive, but revenue is not counted until the work it covers has been completed, company president Guy Semmes says. Draw schedules are tailored to the job and the client. "You’re trying to sell the client on a schedule of payments that suits them" he says. With 10% paid at contract signing and 20% at start of construction, 30% of the total contract price on the salon remodel was paid on the day the job started, salesman/designer Andy Gilbert says. Two 30% progress payments and a 10% payment at substantial completion covered the remaining sum. Change order payments totaling $30,790 are sprinkled through the receivables log.
At weekly meetings, company managers and salespeople review job cost reports that show what has been spent, the contract total and a computer-generated projection of estimated final job cost. When necessary, they will determine if anything can be done to stop a slipping profit margin. "Sometimes there isn’t," Denker says.
The salon job was a case in point. Bid at a 37% gross profit margin, it yielded 26.2% after all job costs and a few minor warranty items were logged in. "This was unusual," Denker says. But then, so was the company’s foray into commercial remodeling. The estimates might have been out of whack because the company was not used to the "hurry-up-and-get-it-done" nature of commercial work, she says. Labor costs ran high thanks to the extra time spent cleaning and organizing the work area so the salon could continue operating, carrying materials to the second-floor salon in quantities small enough to fit in the elevator, and so on. "Every time you do a job that’s not in your norm, you’re going to pay for some education," Denker says.
You also might reap rewards. At Hopkins & Porter, Denker says, there was a feeling of excitement about doing something new. "Everybody had the feeling that it was going to be a beautiful project. There’s joy in that."
Project Spotlight: Commercial Makeover