Managing cash flow and ensuring profitability are critical to the success and sustainability of any roofing company.
Many articles on this topic often suggest quick fixes such as using a payment processor, leasing equipment, and negotiating with suppliers. While some of these may help in the short term, they are merely band-aids for a deeper issue prevalent in many roofing companies and (U.S. households alike): we're spending more money than we're making. Many of us don't have a detailed business plan, and even fewer have a true STRATEGY for the business. These suggested solutions may alleviate cash flow issues but at the expense of profitability (payment processors for customers adding a 3% cut into your margin, leasing equipment (that you can't afford), asking for longer payment terms from vendors (delaying the inevitable), or using credit cards to pay for materials or other expenses).
True cash flow management and profitability require a methodical and judicious approach. Here are the key components you need to focus on that we have observed from working with multiple roofing company owners:
1. Build a Business Plan with a Detailed Budget and Forecast
You may be saying, "I already have a business plan!"
Well, if you're here reading this post on fixing cash flow and profitability, then your plan probably isn't working (or you aren't following it), and it's time to start at the beginning.
Strategy First
As Roger Martin (named in 2017 as the world’s #1 management thinker by Thinkers50, a biannual ranking of the most influential global business thinkers AND former dean of the Rotman School of Management at the University of Toronto) has repeatedly said, "A Plan is Not a Strategy."
Strategy is finding a problem to solve.
Start by asking yourself, “Who is our (ideal) customer?” Most of us know by now who our ideal customer is, and at the very least, we know who our ideal customer isn't! Just saying “Roofing” or “Residential Roofing” is way too broad. We don't want to work for anyone with a heartbeat and a checkbook. That’s a pay-to-play market with 5,000-10,000 roofers to compete within major cities and at least hundreds to several thousand in medium-sized markets – that’s not a strategy. We need to define “Where to play” in the market. Then we need to determine how we're going to WIN in that market. What problems does that (target) customer have that we're going to solve in a better way than anyone else? All roofing companies have access to the same materials, the same labor, the same technology... so how are you going to differentiate in a meaningful way?
Roger suggests that the questions to ask when you’re evaluating options for a strategy for your company are:
"What would have to be true…
…About the customer, for that to be a great idea
…About our capabilities, for that to be a great idea
…About the competition, for that to be a great idea
Things to keep in mind when you’re forming a strategy for your roofing company:
What else do we need to think about?
You also need to consider how to generate at least SOME recurring revenue. (Think rental property owners, property management companies, multi-site apartment complex owners, and commercial - (and niche yourself into certain building types or locations if possible for commercial).) Most roofers have to sell their way to freedom every month, with 99.9% of their revenue coming from totally new customers. Developing a strong referral business network should be an important component of your plan as well (insurance agents, realtors, general home inspectors, title agencies, other (non-roofing) contractors, home builders, larger landscaping companies, etc.).
Once you have outlined a clear strategy for how you will compete in the market, your target market segments, your unique selling proposition, and how you will win over customers in those segments, then you need a DETAILED business plan.
Creating a robust business plan is the foundation for managing cash flow and profitability.
This plan should include a detailed annual budget and a comprehensive 3-5 year forecast covering cash flow, profit and loss (P&L), and balance sheet projections. A solid business plan acts as a roadmap, guiding your business decisions and helping you stay on track. You need to work with your internal finance person or your external accountant/bookkeeper on developing this and tracking against it.
Detailed Roofing Specific Accounting
You need to work with a bookkeeper/accountant that KNOWS roofing and who WANTS to take the time to understand YOUR business. They should design your accounting system to allow you to have a line of sight on all of your detailed Cost of Goods Sold (subs, materials, satellite measurements, sales commissions, referral fees, field management) and all of the details of your overhead (rent, insurance, software, payroll, lead gen expenses, etc.). You should look at these numbers monthly if you're struggling and at least quarterly if you're not. You should learn to have an opinion about these numbers. Are your actual project margins tracking to what you designed in your pricing tool and your forecast? Can you afford your overhead with the sales and profit you're generating? If you can't figure out the answers to these questions, get someone to help you!
Budget Discipline
A well-designed budget is crucial. However, sticking to it is even more important. Avoid non-budgeted expenses that can derail your financial plan. Discipline in following your budget helps maintain financial health and achieve long-term profitability. Regularly review your budget against actual performance to identify variances and make necessary adjustments.
"Profit First" Mindset
Mike Michalowicz says we should make our businesses profitable by design. Build your business to pull profit out first, then taxes and owners' compensation. Then, the business has to live on what's left. This forces us to run our roofing companies responsibly and not have bloated overhead that we simply cannot afford. For many of us, if profit is always what's left after everything else gets paid, there won't be any profit.
2. Use a Pricing Tool with a Waste Calculator
Accurate Pricing
Using a pricing tool with a waste calculator is essential to safeguard your profit margins. Roofing jobs can have significant variability, and accurate pricing ensures you cover all costs and maintain profitability. Tools like SumoQuote, or the estimating features in Acculynx, Leap, or Roofr, are invaluable for consistent and fast quoting. These tools can also help you provide more accurate quotes to customers, with a professional presentation that improves your credibility and chances of winning bids. You can also build an estimator with waste calculations in Excel at a much lower cost, but you'll be missing out on the crisp proposal creation component and the "speed to lead" benefit from these tools is critical in a competitive market.
Profit Margins
Your profit needs to factor in current market/competitor dynamics, but also your forecasted business plan. Never stray from your pricing strategy once you have your target project gross margin in place. You can charge more, but never less. Consistency in pricing helps maintain profit margins and avoids the risk of undercutting your services. Regularly review your pricing to reflect current market conditions, material costs, and labor rates.
3. Stay Out of Debt
Debt-Free Operations
Operating without debt is crucial for cash flow management in a cyclical industry like roofing. You should not buy something if you can't afford to pay cash. Do not finance growth through debt. Debt payments can choke your cash flow, making survival difficult during slower months. Maintaining a debt-free operation allows you to reinvest profits back into the business and live off of them during economic downturns. Paying interest should NOT be part of your business plan when margins in roofing are already razor-thin.
Debt Reduction
If you are already in debt, getting out of debt should be your first priority. Work with your accountant/bookkeeper to review all of your overhead costs to see what can be eliminated. At the risk of stating the obvious, ALL "discretionary spending" needs to be put on hold. Act as if your life depends on it. As Dave Ramsey says frequently "You're in debt, you're broke!" You can use his personal finance approach to snowball your debt. This method involves paying off smaller debts first, then moving on to larger ones, thereby quickly gaining momentum and reducing overall debt. By eliminating debt, you free up cash flow that can be reinvested into your business or saved for future needs or managed growth.
Vendors Aren't Banks
Do not use vendors like ABC, Beacon, or SRS as "banks" for your business. Using the 30 or 60-day terms you have with these distributors to pay for other things you want is playing with fire, and if you get upside-down with them, you will put yourself in a position not to be able to buy materials from them, and you'll quickly develop a bad reputation in the market (they all talk to each other...). Pay your materials vendors, subcontractors, and sales reps first, then cover your overhead, ensuring you are the last to get paid. Many of these vendors offer a 1% discount (that you should always take advantage of, for paying by the 10th of the month following your invoice date (this is typically less than net-30). This discipline ensures that your operational expenses are covered without accumulating debt. Building strong relationships with your suppliers and negotiating favorable payment terms can also help manage cash flow, but don't over-exploit your payment terms.
Tax Payments
Pay your taxes first, not last. This includes payroll taxes and estimated quarterly tax deposits on your company's profit. Falling behind on taxes can result in severe penalties that can cripple your business. Setting aside money for taxes when you receive payments ensures you are always prepared.
Cash Reserves
Build and maintain six months of overhead cash flow reserves. This reserve will help you survive during slow months and provide a financial cushion against unexpected expenses. Regularly contribute to this reserve, treating it as a non-negotiable expense in your budget.
4. Controlled Growth
Sustainable Growth
Do not try to grow too fast, regardless of how well your roofing company is performing. Rapid expansion without proper financial planning can strain your resources and cash flow. Focus on sustainable growth that aligns with your financial capabilities. Controlled growth allows you to maintain quality, manage risks, and ensure that you are not overextending yourself.
Avoid "Keeping Up with the Joneses"
It’s better to be a smaller, profitable company than a large, struggling one. Avoid the temptation to invest in offices, flashy trucks, or expensive technology stacks unless you have the cash reserves to pay for them outright. Prioritize investments that directly contribute to your profitability and growth. Remember, the goal is to build a financially stable business, not to impress others with appearances. We're not saying these things can't contribute to sales or contribute to a strong business operation - but you need to PLAN for these expenses in your forecast and manage them when you're truly ready.
5. Lead Generation and Sales Rep Compensation Cost Control
Lead Generation Strategy
Determine how you will generate leads and measure the costs associated with each lead generation source. Understanding the return on investment (ROI) for your lead generation efforts is crucial. Develop a "lead efficiency ratio" to measure the profit generated for every dollar spent on lead generation. This ratio helps you identify the most cost-effective marketing strategies and allocate your budget accordingly.
Lead Cost Management
By understanding the profitability of each lead source, you can prioritize your investments in the most effective marketing channels. This strategic approach ensures that your marketing budget is used efficiently and contributes to your overall profitability. Regularly review and adjust your lead generation strategies based on performance data. Just because a lead expenditure paid for itself doesn't mean it's a good investment. If you can generate 2-3X the profit (or more) for the same dollars spent on another lead source - then that's where your money should go.
Sales Rep Comp Structure
We recommend a flat commission structure based on a percentage of the roof's sales price. This should vary for self-generated leads vs. company-provided leads. This approach (vs. a profit split method) allows for better forecasting controls in your business modeling, AND sales reps know at the point of "signed contract" what they stand to make on the deal. It also allows for a partial payout following the build-date to the rep from the ACV/Deducitble payments rather than waiting until the end to calculate profits.
While this means giving up more margin to the sales team for self-gen, it means you, as the owner, are at less risk than sinking a large budget into paid leads or marketing. Equipping the sales team with a great canvassing tool like SalesRabbit, Lead Scout, or Canvass, will make it easier for them to manage lead intake into your CRM and inspection scheduling and provide tracking tools to monitor their performance against KPI goals. Your 5-star reviews that result from great sales experience and great field management will help bolster your organic SEO (along with good CMS on your website).
As your business matures and you set aside cash reserves, you can THEN begin to re-invest profits on paid SEO, paid leads, direct marketing, events, etc., while still continuing to monitor the efficiency of these dollars spent by lead source.These investments should aim to make your customer acquisition cost for company-provided leads (to the sales team) LOWER than the delta between their self-gen and company-provided commission rates.
Having great management systems in place should allow you to track this to grow the company intelligently.
6. Develop and Track Key Performance Indicators (KPIs)
Financial and Non-Financial KPIs
Develop KPIs that track both financial and non-financial metrics. Financial KPIs might include revenue growth, profit margins, and cash flow. Non-financial KPIs could include customer satisfaction, employee productivity (in sales, this has several potential measures), and lead conversion rates. These KPIs provide a comprehensive view of your business performance and help you identify areas for improvement.
Accountability
Hold yourself and your team accountable to these KPIs. Regularly reviewing these metrics helps identify areas for improvement and ensures that your business stays on track toward its financial goals. Setting specific, measurable, achievable, relevant, and time-bound (SMART) goals for each KPI can enhance accountability and performance.
7. Accepting Credit Cards and Timing of Customer Payments
Timing of Customer Payments
Payment timing should be well spelled out in the SIGNED CONTRACT you have with the customer. This should also be a point of discussion between the sales rep and the customer to clearly set the expectation that RETAIL builds and REPAIRS must be paid in full on-site at the time of completion of the work. For INSURANCE claim projects, the expectation should be that ACV and DEDUCTIBLE (and any upgrades/change orders) are paid at the time of completion. You must also have clearly spelled out language in your contracts (and verbally with clients) that explains the DEPRECIATION payment and the SUPPLEMENTING process. Collecting these payments via checks is preferable because you're not giving up merchant fees that eat into your already tight margins.
Accepting Credit Cards
If you want to accept credit cards to make your services available to a wider audience, you should either explain to the customer up front that if they pay cash (check) they will get a 3% discount (or whatever your merchant fee is). Otherwise they will pay "full price" for the roof/repair. If you live in a state where passing on credit card fees is not allowed, you should consider a revised approach which is to just factor an additional 3% into all projects that is not a line item cost, with the mindset that many people will pay by credit card and for those that don't, you'll make 3% additional profit!
The point is... don't let merchant fees eat into your precious margin. Protect your gross margin at all costs! (pun intended 😀)
8. Leverage Technology: The Benefits of Great Tech Stack Integration and Efficiencies Through Automations
Your Tech Stack
It goes without saying, that a full discussion on what tools you should be using warrants a full blog post/discussion. We should agree then for the sake of brevity, that you should invest in the right tools for YOUR business that have a great CRM at the core and other apps we have discussed for estimating, canvassing, field management, job progress tracking.
Why is this important for managing cash flow and profitability? The right tools can drive efficiency in the sales process, customer communication, project management and management reporting. Needless to say, using the right software can leave a positive impression on your prospects and customers that could make the difference in closing the deal or that 5-star review.
There are of course several roofing industry focused apps such as AccuLynx, GiddyUp, Leap, JobNimbus, Roofr, and others that either have some of these features build in and integrate with external apps where they don't. You can also try broader contractor solutions like ServiceTitan or non industry specific market leading CRM tools like Hubspot. If you deploy Hubspot, you'll want someone who knows roofing like Adam Sand to customize it for you. Ideally your CRM shouldn't just be a pipeline management tool, but should then transition as a project management tool with a customer facing portal where your clients can follow all the information (schedule, contract, inspection photos, key contacts) and especially task management for closed deals to manage your team's workflows such as this one:
Automations
Whatever CRM you're using, either out of the box automations or with the help of tools like Make or Zapier, or by integrating best-of-breed apps together, you should always be looking for new ways to make your business more efficient through the deployment of technology and automate as much of your workflows as possible.
Conclusion
Mastering cash flow and ensuring profitability require a strategic and disciplined approach. By building a detailed business plan that is based on true STRATEGY, using accurate pricing tools, staying out of debt, managing taxes and cash reserves, growing sustainably, controlling lead generation costs, and tracking KPIs, you can achieve long-term success and financial health for your roofing company. Remember, the key is not just making money but managing it wisely to build a sustainable and profitable business.
If you need help with formulating strategy, building (or rebuilding) your business plan, your budget, a forecast, and tying reliable accounting together, or just want to discuss some of the points made above in this post, be sure to book a conversation with an advisor at One For The Books.