Why Cash Flow Matters

In custom homebuilding, managing cash flow is crucial for the long-term health of your business. With projects often spanning 12-18 months and payments tied to milestones or monthly billing, ensuring a steady flow of cash is essential to cover costs, pay your team, and keep projects moving. These handy tips will help you improve your cash flow and maintain financial stability.

1. Invoice Promptly and Consistently

One of the easiest ways to improve cash flow is by invoicing regularly and ensuring clients pay on time. Instead of waiting for major project milestones, invoice clients on a monthly basis for costs incurred during that period. This ensures a consistent inflow of cash throughout the project.

Action Steps:

• Switch to Monthly Billing: Invoice clients at the end of each month for work completed and materials used, rather than waiting until project milestones are hit.
• Automate Invoicing: Use tools like QuickBooks Online to automate your invoicing process, ensuring invoices are sent on time every month.
• Send Reminders for Overdue Payments: Automate follow-up reminders for overdue invoices to ensure timely payments.

2. Use Payment Terms to Your Advantage

Offering payment incentives or adjusting terms can encourage faster payments and improve your cash flow. Set clear payment terms upfront and communicate expectations early.

Action Steps:

• Offer Early Payment Discounts: Encourage clients to pay sooner by offering small discounts (e.g., 1-2%) for payments made within 10-15 days.
• Negotiate Favorable Payment Terms: When setting up contracts, negotiate net-30 payment terms or earlier, and make sure clients understand any penalties for late payments.
• Enforce Late Payment Fees: Clearly state late payment fees in your contracts and enforce them to avoid long delays in cash inflows.

3. Manage Subcontractor and Supplier Payments

Cash flow isn’t just about money coming in; it’s also about how much you’re paying out. By negotiating better terms with suppliers and subcontractors, you can create more breathing room for your business.

Action Steps:

• Negotiate Extended Payment Terms with Suppliers: Talk to your suppliers about extending payment terms to net-60 or net-90 days. This allows you to hold onto cash longer while waiting for client payments.
• Align Subcontractor Payments with Client Payments: Coordinate subcontractor payments with client invoicing, so you’re not paying out before you’ve received cash from the client.
• Review Material Orders Regularly: Avoid over-ordering materials by reviewing project needs regularly and only ordering what is needed for the upcoming phases of the project.

4. Monitor and Forecast Cash Flow Regularly

Custom homebuilders should maintain regular oversight of their cash flow to anticipate any shortfalls and adjust accordingly. A cash flow forecast can help you project future inflows and outflows, allowing you to plan ahead.

Action Steps:

• Create a Monthly Cash Flow Forecast: Use tools like QuickBooks Online to forecast your cash flow based on current and upcoming projects. Adjust the forecast as new expenses and payments arise.
• Review Cash Flow Weekly: Set aside time each week to review your actual cash inflows and outflows against your forecast. This allows you to identify and address potential gaps before they become an issue.
• Adjust Expenses: If you foresee a cash shortfall, adjust your discretionary expenses (e.g., delaying new equipment purchases or cutting back on non-essential costs).

5. Use Business Credit Cards Strategically

Business credit cards can help you manage cash flow by extending your cash cycle, allowing you to cover expenses without immediately depleting your cash reserves. If managed responsibly and paid off in full, credit cards can offer both flexibility and rewards.

Action Steps:

• Use Credit Cards for Routine Expenses: Pay for day-to-day expenses like materials, utilities, and office supplies using a business credit card. This extends your cash cycle by 30-45 days.
• Pay Off the Balance Each Month: Avoid interest charges by paying off your credit card balances in full each month. This allows you to extend your cash flow without incurring additional costs.
• Track Credit Card Spending: Keep a close eye on your credit card spending to ensure it aligns with your budget and cash flow forecast.

6. Control Overhead Costs

Overhead costs can quickly eat into your cash reserves, especially during slower periods when fewer projects are underway. By keeping overhead costs in check, you can preserve cash flow and ensure funds are available for critical expenses.

Action Steps:

• Review Overhead Costs Regularly: Conduct a quarterly review of your overhead costs, including office rent, insurance, utilities, and administrative expenses. Look for areas where you can reduce spending.
• Outsource Non-Essential Tasks: Rather than hiring full-time staff for non-core functions (e.g., bookkeeping, marketing), consider outsourcing these tasks to reduce payroll costs.
• Negotiate Contracts: Review contracts with service providers and negotiate better rates wherever possible. This might include phone plans, office equipment leases, or IT services.

7. Build and Maintain a Cash Reserve

A healthy cash reserve can help your business manage shortfalls, unexpected expenses, or project delays. Aim to build and maintain a reserve that covers 3-6 months of operating expenses.

Action Steps:

• Set Up a Cash Reserve Account: Open a dedicated savings account for your cash reserve and set aside a portion of your profits each month to contribute to this account.
• Automate Contributions: Automate monthly contributions to your cash reserve to ensure that you’re consistently building it up.
• Use the Reserve Strategically: Only dip into your cash reserve for true emergencies or to cover temporary cash shortfalls, and replenish it as soon as possible.

8. Focus on High-Margin Projects

Not all projects are equally profitable. To improve your cash flow, prioritize high-margin projects that allow you to maintain profitability while keeping cash moving.

Action Steps:

• Analyze Past Projects: Look at previous projects to determine which ones were the most profitable and which had the highest cash flow.
• Prioritize High-Margin Clients: Focus your marketing and business development efforts on clients who are willing to pay for premium services, rather than competing for low-margin projects.
• Streamline Project Management: Use project management tools like Ressio or BuilderTrend to streamline project timelines and reduce delays, which can eat into your profit margins.

Improving cash flow is key to ensuring your custom homebuilding business stays financially healthy and ready for growth. By invoicing regularly, managing expenses carefully, and monitoring cash flow closely, you can create a stable financial foundation for your business.