Tips for Maintaining Cash Flow at Your Firm

Maximizing cash flow is critical to the success of any kitchen and bath firm. Recently we discussed how to allocate the cash flow from times when business is booming in order to prepare for the not-so-good times. This month we will look at things that can be done to keep that cash flowing in, even during more challenging times, as well as how kitchen and bath professionals can control cash outflow.

There are three areas we will take a look at: cash requirements, the contract payment schedule and the management of disbursements.

Casf Requirements

Begin by performing an analysis of the things that cash will be needed for. Any such analysis requires that certain assumptions be made about levels of activity. If the business is ongoing, recent experience will provide a starting point on which to base these assumptions.

The level of business that is expected will determine the assumptions made about overhead items such as fixed assets, administrative staff, office space, etc. In the short run, these areas of expenditure are relatively fixed in nature, that is, they cannot be quickly adjusted to the current level of business activity.

Since overhead expenses are not easily adjusted, care should be taken in making any adjustments. A careful evaluation of where the business is headed should be undertaken before either adding to or removing this overhead support. One thing to keep in mind is that it’s always easier to add to your employee count than it is to reduce it later.

An intermediate level of flexibility of expenditures is field labor. Here, individuals with the requisite skills can be added relatively easily as business increases. While this element of cost is often referred to as direct variable expenses, or direct costs, the reality is that once on the payroll, it is never easy to let these people go, nor easy to replace them should they leave. There is, therefore, a propensity for this area to grow when the business is busy, but not return to previous levels when business activity recedes.

Finally there are subcontractors. In this area, it’s pretty simple to adjust costs to reflect the level of business, with payments only going to subcontractors and vendors when jobs are actually progressing.

All of these things can have timing attached to them and will allow a cash “outflow” schedule to be developed. Again, some of these cash requirements, such as payroll, do not allow much flexibility, while others offer opportunities for timing. We will review disbursement management after taking a look at cash receipts control.

Payment Schedule

A lot of thought must be given to setting up payment schedules for your clients. The main consideration in establishing payment schedules should be fairness to both the client and the business. That simply means that the amount of money collected should be roughly equal to the amount that the business has already spent, or is committed to spending (i.e. special order products, cabinets, etc.)

There’s a broad range of project types that call for differing payment schedules. Relatively small projects, such as a kitchen or bath face lift, will likely take place over a short period of time and therefore, three or four payments can be timed to align cash flow. On the other hand, large projects involving additions that will be underway for many months call for a more spread out payment schedule spanning the course of the project.

The other element to consider is what and when payments to vendors are committed. For instance, a simple kitchen remodel may require the cabinets to be ordered as soon as the contract is signed, thereby committing a payment of a large portion of the total contract to the cabinet supplier. In this case, a large down payment would be justified.

On the larger projects, it’s likely that no product ordering will take place immediately and therefore a much smaller (in relation to the total contract) down payment is required.

The key to a predictable cash flow from clients is to make sure that the payments are associated with easily definable benchmarks, and that the amount of each payment is defined in the contract. For instance, “upon delivery of cabinets” is a good example. An example of a poor benchmark would be “upon completion of painting,” where the completion of painting is such a subjective issue and could lead to disagreement as to when that point is reached.

Set up the payment schedule to have a relatively small final payment of about 2% of the total amount. While collecting this final payment should not be a problem, there are always a few customers who will drag their feet on this last payment, and the larger the amount, the more incentive there is to do this.

Managing Disbursements

There are a number of steps that can be taken to enhance the cash flow position by properly arranging payroll, payments to suppliers and payments to subcontractors.

With payroll, consider paying biweekly or even monthly and actually disbursing paychecks one week after the end of the pay period. The effect of this is to permanently defer two to three weeks’ worth of payroll. Another measure to control payroll is to closely monitor overtime, as in most instances overtime rates are 50% more than regular rates for non-supervisory personnel.

Another way to manage disbursements is by paying attention to when material is delivered to projects in relation to vendor billing practices. If vendors cut off their billing at the end of the month, then waiting a couple of days for delivery of materials that are not immediately needed on a job site could add 30 days to the due date of that invoice.

Disbursements to subcontractors require a balance of prompt payment with some amount of deferral. Retaining the best subs is normally a case of being predictable with your payments. As long as subcontractors can count on their payment being there at a specific time after the bill is submitted, they can concentrate on doing their job instead of chasing their own cash flow. If subs can count on being paid on a timely basis, they will be loyal.

In a previous column, we discussed the importance of putting aside and investing in the business in the good times so that there are resources available for the lean times. Whether in good times or bad, it is important to pay attention to all elements of managing both incoming and outgoing cash flow. Paying attention to all of the small details outlined above can make a significant difference in the net cash flow position. Conversely, not paying attention to these details can easily put a company into a cash squeeze.