Businesses don’t fail because they are unprofitable. They fail when they run out of cash and can no longer keep the doors open, the lights on, and the employees paid. Sadly, cash-flow problems are more common than we like to admit. Following are 16 such drains to avoid that will save your business from closing.
Poor Pricing — The number one reason HVAC companies run out of cash is failure to charge enough. Usually, when a company fails to charge enough, the company is working just for time and materials. Know your numbers. Raise prices if necessary. Present them using a flat rate pricing system. This is a win-win scenerio.
Extending Credit — Accept cash, checks, and credit or debit cards. Do not extend credit. If asked, state that you no longer extend credit or bill customers. Payment is expected as soon as service is complete. This is key!
Too Much Corporate Commercial Service Work — Corporations often have slow pay policies where they stretch payments 90 or even 120 days. If a corporation or management company wants to delay payment, tell them you accept credit cards, just like the airlines.
Too Much Large Project Work — Large projects, whether residential new construction or commercial, often create problems when project payments are too infrequent or occur after payroll. Before accepting project work, smaller HVAC contracting companies especially should project expenses and receipts to identify the cash flow requirements.
Too Much Overhead — Payrolls padded with relatives who don’t carry their weight, suck cash from a business. A company is not a welfare program for the extended family.
Too Much Capital Investment — Contractors can get into cash flow trouble when buying too many new vehicles at one time or when moving into a new building.
Too Much High Labor Work — High labor content requires more overhead. If your company lacks a dual-overhead pricing program or incorrectly allocates overhead, high labor work reduces profit and cash.
Excessive Floor Plan — The inventory in a warehouse should be seen as stacks of cash. Floor plan discounts may not be attractive enough to tie up the cash required.
No Line of Credit — A bank line of credit can bridge a cash shortfall for a company determined to chase project work. However, lines of credit must be established in advance of their need and must be exercised from time to time, even when not needed.
No Service Agreement Reserve — Contractors get into trouble when selling service agreements and spending revenue without holding a reserve to pay for pre-paid maintenance labor.
No Warranty Reserve — The lack of a warranty reserve can also create problems for contractors when jobs go bad. Even if a manufacturer is paying for labor, a reserve helps bridge the gap between payroll and receipt of the manufacturer labor allowance.
Too Much Home Warranty Work — Home warranties can seduce contractors since they result in calls with little effort. However, warranty work is typically low margin and should not be allowed to suck capacity away from higher margin service.
Too Much Overtime — While overtime bears little to no overhead if all overhead has been allocated against standard labor hours, it nevertheless results in more labor and burden expense, which can be problematic when cash is constrained.
No Cash Flow Forecast — Annually, contractors should forecast monthly cash flow requirements and take steps to hoard cash for, and restrain spending during tight periods.
No Cash Cushion — A cash cushion held in a separate investment account is the ultimate insurance policy against cash flow problems.
For Matt Michel’s “Guide to Weathering a Cash Flow Storm," call 877.262.3341 and ask for a free copy from a
Service Roundtable Success Consultant.
Matt Michel is CEO of the Service Roundtable. The Service Roundtable is an organization founded to help contractors improve their sales, marketing, operations, and profitability. Call toll free: 877/262-3341.
