Okay, so you're pretty darn good at your job. Out in the shop, you can effortlessly build that angled walnut vanity with flush inset raised- panel doors and faster than any cabinetmaker you've ever hired. You can read and understand complex plans, you do great shop drawings, you put together accurate cut-listsyou can even tear apart and rebuild any of the machines in your shop.
But, what about managing your cash flow? You may indeed run the
best shop in your area, but if you're not on top of the financial
end of your business, things can go wrong in a hurry. Part of all
of this is keeping the cash coming into the shop. As we all know,
it sure seems to flow out quickly. And, you can't slide on the
payroll or paying your suppliers.
Over the years at our own shop, we've learned a few things about the money end of the company, so here are a few tips.
Your office staff can be key people in the cash flow side of the shop. Constant attention to the people who owe you money is the rule here. Your office employees have to be adept at polite but firm collecting, and need to stay in touch with both your customers and your accounting. Keeping a continuous handle on your "receivables" either through a computer program or with a simple list of accounts is the way to go. And you, as the owner or manager, may have to review this with your office staff on a weekly basis.
You may want to send out monthly statements to your customers, just as reminders that payments are due. If they look professional, you may stand a better chance of getting paid.
If your shop's big enough to have a project manager on staff, this person can help in the money side of things, too. He or she can choose the right moment with your customers to remind them that a payment is due, or to find out what a contractor's billing schedule is like. The project manager is on the front line, often in the perfect position to help.
Your salespeople, too, can help in the money side of things. Make that a part of their involvement in that fat kitchen cabinet project after they've sold it. It keeps them in touch with the customer, and helps you out with collecting the money.
Get to know your banker. Do the lunch thing, arrange a shop visit, take him to a job. Show him what you do, that you're for real. The relationship here is very important, especially when you're getting a credit line established. This process may be a little difficult when you're first starting out, or if your operation isn't too big, but hang in there with the paperwork a credit line may come in very handy.
Your credit is a fundamental element if you want to grow your
business; you'll probably find yourself always a bit short of cash.
A credit line can help to buy tools, or cover a pay period in a
pinch. Even if you're a one- or two-person shop, having credit line
money available can really bail you out on occasion with commercial
work, or on slow-paying builder projects. Start small with the
credit line; a good rule of thumb is to get a credit line limit of
two or three months of your shop's volume.
COLLECT YOUR MONEY
At our shop we're big on the money arrangements. In our contract, we spell out what we'll build, and how and when. But, equally important to us is what is expected of our customer. Payment schedules are carefully outlined, sometimes by date, but more often these days by completion of stages of the work.
We usually ask for a deposit as soon as the work gets underway, sometimes before. You will have to comply with your state laws as far as deposits, but most of the time in the custom fabrication industry, you can usually take money up front. And, there's no harm in requesting it anyway, right? Maybe you can tie the deposit in to material purchasing, or to shop drawing work? Some shops even take scheduling deposits from people to ensure their spot in the workload.
Progress payments are a big deal, too. Here, it can be good to tie a payment to work that is completed in the shop, rather than to actual deliveries especially as your shop may be subject to the all-too-common jobsite delays. These delays are often completely out of your control, so we don't tie our payments to the customer's schedule.
If needed, you can invite your clients to come to your shop to inspect the progress of the work, but make it clear that you expect to be paid as per your contract, whether it's delivered or not.
Let's repeat this the balance is due when you're done. It sounds obvious, but many building contractors expect to pay you when they're done. Here, you may want to be paid prior to delivery.
Another way of defining payment being due is when the work is "substantially complete." This may not sit well with some of your customers, but there are those folks out there who will pick apart your work forever as a pretext for slow pay, or in some cases for no pay. The substantially complete language in your standard agreement may help in those instances.
You also want to try to avoid retentions. This is common on
commercial work, where the owner or general building contractor may
require monies to be held back until the whole project is
completed. This can amount to
as much as 10% more than your net profit, right? You may want to ask if the retention is negotiable, because often, they are. Perhaps you can meet them halfway, say at 5%?
With change orders, try to be paid as they occur, rather than at the end of the work. Incorporate the change into a revised contract total, and revise your billing amounts to reflect the additional work.
When you do get ahead a little, try to squirrel some of it away,
perhaps into a money market fund. That way, you'll have a little
cash stash of your own if the work slows down, or if you find
yourself with an unprofitable project.
And lastly, if you do good work and conduct your business in an open and honest manner, you will probably find that the money will come in.
Next Column: Dealing with a Larger Group of Employees