FINANCIAL MANAGEMENT - PAYMENT SCHEDULE
The contract for every job you take on should include a payment schedule; that is, a net amount or percentage of the total price that you receive as a draw in advance, or upon billing for each milestone of the jobs progress, such as slab, rough, trim, etc.
If you estimate by computer, you should know more accurately the cost for each increment of job progress, so youre aware of what your draw should be. With manual estimating, you probably have a set formula, perhaps 50 percent for slab, 30 percent for rough, and 20 percent for trim. Be cautious under this arrangement since the draws you get for the early stages may be more than your actual costs, resulting in later stages being under-billed in relation to incurred cost.
While it is great to receive all of your money up front, your billings should closely agree with the actual current cost. You dont know if youre making money when current period billings do not reflect current period cost. Your (apparently healthy) bank balance may cause you to overspend, resulting in cash-flow shortages during the latter stages of the job.
Be sure that your draws are billed correctly so that your expenses do not exceed your income in any billing period. Keep track of how much youre billing in advance. You can control cash flow by manipulating the material order schedules.
NOTE: For other closely related topics, be sure to review the section on Budgeting (#44) in this series of articles on Financial Management.
Mike Holts Comment: This newsletter was extracted from my Business Management and Management Skills Workbook. Watch for our next newsletter, and as always, we encourage your comments and feedback. Send us your real-life experiences. Please respond to Barbara@mikeholt.com.
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