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Cash Flow Forecasting: Your Crystal Ball
By Steve Maltzman, CPA
Cash is king. This expression is especially true within the building business where cash flow is more important than the bottom line because if you don’t have cash, you’re never going to make it to the bottom line. Many builders fail in their first several years of operations as a result of mismanaged cash flow.
 They get into a rut of “robbing Peter to pay Paul” taking the cash from a current job draw to cover the sins from a prior job.
Cash flow forecasting is one of the key components to a builders’ financial success. There are two levels of cash-flow planning that all builders should engage in; long-term and short term. Long term cash flow planning should be an integral part of the budgeting process and should look at your cash sources and requirements on a monthly basis. In addition to developing a monthly cash flow forecast, I suggest you begin to look at weekly cash inflows and outflows. I recommend using a six to eight week rolling schedule.
Many builders, when developing their annual operating budget, identify their annual expenditures and divide that amount by 12 in order to come up with a monthly operating budget. By budgeting this way you really can’t get a true picture of your monthly operations. When preparing your annual budget, try to identify the month in which the expenses will be incurred. For example, when planning the amount you expect to spend for advertising, identify when you plan on running your ads and put the planned expenditures in that particular month, if you have a yellow pages ad, budget for the cost of the ad in the month that the expenditure is to be made.
After you have identified your monthly operating expenses in the month you anticipate them occurring, you need to adjust you total expenses for other cash flow items. Deduct items such as depreciation since this is a non-cash expense, and add in non-expense related cash items such as note payments (the interest portion should be considered as an expense while the principal payments affect cash flow), cash payments of other liabilities, cash purchases for equipment, as well as cash payments for federal and state income taxes. After completing this process, you should have identified the amount of cash needed on a monthly basis in order to operate your company.
The next step in your annual cash forecast is to look at cash flow from jobs. Depending upon the number of units you build, this budget can be prepared by unit or by subdivision. There are four items you need to have when developing you job cash flow: your draw schedule (whether from the bank or from your customer), construction schedule, payment terms for your subcontractors and suppliers and job estimate. With all of these in hand you should easily be able to predict cash inflows and outflows for your jobs.
When you combine your cash flow from jobs with the cash outflows anticipated from operations you will be able to identify the months in which you will have excess cash and those which you identify cash shortfalls. Use this projection to make strategic decisions for the year such as do you need to develop a line of credit to smooth out your cash flow, should I start a spec home to provide me with cash flow from my construction loan, do I need to renegotiate payment terms on a note coming due?
Just as you do with your other financial reports your monthly cash flow projection should be reviewed and updated regularly. In addition to a monthly forecast, builders with tight cash needs should prepare a more detailed weekly cash flow projection. This projection should include information on what subcontractors and suppliers are to be paid on a job-by-job basis as well as look at weekly cash inflows such as draws and collections of receivables. This forecast should be updated each week and will assist you in identifying weekly cash problems and communicating payment plans with your vendors (if necessary).
Cash Management Tips
Developing a cash forecast will assist you in planning for your cash inflows and outflows. Following are some tips on managing your cash flow and making additional profits at it.
- One of the advantages of the custom building business compared to spec building is that you can use the customer’s money to pay off your trades and suppliers instead of using internal funds or construction loans. You should try to always be ahead of the customer and maximize the use of your client’s funds by taking a deposit and “front-loading your draw.”
- If you are front loading your draws it is imperative that you manage your books on a percentage of completion basis. This will enable you to understand and account for overbillings on your jobs. By using percentage of completion accounting you will always know when you are ahead on a job.
- Try to set up benchmarks for payments that correlate to the start of a phase rather than its completion.
- Take advance of vendor discounts. It is cheaper to borrow money to take a vendor discount. A 2 percent discount for paying in 10 days is like 72 percent per year. Considering it would be due in 20 more days anyway, pay up, where else can you be earning that great a return?
- Ask your subcontractors to take a discount if you pay them prior to the scheduled payment date.
- Set up a systematic method of paying your bills (e.g. the 10th and 25th). Keep “hand checks” (issued outside of check paying days) to a minimum. You may also want to consider mailing checks on a Thursday in order to take advantage of the “float” over the weekend.
- Use a “sweep account” to invest your excess cash. In a sweep account the bank will automatically move any amount that remains in your checking account over and above a specified balance needed to avoid bank fees into an interest bearing account. Many banks will allow you to sweep excess funds into a money market or higher interest bearing account than a normal savings account. I have found that with most banks, a builder having an average daily balance of greater than $35,000 would be able to earn interest income which would more than offset any bank fees related to having a sweep account.
- Time your larger draws so that you can get money into the bank before the close of business on Friday to take advantage of earning interest over the weekend.
- Time your loan draws to only take them when you are ready to disburse the cash. If you are borrowing money to build a house you can minimize your construction loan interest by only taking down the funds when you need them.
- Explore the possibility of obtaining a line of credit even though you may not need it at this time. It is easier to start up a credit line when you really don’t need the funds. A credit line will also provide you with flexibility in taking advantage of discounts.
- When setting up credit lines or construction loans don’t be afraid to ask for better rates. In most markets if you have a good set of financial statements, points and rates are negotiable.
Over the years I have seen more and more builders add some nice amounts to their bottom line in interest income and discounts earned as well as reducing interest expense by proper management and projection of cash flow.
Steve Maltzman is a CPA and is president of SMA Consulting, Inc. (www.smaconsulting.net). SMA Consulting, Inc. provides financial and business management services for builders and remodelers. Maltzman is Past Chairman of NAHB’s Business Management & Information Technology Committee.
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Business Management Resources Released at IBS
 Three new, free Biztools builder business guides ― created to help NAHB members manage their businesses more effectively and increase their profits were released at the International Builders’ Show in January at Las Vegas.
The guides offer members tips on technology, business planning, ensuring the financial health of their businesses and more. Each guide is comprised of member-written articles that offer tips and advice on topics to better ones business – especially in tough times.
Produced by NAHB's Business Management and Information Technology Committee, and found in the business management resources section of the
 NAHB Web site - www.nahb.org/biztools - the new 2009 Biztools builder business guides include:
- “Information Technology for Home Builders: Using Technology to Increase Efficiency”
- “Business Management for Home Builders: Succession Planning to Map Your Future”
- “Financial Management for Home Builders: Understanding Cash Flow”
All three concise guides ― which include lists of other valuable NAHB Biztools resources ― are free for members and HBAs. For electronic versions, go to www.nahb.org/bbg. To order hard copies, free of charge minus shipping, go to www.nahb.org/materialsordering.
Free 2007 and 2008 BizTools Business Guides Also Available
The 2006 and 2007 BizTools builder business guides are also available free to NAHB members and can be downloaded from the NAHB Web site in a PDF format only.
To view or download the 2007 and 2008 guides, click here.
Show Your Membership What NAHB Has to Offer
The BizTools Flyer free resource was also released at the International Builders' Show and available to members and HBAs. This flyer shows all the resources www.BuilderBooks.com and the Business Management Department have to offer.
Packed with resources to keep a business afloat, the flyer is the perfect introduction to NAHB resources an HBA can offer a new member - or remind veteran members as well.
To order hard copies, free of charge minus shipping, go to www.nahb.org/materialsordering.
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NAHB Members Elect Leadership for 2009
Members of the National Association of Home Builders (NAHB) elected four Senior Officers to top leadership positions within the federation during the association’s International Builders’ Show in Las Vegas.
Taking the helm as NAHB’s Chairman of the Board this year is Joe Robson, a Tulsa, Okla.-based home builder. A leader in the Tulsa area home building and development industries for more than 25 years, he is the founder and president of The Robson Companies, Inc., developers of residential communities and commercial properties.
“We look forward to working with the Obama Administration and the new Congress to develop policies that will help families facing foreclosure, stabilize home prices and put America’s home builders back to work as the engine of the economy,” Robson said. “NAHB will be pushing very hard for an economic stimulus package that recognizes the important role that residential construction plays in generating economic activity and jobs.”
Also moving up on the association’s leadership ladder during NAHB’s Las Vegas board meeting was Bloomfield Hills, Mich.-based home builder Bob Jones, who was elected to be NAHB’s First Vice Chairman of the Board. As president of Robert R. Jones Homes, he specializes in land development and the design and construction of single-family luxury homes throughout metropolitan Detroit. During Jones’s 35-year career, he has earned a reputation for excellence and established a continuing commitment to the home building industry across the local, state and national levels.
Reno, Nev.-based builder Bob Nielsen was elected to the post of 2009 Second Vice Chairman. Nielsen has over 25 years of experience in the industry and has overseen the development of more than 45 new home communities housing more than 4,500 families. He is president of Shelter Properties, a building and development company headquartered in northern Nevada that has constructed communities across the state and in California.
Barry Rutenberg, a Gainesville, Fla.-based home builder, joined the NAHB leadership ladder with his election to the post of Third Vice Chairman. Rutenberg is president of Barry Rutenberg and Associates, Inc. in Gainesville. He has more than 30 years of experience in the housing industry and has overseen the development of more than a dozen communities and 1,000 homes in the Gainesville area.
2008 NAHB Chairman of the Board Sandy Dunn, from Point Pleasant, W.Va., remains on the leadership ladder as Immediate Past Chairman. Dunn is a second-generation West Virginia home builder who has provided affordable housing to Mountain State residents for more than three decades. She is president of Point Pleasant, W. Va.-based B.J. Builders, Inc., a company founded by her father in 1953 that specializes in single-family, entry-level homes.
Rounding out the association’s leadership is NAHB Executive Vice President and CEO Jerry Howard, from Washington, D.C. Howard heads up a professional staff of more than 300 working out of the National Housing Center in Washington. After previously serving as the association’s chief tax counsel, Howard was promoted to EVP/CEO in February of 2001.
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NAHB Applauds ANSI Approval of National Green Building Standard™
 The National Green Building Standard™ for all residential construction work including single-family homes, apartments and condos, land development and remodeling and renovation was approved today by the American National Standards Institute (ANSI).
The approval signals a new era for the nation’s builders, remodelers and developers and also provides an extra measure of reassurance for home buyers, said Joe Robson, a home builder in Tulsa, Okla., and Chairman of the National Association of Home Builders (NAHB).
“The National Green Building Standard is now the first and only green building rating system approved by ANSI, making it the benchmark for green homes,” said Ron Jones, who chaired the consensus committee charged with developing the standard.
“The standard provides home builders and remodelers with a much more expansive third-party rating system that they can use to achieve green certification under NAHBGreen and the National Green Building Certification Program,” said Mike Luzier, CEO of the NAHB Research Center.
The Research Center provides certification for NAHBGreen projects, which until now have only included single-family homes. “Consumers are looking for authentic, verifiable green building practices, and now they’ll find them with a true industry consensus standard for residential green building,” Luzier said.
The standard defines what green practices can be incorporated into residential development and construction and how home owners can operate and maintain their green homes.
But the National Green Building Standard also provides for flexibility – allowing home builders and home buyers to make green choices based on climate and geography as well as style preferences and budget.
As part of the stringent process required by ANSI, NAHB and the International Code Council gathered a fully inclusive and representative consensus committee composed of a broad spectrum of builders, architects, product manufacturers, regulators and environmental experts. The work of the consensus committee was administered by the NAHB Research Center, an ANSI Accredited Standards Developer.
The consensus committee deliberated the content of the standard for more than a year, held four public hearings and evaluated more than 2,000 public comments in the development of the standard.
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Free Consultation Offered for NAHB Members
NAHB will offer a new member benefit to help answer questions and alleviate some of the financial pressure experienced during these extraordinary times from Feb.16 to March 13, 2009. The law firm Gardere Wynne Sewell LLP has agreed to provide a free consultation to NAHB members in the following three areas:
Bankruptcy/Reorganization
- Bankruptcy, reorganizations, out-of-court workouts, restructuring, foreclosures, deficiency judgments
Business Structures
- Director/officer issues, partnership issues, personal guarantees, business divorces
Operational
- Liens, developer disputes, subcontractor disputes
This valuable member-only service will be available beginning February 16th at http://www.nahb.org/legalconsultation. Members will be directed to a page with Frequently Asked Questions in the three areas mentioned above. For questions not answered, a post may be sent to the law firm, which will be responded to by email or phone.
For more information on this program, contact David Jaffe at djaffe@nahb.com
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