Paul Riddle
Contributing Writer
Success Group International
Thousands of small businesses fail every year, but why?
What are some easy indicators to look out for and avoid?
Every year, dozens of contracting companies close their doors and throw in the towel. All of these companies started with a dream. All of these contractors know the technical components of their industry. Most of them probably had incredible service for their clients.
Why do most of these technically-proficient and service-oriented companies fail? If it’s not a lack of technical knowledge, customer service, or service opportunities, then what is it? The answer is simple. It’s all about cash.
Cash is the fuel that keeps your business running. The cash flow in your company is what keeps things moving. It keeps your trucks full of fuel. It keeps your utilities on and your payroll up to date. When you don’t have the cash you need to keep things moving, you’ll find yourself in a cash crunch. To successfully manage your cash flow and keep your company sailing smoothly, you need to monitor your cash regularly and make sure that your account stays in the black.
That’s easier said than done though. To help you avoid the cash crunch and keep your company running smoothly, here are a few steps to follow to keep your cash level high:
Step One: Watch your numbers every day
The amount of cash you have available will fluctuate every day. As your team collects revenue on calls and you pay your suppliers and bills, your cash flow will go up and down. It’s important though to know the level of cash that you start every day with and the opportunities that you already have scheduled to provide your company with more revenue.
If you look at your call board in the morning and you need calls that should be the most important focus of your day. Getting the calls that your team needs to hit your budgeted goals is the best way to keep the cash flowing through your company.
Step Two: Collect that cash
Getting the calls on the board for your team is only the first step. Once your team provides their high level of service, they also have to collect the revenue that they have earned. Substantial accounts receivables (A/R), your company will be paralyze any business.
To ensure that you limit your A/R, it’s paramount that your call takers inform clients of your payment policy, and it’s imperative that you train your technicians on how to collect at time of service. They must know that it’s not acceptable to leave a job without payment. And to help your customers and technicians ease this process, it’s necessary that you accept credit cards and have an array of financing options available. After all, in today’s society, few people carry cash—and it’s not always smart to take checks.
Step Three: Keep an eye on your debt to income ratio
Also known as the current ratio, this is an important ratio from your balance sheet to monitor at least on a monthly basis. It shows your ability to cover your liabilities, and it is calculated by dividing your current assets by your current liabilities. Another way to think about it is that it’s your cash and receivables divided by your payables.
Try to keep your current ratio above one. A current ratio of two will demonstrate that you are prudently using your cash. A current ratio of three will ensure an ample availability of cash for all your growth initiatives.
If you start to notice a decline in this number, take corrective actions immediately. Extend your A/P further, or look for assets that you can sell or use to create cash, such as selling a truck that is no longer in use or leasing out part of your building.
Step Four: Inventory
You obviously need inventory, but every dollar that you spend in inventory is a dollar that isn’t going to your bottom line. Be sure to keep close tabs on the inventory that is in your trucks and in your warehouse. If you have to buy more because of damages, theft, or misuse, that’s more cash you’ll have to outlay.
Keep your level of cash in mind because it’s one of the most important facets of keeping your business running smoothly. No business can survive without cash no matter how good you are technically. Watch your level of cash every day and you won’t have to worry about being caught in a cash crunch.
About the Author: Paul Riddle, Vice President, Success Group International
Paul Riddle has over 25 years of hands‐on experience as GM, COO, CEO, and owner of service companies specifically in the mechanical and restoration segments. Throughout his career, he has personally trained the owners and employees of hundreds of businesses, including several turnaround situations. His hands‐on training for owners and their employees has been in the areas of business planning, sales & marketing, and company culture. Paul enjoys applying his knowledge and experience working directly with business owners and their employees to increase profits, improve the company’s present value, and unlock the intrinsic value of the business when sold. Paul joined SGI in 2009 as the VP of Operations.