Managing Cash Flow
Do You Really Want to be
Don't Skimp on Employee Benefits
Managing the work flow and finances of my construction company
was fairly simple when I was starting out. Money came in faster
than it went out, so I was able to pay the bills on time. This
was especially important with subcontractors. If I paid them
right away, it was easier to get them back for the next
project. In addition, happy subs were more likely to bail me
out if I got in a bind.
As the business grew, I found myself juggling the checkbook to
keep suppliers, subs, and employees paid. Part of the problem
was that my contracts were poorly written: My payment schedules
allowed me to spend more for ongoing job costs than the money I
had collected from the customer. This led me to shift crews
from job to job so that I could take progress payments from one
project and use that money to pay the bills for a different
project. It was definitely a vicious cycle; I didn't break out
of it until I learned to manage cash flow.
Control When the Money Is
Most contractors have vendor accounts that operate on credit.
Lumberyards and supply houses keep track of your purchases and
issue a monthly bill. The money you owe is due by a certain
date, typically the end of the following month. If you don't
pay on time or in full, you'll owe interest on the outstanding
balance. Interest is expensive, and the money to pay it comes
out of your pocket.
It's important to keep track of the cut-off date for each
monthly billing cycle. For example, if the lumberyard's current
cycle ends on the 26th of August, anything you purchase on or
before that date will be billed to you on the next statement.
Payment will be due by the end of September. Anything you
purchase after the 26th of August will fall into the next
billing cycle and will be due by the end of October. It's more
or less the same with any vendor account or credit card.
Different vendors will have different credit limits, due
dates, and interest rates on open balances. Most offer a grace
period during which no interest is charged. But if you don't
pay on time, interest may be charged on new purchases from the
day the charge is incurred. When this happens, you end up
paying interest on everything you buy. In addition, many
vendors offer a discount for paying by a certain date. Most of
my vendors give a 2% discount for paying in full by the tenth
of the month. I bend over backwards to get this discount
because it goes straight into my pocket.
The grace period is like an interest-free loan — you
want it to last as long as possible. Here's an example of how
it can work. My production manager ordered a stock bow window
and took delivery on the 25th of the month. The project was
starting a week later and he wanted to be sure the window was
in hand. The account closed on the 25th, so if we wanted the 2%
discount we had to pay for the window by the 10th of the
following month. He could have taken delivery a couple of days
later. The window would still have been there early, but we
wouldn't have to pay for it until the 10th day of the second
month. We'd still get the discount, but we'd have 45 instead of
15 days to pay.
Other things being equal, having two vendors for the same
material may allow you to buy from the one who gives you the
most time to pay or the best discount. If the vendors have
different closing dates, one may be better to buy from than the
other depending on when you need the material. (At times, I've
gotten discounts just by asking for them and letting vendors
know that the competition has already offered them.)
It's important to know the details of how each vendor bills
your account. One of our vendors bills for custom-sized windows
on the date they are ready for delivery. A different vendor
doesn't bill until they're actually delivered. Knowing this
allows us to order and accept materials when it's the most
advantageous to us.
Using Credit Cards
My company uses credit cards for mail order items and vehicle
expenses and to buy materials from vendors who don't set up
accounts. Some companies allow you to choose when the bill is
due, so you can time payments so they won't coincide with the
due dates on your other accounts. At one time, vendors were
willing to take credit card payments and still give a 2%
discount. Credit card fees have risen, so you're less likely to
get that deal today. Not only is using a card convenient, but I
also get several free airline tickets a year from the miles I
earn from business purchases.
Get Your Money When You Need
Every contract should stipulate when progress payments are
due. I used to set specific dates, but stopped when I found
myself chasing clients for what they owed. It's better to tie
payments to milestones such as the beginning or end of a
certain phase of construction. This helps in a number of ways.
It gives clients confidence that they're getting what they paid
for because payments are linked to progress. It also makes it
clear to customers that the job will not move forward until
they pay what they owe. If you set it up correctly, the
client's payments will at a minimum match your direct costs to
date plus overhead and profit.
It's easier to collect payments if you're careful about the
milestones you choose. For example, you could say payment is
due after the insulation is in. But what happens if you have to
leave out a small piece of insulation until a special joist
hanger arrives? There are clients who will argue that they
don't owe the payment until the last piece of insulation is in.
Do you allow this to delay the job or do you start drywall
without being paid? It's easier to move ahead if the payment is
linked to the start of drywall instead of the completion of
insulation. Bear in mind that you need to talk to an attorney
before you put something like this in your contract.
Front loading payments is another cash-flow strategy.
Essentially, it's collecting more money on a contract than has
been earned from work completed. If you do it right, the client
will be ahead on payments instead of behind. Keep in mind that
contracts are often regulated by the state. Some states do not
allow front loading. My company is in Massachusetts where we're
allowed to collect up to one third of the total cost of a
remodeling project as the deposit. We're only allowed to
collect more if special-ordered material exceeds one third of
the contract price.Shawn McCaddenis president of Custom Contracting, Inc.;
a remodeling company in Arlington, Mass. He is also a franchise
systems manager for DreamMaker Bath & Kitchen in Waco,
Do You Really
Want to be Competitive?By Melanie Hodgdon
I worked recently with a contractor looking to improve his
bottom line, which was suffering mostly because it was costing
him too much to produce the volume of work he was doing. As
soon as I suggested he needed to bump up his markup, he
declared, "I can't raise my prices if I want to stay
When I hear the word "competition" in a business context, I
think of the old gasoline wars of the 1950s, with two filling
stations offering precisely the same products and services
squaring off on opposite street corners and slashing their
prices. Or I imagine car dealers and chain stores offering to
match the competition's prices on identical products. But if
you can't make what you need by staying within the flock of
same product/same service companies, then you have to find a
way to be seen as something unique — and uniquely
A while back, a local subcontractor took out a half-page ad in
a major periodical that said simply, "We return phone calls."
They'd identified the one thing that drives homeowners and
general contractors nuts around here — the failure to
receive acknowledgement, much less service. Their stated policy
— to call people back — lifted them out of
the crowd. Once you've separated yourself from "the
competition," you don't have to worry about staying
The key to successfully charging more is to make sure you're
delivering unique, superior services. The quality of your
customer's experience will identify you as either a top-notch
service provider worth every penny or a price-gouger who
delivers run-of-the-mill products. In these times particularly,
people place as high or higher value on their time as on their
money. They will gratefully pay more for dependability,
promptness, and follow-through. Be exceptional, and there will
be no competition.
Melanie Hodgdonis a business systems consultant for
builders in Bristol, Maine.
Don't Skimp on Employee
BenefitsBy Patricia McDaniel
When starting out in the construction business, you wear all
the hats in the company. You probably have few, if any,
employees (not counting your spouse who is doing all that
paperwork without being paid, but that's another story). You
file everything in your head, your contracts are handshakes,
and you're probably proud to work over 55 hours a week.
But as the company grows, you'll need help getting everything
done. If you want to maximize the use of your time, you'll need
to find and keep the very best help available. One way to do
that is by offering benefits to your employees.
Since we actually put people on the payroll (instead of
calling them "subs" when they really weren't) we have to pay
for such things as workers compensation insurance and
withholding taxes. These things are benefits, even if people
take them for granted. And as my company grew, benefits were
added gradually. Here are a few we offer today:
• Flexible work
hours. This can be harder for those in the field, but if
you're in search of office help, consider offering a work
schedule that accommodates the demands of raising young
children (let's not even talk about the demands of raising
teenagers). Or you might even consider letting your employees
bring an infant or a sick child to work.
• Holidays and
vacations. Yes, you will need to offer paid time off. We
provide ten paid holidays per year: the employee's birthday,
Memorial Day, July 4th, Labor Day, Thanksgiving Day and five
days at Christmas. We also have a tiered schedule for vacation
time: 1 week after 1 year, 2 weeks after 3 years, and 3 weeks
after 10 years. If you do the math, for a three-year employee,
that's 20 paid days, or 160 hours. For a $15 per hour employee,
that will amount to $2,400 (not counting tax and insurance
• Training. We
provide direct training to our employees, and we support an
employee's own continuing education efforts. Once a month we
have a two-hour company meeting that includes safety and
technical training. We give employees an automatic pay raise
for completing certain product training programs on their own.
We also send employees to trade shows at the company's expense.
Each year, we spend about 40 hours of payroll per employee plus
roughly $600 in travel and seminar costs.
• Tool purchase
plans. The company reimburses employees for 50% of the
purchase cost for power tools, up to a maximum of $500 per
• Health insurance.
We pay a portion of the cost of health insurance for our
employees. This is one of the most rapidly escalating costs of
our benefit program, and currently costs us about $125 per
employee each month.
• SIMPLE IRA plan.
This is a form of retirement plan. Participation is voluntary,
and employees may contribute up to $9,000 per year. The funds
are fully vested, and our company will match contributions up
to 3% of earnings (the maximum allowed by law). So for an
employee earning an annual salary of $30,000, this costs us up
to $900 per year.
• Profit sharing. We
offer an incentive plan as a form of profit sharing. Each year
we set gross profit goals based on both the volume of work and
the intended gross profit percentage. The available incentive
will be in ratio to our performance against these goals. We
divide the pool among all employees based on the number of
regular time hours worked. In recent years the amount has
ranged from $1 to $1.50 per hour.
Stop thinking of benefits as expensive. Instead, consider them
a cost of doing business with the best and the brightest. (If
you don't, contractors like us will be around to siphon off
your best people). You should run your business as well as you
run trim or frame a roof — and benefits are a given at
this level of play.Patricia McDanielis owner of Boardwalk Builders in
Rehoboth Beach, Del. She is also host of the
Exterior Details forum at jlconline.com.