Cash Flow Options

The business side of remodeling is at least as tough as the unexpected challenges that remodelers routinely bring to light inside the walls of the homes. The trouble is that many remodelers come into the business knowing only how to uncover remodeling problems and not knowing the symptoms and pitfalls of business problems and how to bring them to light.

At a recent meeting of the board of trustees of the Remodelors Council of the NAHB, a side conversation centered on the proper qualifications for Remodelor of the Year. In particular, extra points are awarded to companies that have been in business for more than 10 years. On this issue there was unanimity among this group of leading remodelers. Yes. Length of time in business is important. And as one remodeler put it, “A newcomer to the industry can come in and make a splash for four or five years before the business catches up with them.”

This remodeler is referring to the legions of construction professionals who enter and exit the remodeling business each year because they can’t manage for profit. At most times in their business year, they are flying blind. They don’t know if they are charging enough to be profitable. Or worse, they don’t know until it is too late that they lost money on a majority of their projects.

Business consultant Leslie Shiner of the Shiner Group, and a senior industry adviser to Intuit Construction Business Solutions, works with 60 to 100 remodelers and residential contractors each year. She sees lots of companies where the principal uses cash from future jobs to finance current jobs.

“Typically remodelers get in trouble when they end up funding current jobs with future jobs,” says Shiner. “The practice is fine when your volume is increasing. But when it drops, you are going to get caught up and in trouble.”

Back to the group of remodelers discussing the virtues of longevity in the remodeling business, many agree that a newcomer to the remodeling industry can go as long as five years in business before they realize that they have a critical business problem. This problem may cause them to invest more personal savings into the company to keep it going, to acquire additional funds from other sources, or simply go out of business.

That said, Shiner believes even business-savvy remodelers can also fall prey to one big bad job, where scheduling delays and cost overruns pile on top of one another. In these circumstances, good remodelers typically find a way to get through the volatile period, but it often takes months for the remodeler to dig out and get cash flow on an even keel.

“I think cash flow is a leading cause [of remodeling companies going out of business],” says Shiner. “It could be that underlying problems cause the problems. And cash flow is the symptom and not the cause. For instance, a remodeler might not be charging enough and they don’t know it. Or they are overbilling. I tell clients to do it as much as they can, but to be aware of how much they are overbilling. Poor cash flow is one of those things that goes on forever and ever.”

Accounting 101
Like Shiner, Steve Maltzman of SMA Consulting LLC in Colton, Calif., is a business consultant who has worked with hundreds of remodelers and other residential contractors on improving their business. Maltzman’s firm also keeps the books for a number of the Builder 20 and Remodelor 20 clubs organized under the auspices of the NAHB. These clubs are comprised of groups of residential contracting firms from different markets that share detailed financial and business planning information. In turn, they get feedback from others in the group, which acts as an informal board of directors.

Maltzman advises his clients to take the time to better understand the four basic methods of accounting: cash, accrual, completed contract and percent of completion. (See Steve’s sidebar on page 28.) According to Maltzman, percentage-of-completion accounting is the only method that allows remodelers to manage their firm’s cash flow in real-time. When incorporated with one of the leading business software packages, percentage-of-completion accounting can give an owner a digital dashboard on job costs, cash flow as well as profit.