By SKIP SNYDER
Cash flow. Were there ever two words more important to contractors?
There are obvious topics that come to mind when discussing cash flow, such as how your company handles its accounts receivable. However, good cash flow starts with a great business model. Over the years, I've found that addressing cash flow without addressing the core of your business plan is no different than hearing a stampede of hooves, and not knowing if it's horses or zebras heading your way. So, the first step in improving cash flow is to formulate a solid business plan — one that delivers profits, promotes best practices, and provides the chance to grow the business when the opportunity presents itself.
You've probably heard this definition of insanity: "Doing the same thing over and over and expecting different results." Just think about how you manage your business. What innovative changes have you made in the last twelve months that resulted in better business? If the answer is "none," you've wasted a year of your time and, more importantly, the opportunity to improve your business and provide opportunities to your employees.
There are a number of ways to enhance cash flow while also developing better business practices. I've learned many of these practices from my years of experimenting with what works best. I'm also drawing from my years in an Air Conditioning Contractors of America (ACCA) management information exchange (MIX) group, which was the single best commitment I've made in my professional career.
Here are some ways to improve your business' cash flow:
• Review your lines of credit with your lender. When was the last time you shopped for better terms? Are you still using "personal guarantees" for your business? If you've been in business for 10 years and still need to personally guarantee your lines of credit, I believe you need to re-evaluate your levels of risk.
When building your business, part of your business plan should include self-funding your cash needs so the lines of credit from banks are used only occasionally for short-term, unusual circumstances. In today's litigious world, personal guarantees are dangerous.
Besides, add up all the interest payments you make for using these lines of credit, when, in fact, with adequate cash, you don't need truck and car loans. When combining your interest payments for business debt, it's a substantial cash drain. Adequately funding your business through retained earnings will provide additional income, allowing you to avoid paying interest. This will result in additional cash, as you'll be discounting your vendor bills.
• Establish your business relationship with your customers before you conduct business. At The Snyder Co., we use our credit application to establish credit and to spell out the terms and conditions of our relationship before we begin working.
Our credit application claims "venue" where my company is located — in the suburbs just outside of Philadelphia. This means we fight any legal battles on my attorney's turf; it's quicker and we know the terrain.
Next, we spell out that the customer is responsible for all the costs of collection, attorney's fees, and 18% interest on the outstanding balance. We also make the customer responsible for other conditions that we tailor to each specific situation. I can hear you saying that no one "in their right mind" would sign this credit application, but 98% of my commercial customers do sign it. Why? Because they need our service.
The bottom line here is to create a situation where if the customer decides not to pay, I can sue. Obviously, if I do something wrong I can't sue for damages; the only time I would sue is when the customer decides not to pay. The customer controls this environment. And, by the way, when a customer decides (for whatever reason), not to pay, I ask them to give their attorney the credit application before I start litigation. This usually solves the problem.
• Consider unique business strategies. I have two that have generated high-profit work, and increased cash flow, without the customer requesting additional bids. One is a simple "water meter" that we install on each commercial boiler we service. The water meter costs less than $100 and monitors the heating system for leaks. If water consumption is registered, the customer has a leak and it needs to be found. That task is usually given to us.
Loss of water in a closed heating system will accelerate deterioration on the boiler and system, expose the boiler to thermal shock, increase water/sewer bills and fuel consumption, develop sediment in the system resulting in heat distribution problems, and possibly damage the circulators and pumps. What customer would not want you to find the leak?
Another unique business strategy is the "lease based on energy savings" program that we developed during the 1980s. In essence, we offered to install hundreds of thousands of dollars in new heating equipment over a set period of time, with our payment being the difference between the original fuel costs (calculating the degree days) and the reduced fuel costs resulting from new, efficient systems.
This program lasted about eight years and saved our customers hundreds of thousands of dollars while giving us Design/Build opportunities and a strong revenue stream.
Shop for "dead inventory." This is inventory that has sat on the vendor's shelf long enough that factory warranties expired. We contact specific vendors each year towards the end of their fiscal years asking for lists of dead inventory. We review the list and offer a fraction of the original vendor cost to get the inventory off their books. We take the equipment and update critical components before offering the systems to our customers; the discounted costs allows us the opportunity to upgrade the equipment for resale.
We inform our customers and extend our warranties. In every case, the value we save by discounting the purchase, plus the value we save our customer, makes this a win-win strategy. Our extended warranties also allow us to own the customer for a longer period. The cost for the extended warranties is covered by our deeply discounted cost for the equipment.
• Sell preventive maintenance programs. The contract for your maintenance programs should accomplish several things. First, it should offer the customer factory recommended maintenance; next, it should include visits during the heating/ cooling season to check performance; and, finally, the contract should be "prepaid," injecting cash into your company for future performance. A good preventive maintenance program will allow you to own your customer during the heating/cooling season and provide "filler" work to give your technicians a 40-hour week. All of these things, as well as the opportunity to be in front of your customer and provide company labels on the equipment under contract, are cash-flow bonanzas.
Don't Settle for Mediocrity
There are numerous other ways to ensure a strong cash flow in your business, including tracking the wages of technicians vs. billable hours, selling your dead inventory, and using part-time help when possible
The point is, an HVACR business has a tremendous profit potential while delivering quality. Unfortunately, too many of us settle for mediocre results. Too many of us are reacting to situations, constantly putting out fires trying to keep up with payroll, accounts payable, and not spending nearly enough time developing our businesses. This single issue is the largest problem we face when addressing cash flow. It has been said many times before, but you must work on your business, not in your business.
Skip Snyder is president of the Snyder Co., Upper Darby, PA, and a past national chairman of the Air Conditioning Contractors of America (ACCA). He can be reached at 610/789-3000, e-mail firstname.lastname@example.org.
This article is based on the session Cash is King: Understanding Cash Flow and How to Keep Afloat, which Skip Snyder gave at the Air Conditioning Contractors of America's (ACCA's) Conference and Indoor Air Expo, held March 6-8 in Orlando, FL. For more information about ACCA or the conference, visit www.acca.org.
Image courtesy of Artville