Becoming a Money Manager as Your Company Grows
By: Shawn McCadden, CR
As a Design/Build firm grows in volume, the amount of money that passes through the company increases dramatically. Deposits received on account for both design retainers and construction contracts can add up to be a significant sum of money. If the firm is front-loading the payments received as projects progress, this too will increase the amount of money the company is holding inside the business checking account. On the other side of the equation, the business must meet it’s obligation to pay for the costs of doing business in a timely manner. Direct costs on projects accrue, and at the same time, the business must pay for the operational costs related to overhead.
As the business grows, managing cash flow becomes extremely important (even critical) to continued operations. The business owner or manager soon becomes a money manager by default. As this happens, there may be opportunities for the business to earn more money by using the money it already has in a strategic way. There are many strategies you could use. In this article, we will discuss a few simple strategies you could apply right away. I suggest that you always be sure to consult with your accountant and tax adviser before trying any new strategies, including those described in this article.
Many companies leave all the money that is collected in one checking account. The funds are then used to pay for the expenses of producing projects and the operation of the business, leaving any excess of money in the account. If the business’ financial system includes the ability to predict income and expenses on a monthly basis, the cash flow needs for that month are easily determined. Any excess of cash that would normally remain in the account could become an opportunity to earn additional profits. In order to actually qualify what is excess cash over and above monthly expenses, the accounting system should be run on an accrual basis, not a cash basis. By using the accrual method of accounting, expenses are recognized as they occur, even if the expense has not yet been paid for. Income is recognized when the customer is billed, even if payment has not yet been received. Income and expenses are then tracked by the exact day they are to be collected or are due respectively. By tracking the income and expenses in this way, one can easily predict the money that will be owed at a certain given time as well as how much money will be available to pay for those expenses at the time the expenses become due.
Consider opening a second interest-bearing account where any excess monthly funds could be deposited. The amount of interest this second account could earn depends on how long the money can stay there. Typically, the longer the commitment to leaving the money in the account without having to access it, the higher the interest rate. Interest rates on these account types may seem low, but over the course of a year a significant amount of money can be added to your bottom line. I also suggest that this second account and your primary business account are with the same bank. By working with the same bank, transferring of funds between accounts can be instantaneous. There will be no need to wait for checks to clear between banks. Also, most banks now offer electronic banking using the internet. This can eliminate the need to even leave your office when making transfers between accounts happen. On-line banking services can be used to be sure the money is actually available in a “just in time” fashion.
As a word of caution, you might want to move the excess funds out of your business account to an interest-bearing personal account. By doing this, you will pay taxes on the funds as earned income, and the amount of tax paid will depend on your business’ legal structure. The advantage to this strategy is that the money is no longer the business’ money, but rather the owner’s. Should a client pursue legal action against the company, this money has now been protected, at least to a higher degree than it would have if it were in the business account. During legal problems, many contractors have had the funds in their business accounts attached by the suing client’s attorneys. When this happens, the amount of money in the account that has been attached is no longer accessible by the contractor and meeting your business’ financial obligations may become impossible. If this were to happen, you can always move the personal funds back into your business to meet operating cost. If the tax has already been paid on those funds, you will not incur additional tax liability when you eventually take the same amount of money back out to repay yourself.
Design/Build is a way of making business happen for a reason, rather than operating a business from reaction mode. Consider Design/Building your business’ financial systems so collecting and paying out money happens in a preplanned and manageable way. By having such a system, when the unexpected happens, reactions are planned versus flying by the seat of your pants.
Shawn McCadden, CR/CLC
shawnm@charter.net
Shawn McCadden is a nationally-known columnist, speaker, business trainer and award-winning remodeler. As a Certified Remodeler and Certified Lead Carpenter, McCadden has more than 30 years of personal experience in the remodeling and new home construction industry. He was the owner of his own multi-million-dollar design/build remodeling business, Custom Contracting, Inc., in Arlington, Massachusetts until he sold that business in May 2004, was the co-founder of the Residential Design/Build Institute, which trained best business practices to remodelers and contractors across the nation and served as Director of Business Innovations for DreamMaker Bath and Kitchen.
Today, Shawn works with aspiring remodelers, helping them discover, identify and achieve their professional and personal goals. Some of the services he offers to serious remodelers include: Establishing company organization and procedures, planning and budgeting for business and personal profitability, starting a new business, and saving an existing business.
Shawn has received many industry awards including several NARI CotY Awards, Remodeling Magazine’s BIG50, QR Magazines Top 500 and NARI’s Harold Hammerman Sprit of Education Award.
An active member or the National Association of the Remodeling Industry (NARI), McCadden has served as a Massachusetts local Board Representative and was a member of the NARI Certification Board. He writes a monthly column for Remodeling Magazine and speaks at industry trade shows and conventions throughout the year.
McCadden makes his home in Massachusetts with his wife and daughters.
