Here are three essential tips for managing cash flow as a home builder to ensure profitability and avoid financial fire drills on a day-to-day basis.

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One: Avoid the Cash Fire Drill

Two: Customer Deposits

Three: Customer Invoicing

1. Avoid the Cash Fire Drill

Home builders agree on the importance of maintaining cash when it comes to running successful projects. But all too often, builders struggle to keep up with cash in their businesses. Custom home build projects cannot continue unless there is cash in the bank to continue to pay suppliers and subcontractors, and project stalls need to be avoided. This comes up frequently in our work, and we approach this topic in many ways:

• Are you collecting customer deposits when customers sign your construction agreement? Is the customer deposit requested adequate to sufficiently mobilize the project and keep it funded?
• Are you invoicing your customers consistently, every other week (or at least once per month)?
• Are you paying vendors based on their payment terms? Do you have a say in your suppliers’ and subcontractors’ payment terms?
• How are you monitoring each project’s cash to maintain cash integrity at the project level (Avoid “robbing Peter to pay Paul”).
• What do you do with the cash received once a customer has paid? Are you budgeting to cover your construction overhead (O&P) and your paycheck?

As a custom builder, you want to build beautifully inspired homes, earn and preserve the trust of your customers, and get paid for a job well done.

2. Customer Deposits

It was never part of your business plan to be a bank for your customers, so why are you funding projects with your business’s cash? Are your customers paying interest on the cash they are borrowing from you?

There are several heightened emotions when a customer is preparing to sign your construction agreement on their project. This vital step symbolizes the tangible start to the creation of their new home. The place where you will help realize their dream home. The place where they will raise their family. The place they will begin their journey into retirement or whatever the next phase of their lives will be. Excitement. Joy. Anxiety. You’re preparing to generate new income for your business, and we need to prioritize communicating appropriate expectations with your new customer to make certain this collaboration goes well from a financial perspective.

By now, you’ve introduced to your new customer your framework for collecting customer deposits and how deposits are credited against build costs and at which milestones during projects. If not, here is a proven framework you can use to set this expectation:

• Customer deposits are received before the project starts. This is accounted for as a liability (as an overbilling, not income); “Debit” to Cash and “Credit” to Customer Deposit (or Billings in Excess of Costs).
• As the project winds down in the final stages (landscaping, punch out, etc.), customer deposits are credited to the last couple of customer invoices. You can adjust this to meet your preference, but have a system in place. Perhaps you credit once against the very final customer invoice. Perhaps you apply customer deposit credit against the last four customer invoices. “Debit” to Customer Deposit (or Billings in Excess of Costs) and “Credit” to Accounts Payable.
• If your last customer invoice reflects a sum of build costs less than the customer deposit held, no issue. You can remit the excess customer deposit in the form of a refund check. I see no real issue with this, other than an extra fifteen minutes or so of paperwork you will need to complete. Will your customer be upset if you finish their project and they get money back?

This is a win-win for both you and your new customer. The project will be properly funded as you break ground – avoiding a cash fire drill – and you aren’t entering into an unintended financing arrangement where you are using your cash (or worse, another customer’s cash) to build your customer’s home.

Keep in mind, your new customer may push back on this framework. This doesn’t negate the critical need for customer deposits. What an opportune time to decide whether this is a customer you want to collaborate with financially for the next eighteen-to-twenty four months! Our builders explain this system to their new customers during the construction agreement process, and we reiterate it as the customer deposit invoice is facilitated. A perfect opportunity to introduce ourselves as the outsourced accounting firm for our builders and lay the groundwork for how financials will be managed through the life of their home build.

If you’d like to discuss implementing a framework for customer deposits, or if you’re interested in outsourcing the back office of your builder business to Evers CPA, we would be honored to have the opportunity. Please email us at: intro@everscpa.com.

3. Customer Invoicing

When a builder reaches out to us because they are struggling with cash, it is usually because they are not collecting sufficient customer deposits on their projects or they are not invoicing their customers consistently. Or both.

Imagine going to your local grocery store (Publix here in Middle Tennessee) for two or three months, gathering all the food and other consumables you need to sustain your family over this period of time, without paying. And the grocer doesn’t follow up with you to inquire about payment. Seems inconceivable, right? So why would you progress through the home build process, purchasing supply packages, hiring subcontractors, and overseeing the project without asking your customers for progress payment? This, too, should seem inconceivable.

If your customer has not been invoiced in over a month, it is likely their project is underbilled, and as the builder, you are either financing the project using your business’s cash, or even worse, another customer’s cash. You can avoid this by establishing (and following) a consistent process to invoice your customers and require customer payments. Decide with what frequency you will invoice customers and when you expect payments from your customers. As a starting point, we recommend invoicing your customers every two weeks, or at least once per month.

Some builders prefer to invoice their customers after accomplishing certain project milestones. They probably have friends or mentors who operate commercial contracting businesses as this is a common invoicing framework for commercial contracts. For custom home builders fulfilling cost-plus contracts, this invoicing style is usually in direct conflict with the builders’ customer deposit practice. Once you achieve the targeted project milestone at which you are ready to invoice your customer, you’ve likely exhausted the customer deposit long before this point. Now you’re doing your best to sustain the project’s schedule and momentum using your own cash (or another customer’s cash…yikes!). Now, this is one problem we need to address and consider a different approach to invoicing, but it’s not the only significant issue with invoicing based on project milestones on a cost-plus build; there are more:

• You may catch your customer by surprise if you allow billings to accumulate for durations longer than two weeks-to-one month. What if you find out, after carrying costs for two months, that your customer doesn’t have the cash to pay your invoice?
• What if your customer was unclear at the cost of certain invoice items and is now surprised having received the invoice several weeks (or months!) after the costs were incurred?
• What if you ran out of project cash and need to make large materials deposits to keep the project on schedule?
• What if you find out your customers have a habit of “slow paying” your invoices? It would be helpful to identify this problem and nip it in the bud two weeks into the project, rather than eight weeks into the project.

I’m willing to bet your best customers will appreciate the financial transparency that consistent invoicing every two weeks will provide. From our experience, projects flow better in all aspects for builders who have implemented a solid system of invoicing their customers every other week.

If you’d like help establishing a more consistent customer invoicing process, or if you’re interested in outsourcing the back office of your builder business to Evers CPA, we would be honored to have the opportunity. Please email us at: intro@everscpa.com.