For me, this month’s column marks four years of discussing the use of benchmarks to analyze a remodeling company’s performance. Looking back, two installments stand out as pertinent to our current economic reality. In my first Benchmark column (September 2005), I proposed an “alpha number” for company performance.
The idea behind the Customer Satisfaction and Net Profit Index, or “Snippy” (from the acronym CSNPI), is that high customer satisfaction means you are doing things right from a third-party perspective; and good net profit indicates that you are doing things right internally as well. Taken together as an index, this is a good indicator of business health. The November 2005 Benchmark on backlog discussed the importance of having enough work in the pipeline to cover overhead during the time it takes to line up future work.
Cash Is King
But one subject is still missing: cash flow. Many remodeling companies have had their credit lines either reduced by half or more, or entirely cut. One of my clients paid off his $50,000 balance, only to have his $100,000 credit line yanked away the next day. These are dangerous times to rely on credit for cash sufficiency.
The industry standard for available cash is 10% of annual volume. So if the company budgets for $1 million of annual volume, you should count on having $100,000 of free cash on hand at all times. That could be tough right now, so in the example above, I’ve defined two “comfort levels,” one based on cash alone, the second based on cash plus available credit. To find your current comfort level, enter budgeted volume for the period you want to measure — typically, a year — then enter balances from all your cash accounts. If you stop here, you’ll get a comfort level based on cash only, without relying on credit of any kind.
To include credit in the equation, add the amounts available from your current lines of credit, plus any balances remaining on company credit cards. Together, this is total available credit.
What comfort level should you shoot for? For me, knowing that the credit system remains in lockdown, I’d only be satisfied with a comfort level above 70%. As credit eases, a comfort level as low as 50% would become less risky, but err on the high side. And for now, keep the cash coming in and save it!
—Judith Miller is a Seattle–based remodeling business consultant and trainer specializing in accounting, finance, and computerization. Visit her blogs at Remodeling online and at remodelservices.wordpress.com.