Cash Management: Five Ways Builder Customer Expectations May Change
How crisis cash management strategies could affect business with builder clients, plus tips on how fenestration companies can improve their own cash flow
As Marco Terry wrote in a recent Talk, improving a company’s financial position is key to limiting financial damage during the coronavirus pandemic. One of the strategies he mentioned that can help companies to absorb financial shocks while limiting their impact on business is to establish a cash reserve. “Cash reserves are a critical resource for companies,” he wrote.
Establishing a cash reserve requires taking a critical look at cash flow, something you and your customers will be keeping a close eye on for the foreseeable future. The National Association of Home Builders hosted a webinar, in which R. David O’Brien, CPA, CGMA, Partner & Director of Construction Services, discussed the principles of cash management.
While his presentation was directed toward home builders, there are some important takeaways that fenestration suppliers should be aware of as they continue to serve their builder customers:
- Builders will be looking to their suppliers for help managing their cash and projects. Anticipate how you will handle requests for discounts, extended terms and help on margins. If they have the cashflow, can they get discount terms? If not, will you extend terms?
- Builders and contractors will also be paying extra close attention to Work in Progress schedules, margins and markups. They will need to be much more accurate on estimates for their customers.
- Fixed-cost and cost-plus builders, as well as those using the markup method, will have different considerations in terms of improving their cashflow. Consider where your customers fall in these categories.
- Completion dates are going to be of utmost importance to builders right now: deliverables will need to be timely.
- Builders will look to reduce cycle time, avoiding multiple punch lists, reducing trips to the jobsite and managing callback and warranty claims. Where do you intersect the homebuilder on these points and how can you work together to help meet their objectives for efficiency?
Tips for Cash Management
Much of the advice O’Brien provided was exclusively for builders, there are a few cash-management tips that apply to fenestration companies.
The first step to managing cash flow is for business owners to take a critical look at the overhead budget, including all fixed and variable costs. Break down every line item in that budget, using the prior year amounts for estimates.
Once you have an accurate picture of overhead, analyze all expenses, become leaner, and consider debt payments and required equipment purchases. Prepare a best, likely and worst-case scenario. If cash flow starts to decrease, make adjustments to overhead.
Create a cash-flow projection: track cash receipts and disbursements (including overhead costs) with real, accurate figures to determine your cash balance. Forecast as often as is necessary: daily, weekly, monthly, etc.
The most effective methods to improve cash flow, according to O’Brien are to make timely collections, seek ways to stretch out cash disbursement terms, analyze and improve profitability, and consider bank and stockholder loans.
Do you have a current, accurate break-even analysis? Determine a break-even analysis by dividing operating expenses by your gross profit percentage. Both figures must be accurate—even a 3 percent variation can skew the picture by hundreds of thousands of dollars.