Builders, contractors, subs: Protect cash flow

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You’ve heard it said that cash is king. In a boom market, cash flow is hands down your most important asset. According to Forbes Magazine, the No. 1 reason that businesses fail is that they run out of cash.

j prager

Jeffrey K. Prager
Founder, Cash Flow Engineering LLC, Centennial

Contractors, builders and subcontractors are particularly susceptible to the “cash crunch.” It only takes one or two slow-paying customers, a delayed project or a market downturn to quickly deplete your cash reserves. Here are six areas you can examine to make sure you’re streamlining the cash inflow:

Sales and marketing. The key to consistent growth in your company is to market at all times, regardless of the economic market. When times are good, develop relationships that will survive the market changes (especially now, when you don’t have time). And when times get tight, the marketing budget is often the first to go. That’s a mistake. Cutting out your marketing might save some time and money now, but also it will leave you with fewer new leads to sell to in the future.

Rather than stripping your marketing budget to the bone, we recommend a more long-term, consistent strategy, such as customer loyalty programs and referral partner programs.

Estimating and pricing. When building on an out-of-level foundation, you know you’re going to have problems with the project. Your estimates are the financial foundation of your project. Create systems that help you estimate effectively and efficiently.

When getting bids from suppliers and subcontractors, make sure all estimates are accurate and competitive by using detailed bid sheets that don’t “assume” items not specifically stated. Document all bids and make sure your contracts are specific as to who covers any costs not itemized.

One of the biggest problems in the construction industry is improper pricing. Make sure you’ve analyzed your fixed costs and know your breakeven at various target gross profit margins. Keep your pricing at a level that insures success.

Your pricing must be competitive, but it must also be realistic. Never let your competitors set your pricing – they are probably losing money on their services or trying to make it up with add-ons and change orders. Be realistic, and up front, with your pricing. You will build a reputation of honesty and trust.

Job costing. “The devil is in the details,” so make sure you have every item in your estimate accounted for. Don’t wait until the end of a job to determine if you’ve made money; constantly compare budgeted costs to actual costs. Use a checklist, spreadsheet or job costing software to compare and correct.

Scheduling. When a job runs behind, chances are so do your draws, putting a crimp in your cash flow. Build a realistic schedule to begin with, taking into consideration seasonal disruptions (even the first day of hunting season can keep crews from the job!) and allowing reasonable time frames so setbacks don’t affect delivery dates.

Change order management. Every change to the original agreement must be accompanied by a change order. You should view this document as a binding contract, with payment terms specified in writing. Is the customer paying for this out of his pocket, or will this need to be added to the construction loan? If so, what is the approval process? It’s your cash flow, so make sure that you aren’t the one funding changes.

Communications. When communications break down, everything stops, including your cash flow. Have set times to update your clients each week during construction. One builder takes photos of every project on Thursdays and sends them with a detailed progress report to his customers on Friday. The result is that he isn’t inundated with customer calls all weekend.

Communicate well with your vendors, employees and subs, too. Weekly updates or progress meetings will allow everyone to make adjustments for scheduling, ensure that all work stays well choreographed and keep your projects on time and on budget.

These six cash flow strategies should be integrated into your internal processes. In fact, the best way to ensure consistent, predictable and sustainable cash flow is to create systems for every area of your business – marketing and sales, operations and financial management. Apply these systems in your business, and you’ll never run out of cash again.

Featured in CREJ’s Sept. 7-Sept. 20, 2016, issue

Edited by the Colorado Real Estate Journal staff.