How to Manage Cash Flow in Your Remodeling Business

If you were to plot your client billings on a chart over six months, what would that image look like? 

Ideally, you should see a relatively even line indicating regular billing amounts at regular intervals, indicating a positive cash flow.

But, if that chart looks more like an EKG printout and you're struggling to cover project expenses as they roll in, it could be a good indicator that your business is struggling with cash flow management.

Maintaining healthy cash flow on each construction project is critical for the success of your remodeling business. That means ensuring money flows into the business a bit quicker than it's flowing out to pay for materials, labor, and trades, not in peaks and valleys that leave you tight for cash.

And flattening those peaks and valleys in your cash flow ultimately depends on how you're billing clients for your services and, to a lesser degree, how frequently you're paying out to employees, trades, and vendors.

Three Types of Client Billing and How They Affect Cash Flow

We typically see three types of billing in the remodeling industry, and each one impacts your company's cash flow differently.

The most common types of client billing that remodelers use are:

• Milestone Billing

• Random Billing

• Scheduled Billing

Milestone Billing

Milestone billing means you're billing clients based on an initiated or completed construction phase. This might look like billing a certain percentage of the total project cost at the start of construction, halfway through, and when the project is complete. Or it could be based on other specified milestones along the way, such as framing completion, drywall completion, etc.

The challenge with using milestone billing is that you increase your risk of running out of money in between milestone payments. Milestone billing is often based on arbitrary amounts, and it's common for many remodelers to assign those milestones without looking at all the things they'll need to pay for during that phase of the project to ensure they have sufficient cash on hand.

For example, the framing phase of a remodel isn't just about covering lumber and labor, but it's also the time to put down deposits on the next phases after framing. If you aren't near another milestone, you won't have the cash on hand to cover those expenses.

Random Billing

If you're using a random billing system, you're likely billing clients only when you remember to bill them. The biggest problem with random billing on construction projects is that, like milestone billing, it's often done arbitrarily and doesn't factor in the cash you'll need to complete each remodel phase. 

Random billing often happens after you realize you're strapped for cash, putting you in an awkward position of having to delay payments or borrow money you've collected from another project to cover expenses.

Scheduled Billing

The final method of billing is the one most recommended for ensuring a consistent, healthy stream of cash is flowing into your remodeling business, and that's known as scheduled billing.

Scheduled billing means you keep a positive cash flow by billing your clients based on a recurring payment schedule regardless of the phase of construction. In this scenario, a billing schedule with payment terms is provided to the clients before starting a job, so they know when to expect invoices and can ensure you're paid on time.

Cash-flowing Your Projects

Learning how to "cash flow a project" so that your cash levels don't resemble an EKG is an essential lesson for all remodelers and custom home builders - or any project manager in charge of a project budget.

For example, let's say you sign a client on for a $500,000 remodeling project. Obviously, the client isn't going to pay for that entire job up front, and they need to know what frequency they'll receive and be required to pay invoices. They also want to have a sense of control over the financial aspect of their remodeling project.

Billing them via milestones or randomly would disrupt that schedule and give clients "sticker shock" at unexpected large bills. It also elicits a fear response from them because it can give the impression that the project is going over budget and expenses are out of control.

Just as most nutritionists would tell you that it's better to eat several smaller meals throughout the day rather than three large meals, the easiest way to keep clients from having large-invoice sticker shock is to use scheduled billing that breaks their total project cost into multiple smaller invoices.

Three Strategies to Manage Project Budgets

To help ensure that you're managing your business's cash flow properly and you're keeping client fear responses in check, use these three strategies to manage your project budgets:

1. Ask for deposit invoices from each trade partner when you hire them

Don't wait for trade partners to get around to invoicing you because if they aren't invoicing on time, that will mess up your schedule. Get deposit invoices up front so you can invoice your clients and plan to have cash on hand to pay those trade partners.

2. Issue purchase orders to your vendors

And ask them for their initial deposit invoice while you're at it too. This helps you secure the materials needed and manage costs for the project.

3. Be prompt with issuing change orders

Changes in the original project scope cost the project (and you) time and money.  

• Issue change orders to clients promptly to ensure you get paid for those changes and aren't left holding the bag for extra costs that can affect your profitability. 

• If you're doing fixed-cost work, make it a policy to get paid in full for change orders before the work commences. This ensures you'll have the funds on hand to pay your partners on time instead of waiting for the next milestone

• If you're cost-plus, get deposit invoices from your trade partners and vendors as soon as your change order is approved to ensure you are billing before the work is completed and properly "cash flowing" the project.

Managing Project Cash Flow Benefits Everyone

There are several reasons why it's important to manage cash flow on your remodeling projects closely:

• A properly managed project budget shows your team that the company is financially stable and that they don't have to worry about making payroll each pay period.

• Even cash flow management in your business means you can pay your trades on time and not have to figure out who you can afford to pay each week. This helps establish you as a trusted partner with your trades, making them more likely to work with you again.

• Using a billing schedule to invoice clients gives them more control over the project's finances and allays any fears about budget overages or sticker shock from randomly-spaced large invoices.

If your project billings look like an EKG printout with large peaks and valleys, that's a warning sign that you're not managing cash flow effectively - and that can have lasting effects on the success of your remodeling business.

I created the BUILD AND PROFIT SYSTEM to help remodelers, custom home builders, and specialty trade businesses the benefits of using systems to automate your business and help it run more efficiently and profitably. Click the button below to learn more about how the BUILD AND PROFIT SYSTEM program can help you.