Maximizing Cash Flow More Crucial Than Ever
Maximizing your cash flow is extremely important no matter what shape the housing industry is in. Now, however, it’s more crucial than ever.
First, don’t confuse profits with cash. When times are tough, cash actually is more important than profit because, if you are to survive, you need cash to continue your operations.
Toward that end, there are a number of simple ways to increase the flow of cash through your business without having to take out bank loans or borrow from relatives or friends. Let’s look at some of those options:
Adjust Your Contract Payment Schedules
The simplest thing that you can do is pay closer attention to the details of your contract payment schedules, assuming you have jobs in progress.
Try to get larger deposits on your jobs. Twenty percent on additions should be acceptable; you might be able to get 50% or more on kitchens and 70% on window work.
Many people only ask their clients for 10% down and don’t try to stay ahead of the client with a reasonable payment schedule as the job progresses. This is a mistake in any market — and can be critical to your survival in a bad market.
Instead, schedule payments ahead of project costs and establish payment triggers for special orders and job progress.
Use Specific Terms in Your Contract for Payments Due
From now on, if you don’t already, write your contracts using terms such as “when delivered” or “when ready for” to trigger payments. You also want to avoid using terms such as “after installed” or “completed” because, while they appear to be specific enough, they really can be left open to discussion and sometimes result in arguments with clients about the completeness of some small portion of the project or a perceived defect.
Avoid using “fully complete” in your contract. I can’t stress this enough. The term you should use to trigger your final payment instead should be “substantial completion” — which is loosely defined as suitable for the intended use. For example, if your client is using the kitchen but hasn’t made the final payment for your work, he would be in violation of the contract because he is using the kitchen for its intended purpose.
Also, hold back three times the value your client may place on any missing or broken items and be sure to set a specific date for warranty coverage to begin.
You should also front load your client payment schedule so that you are able to receive larger payments earlier in the schedule and limit the final payment to about 5% or 10% of the total invoice for smaller jobs. Your goal would be have as small a payment for “substantial completion” as possible.
Too much flexibility in the payment schedule gives clients too much leverage. If they have the flexibility and run out of cash, you could find yourself too far ahead of their payments to recoup what you put into the job.
Some clients will argue for more flexibility and against a front-loaded payment schedule, but it protects your business and cash flow. We rarely back down on our payments schedules, maybe changing about 5% to 10% of them.
Take Advantage of Change Orders
Attempt to get the costs of change orders paid “in full” at signing. If you can't, then try to secure at least 50% at signing and the balance at the next milestone.
Some remodelers even charge for the time to prepare their change orders so that, if they are not acted upon, the contractor at least gets paid for the time needed to prepare those wild goose chases the client sends you on in search of that perfect look.
It’s also not a bad idea to charge an administrative fee to perform a change order. Be sure to include the time lost by deviating from the job schedule and ask for the fees to cover the other subs and suppliers needed to work out a new schedule.
Face it, change orders are usually not your idea, they’re disruptive to your schedule and they do take time to prepare, so change orders represent one of the few chances to recoup everything you put into preparing and completing them.
This is not, and should not be considered, ripping off your client; it’s accounting for everything that happens along the way. So don’t discount your change orders.
Your client can always say, “No,” and get someone else to do the work. But be sure to keep everything in proper perspective for your client. List as "No Charge" all the free things you have done for your client that were not in the contract but are still part of the job. This will show them that your change orders are not a one-way street.
Use Payment Discounts From Suppliers and Other Businesses
Take advantage of all discounts for payments available to you on materials, services and other business expenses. Cumulatively, these discounts will save you money. For instance, a 2% discount for a payment made by the 10th of the month is comparable to about a 72% annualized return.
Restructure Your Debt
Move short-term debt into long-term loans so you can pay off your debt over a longer period of time with smaller monthly payments.
Strategize You Bill Payments
Pay your bills at the last minute possible, but before there is an interest charge or penalty, so you have more cash on hand. Also, don’t be afraid to ask for an extension of the time to pay a bill, but if you get an extension, be sure to follow through and pay it when promised.
Work With Insurers
Many insurance products will allow you to borrow against any cash value in your life insurance or use your dividends to help pay for the premiums for life, disability or other forms of insurance.
Many insurers also offer discounts when you use the same carrier to insure multiple types of insurance products, such as auto insurance combined with liability insurance, an umbrella or even workers compensation.
Negotiate With Suppliers’ Competitors
If your regular supplier has stopped working with you on a better payment plan, try to open an account at one of its competitors and negotiate a payment period of 30 days or more instead of the COD your current supplier is demanding.
Shop With Coupons, Be Smart With Your Spending
Shop the specials, buy in bulk and be smart with your spending. I am always looking at flyers for coupon deals on office supplies, inks, caulking, insulating foams — anything that I know I will have to buy eventually, but can get 20% or more off if I buy it now. Coupons are even available online, if you know where to look.
Get the Check in Hand
Don’t use the mail to receive payments, but do use it for paying your bills. Telling someone to leave you a check or that you will be by to pick one up, is much more reliable than, “The check is in the mail.”
Charge More for Your Services
Raise your prices. That’s right, even in a recession.
If you didn’t make money during the most recent raging bull market, the one that lasted 10 years, then you obviously weren’t charging enough. You might as well practice selling your services at higher prices while your sales skills are their sharpest and your best employees are the only ones you still have on staff.
Sell all your underutilized assets, tools, equipment, trucks, cars and trailers to get them off the books and tax rolls — and clean up your yard or garage. While you probably won’t get too much cash for these items, the next time you need one of them you’ll realize that you can rent it for less than the cost of use divided by your annual cost of ownership.
Rent Instead of Own
Lease instead of buy to lessen the downpayment and obligation to fully pay for the asset, assuming you are going to keep it.
Leases are easier to break and deal with than is giving a truck back to the bank.
Sell part of the business to your employees — for cash of course — or to a silent investor who understands the potential when we come out of today's market correction.
Alan Hanbury, CGR, CAPS, CGP, of House of Hanbury Builders based in Newington, Conn., provides remodeling and handyman services. A longtime leader and past chairman of the NAHB Remodelers, Hanbury is a sought-after lecturer and writer on the remodeling industry and its professionalism. For more information, e-mail Hanbury, call him at 860-666-1537 or visit www.houseofhanbury.com.
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