Cash is tangible, therefore it seems easy to understand: just look in your wallet, your checkbook, or under the mattress — either you have it or you don’t. But the movement of cash into and out of your business — cash flow — is a different matter.

Managing cash flow involves predicting the future as well as understanding both quantity and timing: how much is needed and when. Payroll is due on Thursday. Will the funds be available? You need a cash management system that shows, in advance, if your cash position will be positive or negative, and which does so while providing time to remedy a shortfall. Here are some elements of a cash management system.

  • Forecast cash income. Include payment schedules in your construction contracts. Pre-scheduled payments for current contracts, when listed together and regularly updated, are your most reliable basis for forecasting cash income.
  • Forecast cash outgo. Summarize cash outgo in at least two categories: direct costs and operating expenses. For direct costs, you must know the total costs for each job, when payments will be due, and what costs are still outstanding. Forecasting operating expenses is easier. Some costs, such as rent, recur regularly and can be easily projected; others, such as insurance, are paid in occasional lumps. Don’t reduce occasional payments to monthly averages because your goal is to predict actual cash needed per month, not average cash needed.
  • Forecast cash flow. Combine income with outgo to create a summary of cash flow. Begin with actual cash on hand now. Add projected income for the period to calculate total cash available. Subtract projected cash outgo from available cash to calculate cash remaining. Cash at the end of one time period becomes cash at the start of the next.
  • Create a cash flow detail sheet. A cash flow summary spreadsheet is a valuable tool for big-picture analysis because it can easily be read and digested. But you also need a way to drill down into the details, both to confirm accuracy and to inform daily management decisions. An expanded cash flow detail sheet shows adjustment options. If your projection shows a shortage of $2,000 at the end of May but a surplus of $13,000 by the end of June, can you delay some May disbursements until June? Can you collect some income earlier? Do you have a cash reserve or credit line for use in May and repayment in June?

Cash flow closely depends on both your sales and production schedules. The sooner a homeowner signs a contract, the sooner you can collect down payments. And timely completion of construction benchmarks keeps progress payments on schedule. Nothing will put you out of business more decisively than running out of cash. And nothing gives you more peace of mind than the ability to accurately predict your cash flow for months ahead.

Tips for better cash management:

  • Keep a cash reserve of either savings or a credit line. Without this cushion, managing your cash will require constant attention.
  • Manage each job for a positive cash flow. Design payment schedules so that job income precedes disbursements.
  • Manage client expectations for collecting payments. Confirm upcoming payments so that funds can be transferred or any objections can be raised in advance.
  • Don’t treat downpayments as extra cash. They’re often received before any direct expenses are paid and make your cash position look unrealistically positive.

—Richard Steven, president of Fulcra Consulting, specializes in helping remodeling companies create and implement effective management plans.

This is a longer version of an article that appeared in the April 2012 issue of REMODELING.