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Contractors, Watch Your Cash

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Contractors, Watch Your Cash

Seasonality, cycle time, weather, and other variables make cash flow management a challenge for home improvement contractors

By By Jim Cory, Senior Contributing Editor November 14, 2018
managing cash flow

A West Coast contractor, whose business this year will generate $8 million in residential roofing sales, started his company in 2012. That year, the company did slightly more than $700,000 in sales. He had planned, he says, to become profitable in his third year of business. And he did.

How did he pull it off, despite spending more than he made? Watching his cash.

What It Is, How It Works

Let's start with a simple definition of cash flow: “the money that is moving (flowing) in and out of your business in a month.” Positive cash flow means that the money coming in is greater than the money going out, while negative cash flow is a “situation where the cash outflows during a period are higher than the cash inflows during the same period." Having a negative cash flow doesn't necessarily mean you're facing losses; it could be due to mismatched income and expenditure. 

That can be managed in several ways, including recourse to a revolving line of credit that, according to U.S. Small Business Administration blogger Marco Carbajo, “provides companies the flexibility needed to meet their short term funding needs.”

Why Contracting’s Tricky

Balancing income against expenditure is fundamental to running any kind of business, but it can be a little tricky in home improvement.

One reason is seasonality. Say, for instance, your roofing business is located in a part of the country where it gets cold in the winter. At a certain point you’re forced to pull back production and await the return of warm weather and, as a result, your cash flow. 

Another complication is the nature of the business itself. You sell a job, collect a deposit, and then order the materials and line up installers. You have a substantial outlay in the materials—a quarter of the consumer price of the job, for example—and a delay in receipt of full and final payment until the job is completed, which might be six weeks or more.

Suppose once you’ve sold a job you can’t find a crew to install it, or you face inclement weather that delays progress. Now you owe your supplier for the materials, but you have no cash coming in. “Cash shortfalls in construction can be serious, and finding willing lenders in the middle of a cash crisis can be extremely difficult," writes Mike Periu, president of Proximo. "A delay on one project because of a cash shortage will lead to delays on other projects. It could eventually put your entire business at risk.”

In a retail store, the business sells a product to a customer, and the customer pays. But in home improvement contracting, the process is complicated by not only seasonality, labor availability, and weather, but the size of the transaction—typically five figures—and the fact that the contractor doesn’t just sell it, he actually builds it. If you collect a third as down payment, a third at project start, and a third upon completion, it’s going to be a big hit financially if that last third is not collected.

Know Your Position

If that situation sounds familiar to you, there are ways to safely steer your boat through the channel. First, experts advise you to track cash inflow and outflow regularly: weekly if you’re running a healthy business, and daily if you’re crunched.

One of the simplest ways to set up a cash flow forecast is by using a spreadsheet to list income and costs, month by month. "Take note of any seasonal variations—for example, heating bills will probably go up during winter," says business expert Alex Jordan. "Factor in fixed and variable costs to your cash flow forecast and be realistic—include every item.”

Additional tools exist to help you track cash flow and analyze your company’s cash flow position, inlcuding programs that integrate with accounting platforms and ones that provide automation for various cash-flow sources. 

Tips for Improved Cash Flow

Good cash flow control results from setting up processes throughout your business.

  • Get the price right upfront. The more precise and accurate your estimate, the easier it is to measure costs to income. Periu advises that the more detailed your cost estimates, the better your cash flow control. For example, be sure to update current materials costs, as certain products (such as shingles) tend to go up, sometimes several times a year.
  • Expedite flow of income into the business. Remove any impediments that might block or slow the flow of cash into your business. To facilitate this, make sure your contract indicates at what phase of construction payments are due, and that an invoice is automatically generated. Make sure the homeowner understands what it means that final payment is due upon "substantial completion," as you don’t want the last third of a roofing job payment held up because a downspout hasn’t yet been installed.
  • Accept multiple payment types. If you take only cash or checks, you close yourself off to prospects who prefer to pay by card, and subsequently affect your cash flow. “One way to keep your cash flow positive,” says Jessica Levy,  “is to make it as easy as possible for your customers to pay you the way they prefer and for you to get quick access to those funds. According to Gallup, 53% of Americans say they never or rarely use cash.”
  • Don’t give customers an excuse not to pay in full and on time. There will always be people who, with the work complete and the final payment due, yield to the temptation to hold back based on what they consider a valid reason. Crunch, a company that provides financial services and support to freelancers, contractors, startups, and small businesses, created a color wheel of standard excuses, and if you’ve been in business awhile, you’ve heard them all. So, eliminate the reasons for a client to not pay. Make sure the premises are clean, the trash removed, the nails swept up, and every item on the punch list crossed off. Have a collection procedure in place.

If you, your foreman, or your production manager pick up the check when the job’s closed out, make sure that your customer knows that he or she has to be there to inspect the work. If for any reason they can’t be and you find yourself stuck with an invoice past due, there is a range of options to employ to get your money, from issuing dunning letters to direct contact via phone for invoices outstanding. “If necessary,” advises QuickBooks, “delegate the task of keeping an eye on receivables and contacting customers periodically to collect payment to a trustworthy, persistent member of your team.”

Don’t Get Balance Sheet Blues

No matter how good your cash flow is, it’s wise to have a line of credit to fall back on. “When everything is going great and you have oodles of cash, it seems stupid to waste time setting up a line of credit,” writes financial advisor Melanie Hodgdon. "However, that’s exactly when you should apply: when you don’t need it.”

The reason, she says, is that when you do need it, “the chances are pretty good that your balance sheet will look pretty bad, and it’s your balance sheet that creditors want to look at.”

written by

Jim Cory

Senior Contributing Editor

Philadelphia-based writer Jim Cory is a senior contributing editor to Professional Remodeler who specializes in covering the remodeling and home improvement industry. Reach him at coryjim@earthlink.net.

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