Are You Making These 7 Mistakes with Cash Flow in Your Custom Home Building Business? A Guide for Builders

Custom builders can often feel like they’re on a roller coaster when it comes to cash flow. As a builders business coach, I’ve seen many small-to-medium construction business owners rides the ups and downs of managing their cash flow. It can be especially challenging when you’re trying to balance the demands of running a high-end custom home building business. But the good news is, with the right strategies, you can take control of your cash flow and set your business up for long-term success.

I’m Ashley Thomson, and I’ve spent over 20 years helping businesses thrive. My team of coaches and I provide business coaching for builders so we know what it takes to drive growth and efficiency. In this article, I’m sharing my insights on managing cash flow in your custom home building business so you can trust that you’re getting expert advice tailored to your needs.

As you read about these cash flow mistakes, I encourage you to question if these are happening in your business. If you think the answer is probably ‘no’, take a beat to make sure it’s definitely not. Now on to the seven most common mistakes builders make with cash flow and how to avoid them.

Underestimating Project Costs

Underestimating project costs is a common mistake that can lead to significant cash flow issues. To avoid this, I advise my clients to create detailed project budgets that account for all potential costs, including materials, labour, permits, and contingency funds.

It’s crucial to review and update these budgets regularly. Keeping track of expenses and adjusting your budget as needed ensures you stay on track and can address any discrepancies before they escalate.

For example, one of my clients underestimated the cost of materials for a custom home build. By creating a detailed budget and regularly reviewing it, they identified and addressed the shortfall early, preventing a cash flow crisis. This proactive approach highlights the importance of meticulous planning and regular financial oversight in maintaining a healthy cash flow.

Failing to Invoice Promptly

Delays in invoicing can wreak havoc on your cash flow. As a builders business coach, I often suggest setting up an invoicing schedule to ensure invoices are sent out promptly upon completion of work or at predetermined milestones. This helps maintain a steady flow of payments and reduces cash flow disruptions.

Following up on overdue invoices is equally important. Implementing a system for tracking and following up on late payments can help avoid cash flow gaps. This could include automated reminders, personal follow-ups, or working with a collections agency if necessary.

For example, one of my custom home building business coaching clients used to delay invoicing until the end of the month, which led to inconsistent cash flow. By implementing a more frequent invoicing schedule and following up on overdue payments, they saw significant improvements in their cash flow stability.

Not Keeping Track of Expenses

It’s easy to lose track of expenses when you’re busy managing multiple projects. However, failing to monitor your expenses can lead to cash flow issues. I coach builders to use accounting software to keep track of all expenses and generate accurate financial reports. This software can help you categorise expenses, track spending patterns, and provide a clear picture of your financial health. business coaching for home builders

Scheduling regular reviews of your financial reports is also crucial. By setting aside time each week or month to review these reports, you can identify any discrepancies or areas for improvement. This proactive approach can help you catch issues early and make informed decisions to keep your cash flow healthy.

For example, one of my clients implemented accounting software and started reviewing their financial reports weekly. This change allowed them to identify unnecessary expenses, such as recurring subscriptions they no longer needed, and make adjustments. As a result, they saw a noticeable improvement in their cash flow management and overall financial stability.

Ignoring Seasonal Fluctuations

Many builders experience seasonal fluctuations in their business, which can significantly impact cash flow. An easy win in business coaching for home builders is to plan for these seasonal variations by identifying periods of high and low demand and adjusting their cash flow projections accordingly. This involves analysing past performance data to predict future trends and preparing for any potential downturns.

Building a cash reserve during peak seasons can also help cover expenses during slower periods. This strategy ensures that you have the necessary funds to maintain operations and pay for essential costs, even when business is slower.

For instance, a custom home builder coaching client of mine managed to reduce expenses by $2,000 by pausing unused subscriptions and building a cash reserve during the busy season. This proactive approach helped them manage cash flow during the off-season, ensuring they had sufficient funds to sustain their business.

Overextending Credit to Clients

While offering credit to clients can help secure projects, overextending credit can lead to cash flow problems. As a builders business advisor, I recommend my clients to set clear credit terms and establish and communicate these terms to clients, including payment deadlines and interest on overdue payments. It’s important to ensure that clients understand and agree to these terms before starting any work.

Monitoring your accounts receivable and limiting the amount of credit extended to each client is also crucial. Regularly review your accounts receivable aging report to identify overdue payments and take appropriate action.

For example, one of my clients implemented strict credit terms and reduced their outstanding receivables by 30%, significantly improving their cash flow. By setting clear expectations and closely monitoring payments, they were able to maintain a healthier cash flow and reduce financial stress.

Failing to Forecast Cash Flow

Without a clear understanding of your future cash flow, it’s challenging to make informed financial decisions. As a builders business coach, I often suggest to business owners that they create cash flow forecasts using historical data and project timelines. This process helps in predicting the inflows and outflows of cash, allowing you to plan for upcoming expenses and avoid unexpected cash shortages.

Reviewing and adjusting forecasts regularly to reflect changes in your business is also essential. This involves analysing your cash flow projections against actual performance and making necessary adjustments to ensure accuracy. Regular reviews help you stay on top of your finances and identify potential cash flow issues early on.

A client of mine started creating monthly cash flow forecasts and reviewing them regularly. This proactive approach helped them identify potential cash flow issues early and take necessary steps to address them before they escalated. By maintaining accurate and up-to-date forecasts, they were able to make more informed financial decisions and improve their overall cash flow management.

Not Seeking Professional Advice

Managing cash flow can be complex, and it’s essential to seek professional advice when needed. I recommend that you consult with a builders business coach or financial advisor to get expert advice on cash flow management and financial planning. These professionals can provide tailored advice and strategies based on your unique business needs, helping you navigate financial challenges more effectively.

Attending workshops and training sessions can also help you stay updated on best practices and strategies for managing cash flow. These events often cover a range of topics, from cash flow forecasting to expense management, and can provide valuable insights and tools that you can implement in your business.

Locking it Up – advice from a Builders Business Coach

By avoiding these seven common mistakes, you’ll position your custom home building business for long-term success. Managing cash flow is crucial to the health of your business, and taking proactive steps to improve your cash flow management will ensure you have the financial stability to grow and thrive.

If you’re unsure where to start or need tailored advice, speak with one of our business coaches about a plan for cash flow that suits your business needs. Together, we can build a strong foundation for your custom home building business.