By Tom Grandy
The years 2008 and 2009 were really rough years for most small businesses. Now granted, some reading this article were not even in business 12 years ago, but those that were, will remember the financial bottom fell out of the system. Money became tight, people were not buying,and unfortunately many small businesses failed during that time.
Most tragedies have a silver lining, eventually. The silver lining back then was the “wake up call” for small businesses in terms of getting out of debt and putting money back for a Rainy Day Fund. The companies that were able to survive 2008/2009 were the ones with the least amount of overhead, especially in the area of debt, and those that had a Rainy Day Fund to fall back on.
Most reading this article have children. As parents, there are always specific things we tell our children not to do. If they do it anyway, there are consequences. It the behavior continues the consequences increase. If the parent is consistent, and loves the child, they are relentless with the consequences knowing that if the child does not learn the desired lesson it will have far worse repercussions down the road.
Bingo! Here we are in 2020, over 10 years later, with a test. Did you learn the lesson? No, the current virus is not a financial breakdown but from a business standpoint it can very well turn into that. Let’s assume I am your parent for a couple of minutes. It’s time to restate the desired behavior and to once again explain the consequences if behavior is not modified.
Become Debt Free
Debt always has been and always will be a killer. It’s not so much that the debt itself is bad (although it is) but it’s the fact that it serves as a huge blinking stoplight telling us there is an underlying problem that needs to be addressed. The very nature of borrowing money has one of two main tap roots.
- Greed – Yes, greed is a strong word. Its foundation is that we “want what we want when we want it”. Sound familiar? We want something NOW that we don’t have. When we were children it may have been a candy bar. Today, it might be the latest model of a certain truck. Bottom line, we want it and we want it now. How do we get it? We borrow money and go into debt.
- Poor Planning – Now to be honest, most business debt has nothing to do with greed. However, business debt is a symptom. It’s a symptom of an issue or issues that have not been dealt with as yet. It could be any of the following:
- Poor Collections – Some debt is incurred because the company simply has not been able to collect the money they are owed. The solution is obvious. Take time to review and revise the company’s collections policies. Oh, and implement them!
- Purchase New or Used Equipment – If the money is not available when it comes time to purchase or replace, equipment or vehicles it’s time to institute the Equipment Replacement Fund we have talked about over and over again. Simply stated, if the vehicle is estimated to last three more years, and is estimated to cost $30,000 to replace in three years from today, then the company needs to save back $10,000 per year ($30,000/3 years = $10,000/year) and put the money into a saving account or mutual fund until the funds are needed.
- Improper Labor Pricing – Collections and/or lack of savings to purchase equipment can be a reason for debt as well as many other smaller issues however, the root problem is usually improper labor pricing. It’s amazing to me after three decades plus in the industry, the number of trades companies that still fail to set proper hourly rates. The bottom line is quite simple. It produces a known process with a known end result. If the company is not priced properly, it begins to produce an environment that requires borrowing to stay alive. Debt increases, the cost of doing business goes up, profits fall and bingo, the company fails! Bite the bullet and determine what the company really needs to charge to make a fair profit in each department. Don’t forget, pricing needs to be set based on cash flow dollars not accounting dollars.
Rainy Day Fund
It a fact, it’s going to rain (eventually) nearly everywhere on the face of the earth. It may not be for days, months or multiple years but in all likelihood it will eventually rain. The question is not, “Will it rain?”. The question is, “are you preparing for the rain that is coming?” That is where the Rainy Day Fund comes in. The company needs to be putting money back each month (it’s called savings) to put into its Rainy Day Fund. The rain may last a day, a week, a month or longer. No one can save for every occasion, but a great rule of thumb is to shoot for putting back enough money to cover 3-6 months of fixed overhead costs.
The really good news is that YOU don’t have to the fund the account yourself, let your customer do it! Here we are again, back to proper labor pricing. Let’s assume the company would like to save back $60,000 over the next three years to fully fund it’s Rainy Day Fund. That means they will need to “save” $20,000/year. Simply place the $20,000 in your budget as an overhead cost and be sure it is included when you set proper hourly rates. The really tough part is not so much building the cost into your pricing. The tough part is actually placing the money into some kind of savings account or mutual fund and then having the discipline not to spend it.
Ok, the parent teaching lesson is over. The two points to remember are:
- Get out of debt, and stay there
- Create a Rainy Day Fund
Hopefully the lessons are now learned and will soon be implemented. If not, the consequences may be even worse the next time around.
Another thing all employees need to understand is why the company charges what it charges. Techs and employees are often concerned and/or confused about why the company is charging what it’s charging. The bottom line is simple. If they don’t believe the companies pricing is proper, they will tend to under charge the customer. The Why Do We Need to Charge So Much? presentation does a great job of explaining the basic costs of doing business and therefore why the company charges what it charges. It comes in two formats. The first option is the multi-user streaming version that comes with the presentation, a workbook and directory of how to present the materials. This version is normally $114.95 but this month it is featured at only $99.95. The second option is an online, one-module, single user, version which normally $39.95 but this month is only $29.95 and order HERE. No matter the format you choose, this program will help your employees understand why you charge what you charge.