Regardless of which side of the ticket you’re on, the upcoming election is going to impact your business one way or another. Then when you add into it the recession that we’re in and the decrease in discretionary income on the part of the consumer – it only makes the market tighter. It was Warren Buffett who said when the tide goes out that you can see who has been skinny dipping. Isn’t it interesting that when sales are good it’s easy to hide a lot of messiness in your business. It’s easy to get lax and let some of the details slip. It is imperative that you are hyper focused on the financial side of your company. Here are five things that you can do now to put your company in the best possible position to weather the storm.
1. Proper labor pricing
Get your pricing in line today. Your hourly rate needs to be set at a level that can cover all of your expenses and generate the profit targets that you are looking for from a cash flow perspective. Remember that your profit loss statement will lie to you every day of the week. It’ll tell you you’re making money even if you’re not. Keep in mind that there are a couple of non-cash expenses that you will be incurring on a regular basis that don’t show up in the expense portion of your P&L. The first of those is Equipment replacement costs. Your P&L will show a line item for depreciation that deals with what you paid for a truck two, three, or four years ago. Equipment replacement costs on the other hand as a cash flow item that deals with what it’s going to cost you to replace that same truck two, three, or four years from now in the future. That is what needs to be built into your pricing. For the typical contracting company, depreciation will be 25 to 35% less than your actual equipment replacement costs.
The second item is loan payments. If you have a $500 monthly loan payment and of that 400 is principal and 100 is interest what shows up on your profit loss statement? It’s only the interest. The other $400.00 that’s going toward the principal is showing up on your P&L as profit. Again we’re underreporting the actual cash required to run your company. Make sure your labor rate is set so that you can cover all of these expenses from the cash flow perspective.
2. Pay down debt
Again, remember Warren Buffett’s comment – when the tide goes out, you can see who’s been skinny dipping. The more debt you’re carrying in your company, the more pressure there is on the cash flow side of your company. Just because you had a slow month doesn’t mean the bank is going to give you a pass on making your monthly van payment. You still must come up with the money every single month to make that loan payment.
Paying down debt also includes reducing the balance on your line of credit. When the economy tightens up the 1st place lenders will look at is the lines of credit. The first lines of credit they will look at will be those that are maintaining a high balance where borrowers are just making monthly interest payments. This tells them a lot about the financial state of your company. You don’t need a line of credit, what you need is a short-term loan. We’re already seeing contracting companies whose lines of credit are just being reduced automatically without any notification. Don’t get yourself in a tight cash position because of a high line of credit. Start paying down the balance on that immediately.
3. Improve recurring revenue streams
Look for areas in your company where you can create recurring revenue streams. Your maintenance agreement program is a prime example of this. During the last recession, we studied this quite a bit. What we found is that consumers know that they need to maintain their systems, but when faced with the choice of putting food on the table or maintaining their system, they’re going to choose food. If you’re charging annually for your maintenance agreement, your attrition rate will be significant. If you’re not already doing so, change your maintenance agreements to a monthly plan. Many consumers will look at it and say I can’t afford $300.00 but I can afford $25.00 a month. Make it easy for them to pay.
As you switch customers over to monthly payments, there are two points to remember. First, it needs to either be charged to a credit card or debit card directly to their account. You don’t want to be creating a collections nightmare over these monthly invoices. 2nd change the verbiage on your maintenance agreements to read something like this “agreement will stay in place for a minimum of 12 months or until the customer calls to cancel thereafter.” This way the agreement just stays in place, and you no longer have to get an annual renewal.
4. Master consumer financing programs
The average savings account for consumers today is getting smaller and smaller. The typical consumer has less than $3000 in their savings account, and they don’t have what one might consider an emergency fund. They’re not planning on their systems breaking down. This being the case you’re going to have to provide some type of financing for them to be able to purchase the systems that you’re selling. Most manufacturers will provide some type of consumer financing. I am a firm believer that you should participate in at least two different financing company programs. Not every company will approve every customer, and you need to have more than one option. At the same time, many equipment manufacturer programs will provide discounts to incentivize customers to make purchases now. Learn these programs and implement them today. The huge advantage is the customer can buy the system that they want, and you get paid.
5. Monthly financial review
Putting all these elements in place is great but if you’re not reviewing the numbers, you don’t know how they’re working. You need to perform a monthly financial review. This review should be done by the business owner, the numbers person or bookkeeper, and any other key managers in the company. You should review your profit loss statement, your balance sheet, your payables, and your receivables. At the same time, you should also review your Hill and Valley account to make sure that you’re putting money aside to cover the slow times. After all, they are coming. If you do this on a monthly basis it shouldn’t take you more than 30 minutes a month, but it will start to tell you a story about your company that you can’t see if you’re not looking at it regularly.
Implement these five areas into your company today. While we can’t control what the economy will do, we can control some of how it affects our company. Each of these items will improve your financial position and allow you to weather the storm knowing that your company is on a firm foundation.
If you need help with looking at your company’s cash flow or labor pricing, take a look at our Planning For Profit Software which will let you know exactly what you need to charge each month to cover your company’s cost of operation and generate the profit targets that you’re looking for at the same time you’ll create month by month cash flow budgets and have pricing tools in place to manage your jobs to the profitability targets you’re looking for.
