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.