You can nail your cash flow and build a predictable stream of money coming into your business on a regular basis. Start by not acting like a charity or a bank. Instead, account for the genuine cost of each job.
Are there days when you’re not sure if you’ll make payroll? Weeks when you worry about affording your next critical hire? Months when you’re actively remodeling bathrooms, kitchens, or entire homes – but waiting for a cash avalanche upon completion?
If so, read on. You’re probably not accounting for the full cost of each job, let alone billing your customers on a regular, rhythmic, real-time cadence as your jobs progress. And that will negatively impact a positive cash flow on a regular basis.
Here’s the good news. You can nail your cash flow and build a predictable stream of money coming into your business on a regular basis. Start by not acting like a charity or a bank. Instead, account for the genuine cost of each job.
Limiting age-old beliefs get in our way
For decades – centuries actually– builders were taught to be a bank or a charity. In a couple of ways:
- Were you taught to collect payment after project milestones or in the last mile as the job wrapped up? That leads to cash famines then feasts. That’s a bank, not a builder.
- Were you expected to carry big dollars in fixed costs or operating expenses – things like labor benefits, tax, and equipment allocation? Those costs actually belong to each job’s variable costs and should be built upfront into your cost estimates. Without doing so, you are giving away your time, talent, and tools for free. That’s charity, not business.
To get a handle on your future cash flow and prevent throwing away money:
First, change your mindset. Start with a personal belief and commitment to be profitable every week, month, and year – not just sometimes, the end of a project, or year-end reconciliation.
Second, start regulating your cash flow. Calculate your job costs differently than you imagined – both in “what counts” and “how often”.
Third, never give away your talent and time for free. That is literally throwing profits down the dumpster. Start accounting for the true and full cost of performing every remodeling and homebuilding job.
3 Ways to Calculate Your True Job Costs
Little revs up Aspire’s business coaching staff more than the unfairness of general contractors giving away your assets for free; that is, the 3Ts: your tools (equipment), your time, and your talent. To avoid miscalculation and nail your cash flow, ensure that you:
1. Account for all related job costs.
Think of these as the non-human costs that eat at your profits if not built into your estimates, worksheets, and billing systems. These costs include vehicles, gas, equipment, tools, warehousing, and shops. One job may not eat all of it – so estimate the percentage used across relevant jobs over one or more years. If you buy special equipment for a special job, apply the cost to that job and then depreciate it over time.
Looking at the 25 Must-Have Kitchen Features That Boost Storage, Convenience, and Style, it’s easy to see how special screws, expensive drill bits, or one-time dust collectors might add up. Failing to include those costs to your customer is the same as giving away your tools for free. If the customer wants to keep them afterward, that’s a different story that you can easily manage through effective communication.
2. Track project management and your own time – job by job.
You are human cost #1. When you’re the owner, you wear multiple hats including salesperson, estimator, development, project management, and on-the-job time. In today’s changing labor market, you’ve been smart enough to hire a dedicated, professional project manager (PM) to free up your time for strategic and business development. Either way, build yourself and your PM into job estimates, adjusting your and PM actual hours in real-time.
Because let’s face it – if you’re just taking out those salaries from your profit at the end of the year, you’ve created a huge profit leak. Your value needs to be accounted for job by job – not a fixed slush fund! What’s more, it will be hard to expand your business or replace yourself one day if you have no baseline of what each job requires in terms of you, the owner, and/or PM time.
3. Track fully loaded labor hours.
These are human costs #2. Think of your labor as limited inventory (not counting trade partners of course). You only have so much of it because your tradespeople and partners are each typically available 2080 hours per year assuming no illness and 15 days (about 2 weeks) of holidays.
On top of that, labor costs you more than just hourly wages or salaries. You incur more costs through payroll taxes, benefits, workers compensation insurance, meals, supplies, and training to hit a true labor cost. If you aren’t passing the full cost onto your customers, you’re giving away their time and talent for free.
Your $20 hourly employee is more like $26.33 hourly
Let’s make this less theoretical with a real example:
One of your crew makes $20/hour, and assume you pay $2,000 in payroll taxes, $1,000 in insurance, $2,000 in benefits, and $5,000 in supplies for that one employee. Add together $2,000, $1,000, $2,000, and $5,000 to get a labor burden cost of $10,000. Then, multiply the employee’s hourly wage by the number of hours available for work per year to determine the annual payroll labor cost.
Now, add the annual payroll labor cost to the labor burden cost by multiplying $20 per hour by 2,080 hours resulting in a $41,600 annual payroll labor cost. Add the $41,600 with the $10,000 labor burden to get $51,600.
Now, divide your result by the number of actual hours worked to calculate the fully burdened labor cost. In this example, an annualized salary of $51,600 is divided by 1,960 hours to get a fully burdened labor cost of $26.33 per hour.
So, that means the total cost to employ your worker is $26.33 per hour of actual work, not $20 per hour. The same approach applies to your field crews and office staff alike. Your crews will be 100% allocated to each job, while office staff time is spread across multiple jobs (marketing, finance, administrative, and so on).
See the difference that $6.33 per hour per employee makes to job estimates and customer billing? It pays off in profits – and more money you keep from each job.
Nail Your Cash Flow in 2022
So, remember: Manage all your job costs in real-time and make corrections across the project between estimates and actuals.
Most importantly, value your time, tools, and talented team. Account for them all in each job.
Your customers will learn to value skilled construction trades and your business differently. Just as Aspire sees it – as a complex, customized, and specialized service where the price is NOT the primary driver. Value is. You’re not a ready-made, off-the-shelf product. That’s Home Depot – not you! 😊
So, don’t be shy about fully loading your true cost of labor. Your cash flow will thank you. So will your team.
Download our full paper: Business Strategy for Contractors