Tips for Increasing Cash Flow
If you've attended one of our full-day seminar/workshops and/or our three-day "Basic Business Boot Camps," I hope you walked away with the clear understanding that there are two things that put most trades companies out of business. <p>
The first, of course, is improper labor pricing. Not understanding what the company must charge per hour to cover its real costs of doing business (from a cash flow perspective) while generating a reasonable profit is a killer. The company may be growing at 20 percent a year, the marketing program might be the best in the industry, and the quality of the work can be literally unsurpassed in your region, but guess what? If you aren't priced right, nothing else really matters.
The second thing that puts companies out of business is cash flow. Bottom line, you might be priced absolutely perfectly, but if you don't collect the money it's as if you never did the job. This month we're going to talk about several cash flow tips you can use to help get the money coming in.
Before the job starts
First, be sure all the payment arrangements are settled up front. This alone will solve most of your collections problems. The biggest hurdle to overcome here is that many contractors are afraid to tell their customers how they want to be paid. They're concerned the customer may get upset and not purchase from them. But if you don't set the terms, who does?
Next, be clear whether payment will be made in cash, by credit card, by personal check, or billed to an open account. Part of defining when you are to be paid involves specifying how you are going to be paid: "Mrs. Jones, will you be writing a check, paying with cash, or using a credit card?"
Be sure your contracts include a schedule of dates or events that trigger when progress payments are to be made. Obviously, this is a situation where you are a subcontractor on a large commercial job. The job may be scheduled to take six months so the contract needs to specifically state: "When we finish this...we will be paid this." Make it crystal clear on the front end.
ollect at least the wholesale cost of any special order items in advance to prevent losses from canceled or changed orders. Collecting the wholesale amount ensures you will at least get your cost out of the job if the customer cancels.
Get a deposit on every job to cover the cost of materials and/or labor thus relieving cash flow pressures. Nearly all residential customers expect you to ask for a down payment, but only about one quarter of contractors actually asks for one. Also, don't assume commercial customers will not give you a deposit on the job. A surprising number of them will, but you have to ask. Getting a deposit up front will allow you to pay your materials bills on time, therefore taking the discount and increasing your profits.
During the job
Change orders should be written up and signed by the customer within 48 hours. The rule is: Have change orders written up and signed before you do the work. If work proceeds without written authorization, you may easily find yourself having performed work that wasn't authorized and for which you won't be paid. Verbal authorization won't cut it. Get it in writing or it can cost you a lot of money.
Change orders should be invoiced separately and billed immediately. Change orders are like new projects. They aren't part of the original project, therefore you have the right to bill separately and immediately when the change order work is completed.
When payment is in stage disbursements, does the customer understand that delaying payment will halt production? If you have approval for 27 homes but haven't been paid for the first three, it is time to halt production. I can guarantee that if you're having trouble collecting on the initial jobs, you'll also have problems with remaining ones as well. Cut your losses.
After it's done
Be sure all service tickets and installation paperwork are filled out completely, legibly, and accurately. This is pretty obvious. How can a company invoice the customer properly if they don't know what labor and materials were used on the job? Also, how can you job cost an installation without the proper data? The job is never done until the paperwork is completed.
Print a promissory note on the back of the Service Ticket to prevent C.O.D. calls from becoming unauthorized charges. Before a technician is dispatched, the customer should be asked how they plan to pay the bill. The only options should be cash, check, or credit card. Invoicing is not an option. Perhaps the customer tells you they will write a check. The tech does the work and the charge is $75. The tech then approaches Mr./Mrs. Homeowner and reminds them they had agreed to write a check. The homeowner then usually makes an excuse-their spouse must have taken the checkbook back to the office-and asks to be billed.
The tech then responds by asking him or her to fill out and sign a promissory note on the back of the service ticket. Chances are the homeowner will suddenly find another checkbook and/or dig up $75 cash. People get really nervous when they have to sign something that looks legal. Next time you have your service tickets printed, have a promissory note printed on the back.
Charge customers should be sent a bill immediately after the job is completed. When you bill is important. Charge customers should be billed immediately after the job is completed or at least within 24 hours. Don't wait to invoice.
Bookkeeping or late fees must be clearly noted on the initial invoice. If you plan to charge your customer a late fee for past-due invoices, keep in mind that the late fee (dollars or percentage of the bill) must be clearly stated on the original invoice sent to the customer. It is against the law to send three notices and then, on the fourth notice, charge a late fee. Past-due late fees must be clearly stated on the original invoice.
All monies held in retention require rigorous follow up. This one is obvious as well. Many times, the profit in the job (and often part of the cost) is all tied up in retainage. Do that rigorous follow up. The squeaky wheel really does get the grease.The above cash flow tips are just a few things covered in Grandy & Associates' three day "Basic Business Boot Camp." If you would like to attend a free 30-minute Webinar on the boot camps, simply call our office or go to our Web site, www.grandyassociates.com to view the times and dates. You can even register online. Hope to see you soon.