Profitability Revolution Paradigm
When you get really busy, many have a tendency to relax or forget the cash rules that you put in place to ensure that cash comes in the door – in slower and busier times. Here are four stupid things owners and employees do when it gets busy.
1. Not putting 1% of all cash coming in the door in a separate savings account.
This is the time of year that you definitely won’t miss the 1%. If you have a deposit of $5,000 and you put $50 in a savings account, that still is $4,950 to use for operations. Put the money away!
Every little bit added to the savings account means that you have money for unexpected cash needs in slower months. I’ve also seen business owners who use the savings account to purchase computers, trucks, and other assets rather than borrowing from a bank.
2. Not putting your project deposits, maintenance agreement sales dollars, and warranty reserve dollars in an interest bearing account.
Many companies receive a deposit before they begin work on a project. Sometimes these deposits are for work that isn’t to begin for many months. The dollars you receive for future work should go in an interest bearing savings account until the work begins. You have a liability to perform and this liability is shown on your balance sheet. You can take it out of a savings account when you perform the work. However, if you don’t need the cash for operations, then leave it there. When it gets busy you probably won’t need it so keep it in savings for a rainy day.
Likewise, when you receive money for maintenance agreements in advance, that money is not yours until you perform the work. It is a liability to perform. Put it in a savings account. You can take it out of a savings account when you perform the work. However, if you don’t need the cash for operations, then leave it there. When it gets busy you probably won’t need it so keep it in savings for a rainy day.
A small portion of each installation job (1% of equipment cost, for example) is warranty expense to cover future warranty issues. These dollars should go into an interest bearing account until the warranty period is over.
3. Not getting financing paperwork signed.
I’ve found financing paperwork on desks. The jobs are done and the paperwork has never been signed. Excuse: the owner (or salesperson) didn’t have time to get it signed.
Taking care of this from a sales person’s perspective is easy – no payment, no commission.
Owners are a little more difficult. They relaxed because cash was flowing and it wasn’t critical that they get the paperwork signed immediately. However, they must make the time to get it done – even if they are busy. Getting financing paperwork signed 45 days after the job was done is harder.
4. Not billing.
You’ve performed the work but don’t have time to bill it. The reality is that the work isn’t complete until all paperwork, including billing, is done. If a customer doesn’t get a bill until months later, they may “forget to pay the bill” or question the work that was done. Even in busy times you’ve got to bill. Overtime is justified in this case.
Cash flow is the life blood of your business. Make sure you follow the procedures in slow and busy times.
Ruth King is CEO of HVACChannel.tv and a nationally recognized HVAC expert. You can reach her at firstname.lastname@example.org or review her manuals at www.hvacoperationsmanual.com.