By Alan Hanbury, CGR, CAPS, CGP, From ReNews by the NAHB Remodelers
Cash flow maximization is important in any economy, but it’s crucial now more than ever.
There are a number of simple ways to increase the flow of cash through your business and most don’t include a visit to your local banker. Most people confuse cash with profits and this is the start of a very slippery slope. In a down economy, cash becomes much more important than profit. Let’s look at some options for increasing your cash flow.
Adjust Contract Payment Schedules
The simplest thing that you can do is to pay closer attention to the details of your contract payment schedules (assuming you have jobs in progress). Try to get larger deposits. Even 20% on additions would be fair game, 50% or more on kitchens, or 70% on a window job. Many people only ask for 10% down or don’t try to stay ahead of the client the whole job, which is a mistake in any market and can be death in a bad market. Try to tie the payment in with any special orders, plan the next trigger for payment, and schedule in advance to stay ahead of project costs.
Use Specific Terms for Payments Due
Contract terms should be written using the terms: “when delivered” or “when ready for”, not “after installed”, or “completed,” etc., which leaves you open to discussion and sometimes arguments with clients about the completeness of some small portion of the project or a perceived defect.
The term used for your final payment should be “substantial completion,” which is loosely defined as suitable for the intended use. If the client is using the kitchen and hasn’t paid for it, they would be in violation of the contract because they are using it for its intended purpose. Hold back three times the value they place on any missing or broken items. Be sure to set a specific date for warranty coverage to start. And be sure to use the term “substantial completion,” not “fully complete.”
Preparing your client payment schedule for larger payments earlier in the schedule helps to get the last payment down to 5% or 10% for smaller jobs, then a payment for substantial completion. Any more flexibility gives the client too much leverage and they may run out of cash. If they do, you don’t want to be way ahead of their payments near the completion of the project. Some clients will argue this point, but it protects your business and cash flow. We rarely back down on our payments schedules and only change them 5-10%.
Take Advantage of Change Orders
Change orders seem like a strange place to ring up cash, but don’t forget the opportunity to get them paid for, in full, at the signing! If you don’t receive full payment at the signing, then secure at least 50% at signing and the balance at the next milestone. Some people will even charge for the time to make up change orders, so if they are not acted on, the contractor gets paid for those wild goose chases for just that perfect look but when you finally get it together with a number, they pass on it. It is also not a bad idea to charge an administrative fee to perform a change order, include the time lost while the job is not on the original schedule and other subs and suppliers needed to work out a new schedule. Face it, change orders are disruptive, they are usually not your idea, so they are one of the only chances to “get even” (not rip them off, but NO discounting change orders) for things that happen along the way. They can always say no, OR get someone else to do the work. Be careful to list all the free things you have done that were not in the contract as “No Charges” so they see that it is not a one way street.
Use Payment Discounts
Take advantage of all discounts for payments on materials, services, and other business expenses. A 2% discount for payment by the 10th of the month is like 72% annualized return. Anyone getting that kind of return on legal activities?
Move short term debt into long term loans, so it is paid over a longer period. Banks, other loan facilities, and investors might give a multi-year loan that reduces the monthly repayment of debt.
Strategize Paying Bills
Remember adding to payables will reduce cash needs, so pay bills at the last minute, before there is an interest charge or penalty. Don’t be afraid to ask for an extension of time to pay, but do follow through!
Work with Insurers
Many insurance products will allow you to borrow against any cash value in life insurance, (even cash it in, if your health is good) or use the dividend to help pay for the premiums for life, disability or other forms of insurance. Many insurers offer discounts for insuring multiple types off insurance products with the same carrier, such as auto combined with liability insurance, or an umbrella, or Workers Comp.
Negotiate with Supplier Competitors
If you have been shut off at some of your suppliers, you can try to open accounts at their competitors, getting 30 days or more to pay the bills instead of the COD with your current supplier.
Shop with Coupons
Shop the specials, buy in bulk, and be smart with your spending. I am always looking at the flyers for office supplies, inks, caulking, insulating foams—anything that I know I will have to buy eventually, but can get 20% off if I buy it now.
Get the Check in Hand
Don’t use the mail for billing, but do use it for paying bills. Telling someone to leave you a check or that you will be by to pick it 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 in the last raging bull market that lasted 10 years, then you obviously weren’t charging enough. You might as well practice now while your sales skills are the sharpest, and your best employees are the only ones left.
Sell underutilized assets, tools, equipment, trucks, cars, trailer just to get it off the books, tax rolls, and clean up your yard or garage. You won’t get much, but next time you need one of these items, you will realize that most of it could be rented 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 down payment and obligation to fully pay for the asset, assuming you are going to keep it. Leases are easier to break than giving the truck back to the bank.
Sell part of the business to your employees (for cash of course), or to a silent investor that sees the potential coming out of the oncoming 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 http://www.houseofhanbury.com.