Today I want to talk to you about the difference between profit and cash flow, and how it is possible to be profitable one month and see that you've made quite a good profit on paper, but still look in your bank and go, “Shit. Where's all the money gone?” Well, it could be sitting in supplies, could be sitting in progress payments, could be sitting in stock, or you just might need to do a few key things that could make a significant difference to improve your cash flow, because cash flow is like oxygen for the lifeblood of your building company.
Today, I'm going to show you 17 key tips that you can improve and use tomorrow to start improving your cash flow. When I say cash flow, we're talking about how much money actually physically moves in and out of your bank account in a certain period, and for this month or for this time period, we'll talk about one month. It's not profit. Now, if you're looking to make more profit, have a look at our top 27 tips to make an extra 500 to $1,000 per job per week on our membership website.
This is assuming that you are making at least a 20% GP, and or how to go about improving the cash that flows through your business so that you can sleep better, have greater confidence that you know what you need to do to improve your company and get greater clarity. Let's crack into the top tip.
Alright, so cash flow tip number one is to actually have a cash flow forecast. If it's visible, like this one, you can actually see what the differences are and you can know where the gaps are going to be. You can forecast your impact if you, for example, get a bigger deposit, you improve your invoicing so you're invoicing either weekly or fortnightly, and you can also see when you can hire your next person and it should really be kept as a living document so you know how much is actually flying in and out of our bank account. Do we need to make any changes? Are we covering our overhead and making a desired profit each month? And are we making the right gross margin? Gross margin is the number one indicator of the health of your building company.
Number two, KPIs, or key performance indicators. We need to know and show your numbers. It's not just one thing to actually know them. We need to keep them nice and visible so you know how many leads you need to get each day, what the cash is that's flowing into your bank account and how you can improve that because you can't manage it unless you actually measure it. We've got a one-page dashboard that you can use, like when you're, I guess, flying a plane, you want to know how much petrol's in the tank, how far to the destination, what altitude are we flying at. So it is with your business. We need to be able to look at a one-page dashboard to see how well you perform.
Number three. The next key thing is to look towards charger or fixed price contracts. If you can change from charger to doing fixed price contracts, makes it much easier to control the payments and the expectations, and typically if you … During a fixed price contract, you typically might make between five to nine percent more for contractor's risk than if you are just doing cost plus margin.
Alright, tip number four, you might want to look at improving your payment schedule and relating it to your milestones. You might go and or milestone, so date, or time and or milestone. Let's say it's raining, for example, and you can't get a particular stage completed, getting the slab down. You may still have to pay the merchant on the 20th coming up. Now, if you can change your invoicing and your billing in the contract to and or date, then you can invoice the client either fortnightly or weekly, regardless of whether you've actually achieved that milestone or not. And of course, you want to make up their time so you still stay on schedule.
Next key one, streamline you’re invoicing so you and your office can invoice regularly to get cash in quickly. Just like Ross, where he has streamlined his invoicing process, got an exact step-by-step so any office person can carry that out. If you're doing a smaller job you might make it either weekly invoicing or, at a minimum, fortnightly invoicing.
Alright, the next one, get as large a deposit as you're comfortable with, and you want to have it as much as possible so that you're cash flow positive as you go through the job. Some guidelines that some of our members use is they'll take 25% for jobs that are under 100k and they'll take 20% for jobs that are under 200k, and then they might invoice on a regular straight line basis, eight times 10%, and you want to get at least a minimum of a 15% deposit. This way you're able to pay your guys, pay the merchant, and you remain cash flow positive and you're not having to run a float to fund those payments.
Next key one, make sure your payment schedule is consistent, the clients are very aware of it, and they know that every fortnight on the 15th and the 13th, there'll be an invoice coming through to them.
Next key strategy, you can look at front loading or stacking your payments using a sliding scale so that you are cash flow positive through the job. You might go 20%, 15%, 10%, and then the final payments may be as small as five percent, and I've actually seen quite a few members who want to reduce their risk in their cash flow and some of them have got their final payments down to two and one percent, but it's, again, you do what's best for your business.
Next key strategy, you can actually add an extra time-based payment between milestones if they're likely to be more than two weeks apart. This also means that the size of the payments become smaller, so your risk becomes much less.
Next key tip, have a look at the business model that you're actually running You might consider going to fully subcontracted builders and can be a little bit harder to get those kind of guys in this particular climate, but plenty of guys are still actually doing labour only work because they're not comfortable with the marketing, the sales, and the quoting to win the jobs. Just like with other sub trades, like plumbers and sparkies that actually give you a fixed price quote to do that, you can actually get teams of builders to quote a fixed price and then pay them in line with when you receive your progress payments and or the milestones that allow that cash to flow into your account and then back out to them. And the margin obviously goes to you.
Next key tip, order on the first of the month or in that first week from your suppliers to maximise the credit so that you're getting at least an extra 50 days to pay.
Next one, this comes from one of our members, Brent. He uses a credit card to pay his suppliers, especially his merchant, so you can have a conversation with them, and that actually gives him an extra 30 days credit on top of his previous 50 days. So then obviously pay your credit card off before you get those big, whopping, great big huge interest payments. You can get an Amex platinum card that's got 100k limit on it and use this strategy like Brent does to a get a free round the world trip each year through the points and extra credit. Pretty simple and great strategy that you can use there.
Next key one, variation. You want to make sure that your foreman and your builders know the scope of works and the contract, and whatever you've tagged out becomes a variation, and what actually constitutes a variations. Make sure you've got a good process for capturing it, use the checklist available, and then ensure that you invoice the clients as the variations are actually carried out in each particular week. When you have your weekly meeting with your clients and running through your weekly analysis of what's actually being done, you can show them the different variations, what the prices are, and the guy's site logs so that the client feels comfortable and they're not getting a big bill at the end of the job.
Next key one, charge an Edmond fee for any variations that are not proceeded with. You might charge a minimum of, say, $200. Make sure you put this in your contract because you're still going to spend time running around talking to the merchant, talking to subbies, and so forth.
Next key one, don't allow retentions, and be aware of if you are or do have any jobs on, or you've got a contract that does allow retentions like, for example, commercial or the Institute of Architects contract. My sure you're very careful and you know the implications of that onto your cash flow forecast.
Next one, ensure that you control work in progress to ensure that you guys hit the stage milestones to make sure that the milestone gets … Client makes the progress payments on time, and that we're aware of the milestones and the guys are aware on site at the daily milestones that need to be done. The toolbox meeting actually conveys that.
We need to apply the strategies that you think will help to improve your cash flow. Download the documents that we've got available. Go through the checklist, have look at the webinar online, and here's to seeing you put more money into your back pocket.
Checklist – http://tpbnz.wpengine.com/100pt-guide
Online Masterclass – http://tpbnz.wpengine.com/bsb-webinar