Maximizing cash flow is critical to the success of any kitchen and bath firm. Recently we discussed how to allocate the cash flow from times when business is booming in order to prepare for the not-so-good times. This month we will look at things that can be done to keep that cash flowing in, even during more challenging times, as well as how kitchen and bath professionals can control cash outflow.

There are three areas we will take a look at: cash requirements, the contract payment schedule and the management of disbursements.

Casf Requirements

Begin by performing an analysis of the things that cash will be needed for. Any such analysis requires that certain assumptions be made about levels of activity. If the business is ongoing, recent experience will provide a starting point on which to base these assumptions.

The level of business that is expected will determine the assumptions made about overhead items such as fixed assets, administrative staff, office space, etc. In the short run, these areas of expenditure are relatively fixed in nature, that is, they cannot be quickly adjusted to the current level of business activity.

Since overhead expenses are not easily adjusted, care should be taken in making any adjustments. A careful evaluation of where the business is headed should be undertaken before either adding to or removing this overhead support. One thing to keep in mind is that it’s always easier to add to your employee count than it is to reduce it later.

An intermediate level of flexibility of expenditures is field labor. Here, individuals with the requisite skills can be added relatively easily as business increases. While this element of cost is often referred to as direct variable expenses, or direct costs, the reality is that once on the payroll, it is never easy to let these people go, nor easy to replace them should they leave. There is, therefore, a propensity for this area to grow when the business is busy, but not return to previous levels when business activity recedes.

Finally there are subcontractors. In this area, it’s pretty simple to adjust costs to reflect the level of business, with payments only going to subcontractors and vendors when jobs are actually progressing.

All of these things can have timing attached to them and will allow a cash “outflow” schedule to be developed. Again, some of these cash requirements, such as payroll, do not allow much flexibility, while others offer opportunities for timing. We will review disbursement management after taking a look at cash receipts control.