The number one reason why banks fail? Cash. Reason why the mortgage and housing business went belly-up? Cash. The real difference between the rich and the poor? Cash.
Let me qualify this. There are assets that create wealth over time. Usually when you think of assets you think of houses, investments, etc. However, you still have to manage the cash that these assets produce.
It’s not enough to take home a profit. Cash in the business will give you flexibility to overcome down-turns and take advantage of unexpected opportunities.
I think it’s a good idea to look at a few strategies that will help you keep a bigger cash reserve and not run so close to the margins.
Collect revenue quickly.
This may sound simple, but I’ll bet you’ve had this problem. A big part of collecting starts before the project does.
You have to develop a discipline of billing and create systems to support it. Most A/R problems happen because of miscommunication or false expectations between the client, the contractor, and the billing office. So set your system and your processes to eliminate both.
Determine your payment policies.
If you are providing large-ticket items that may require you to finance or spread out payments for your clients, how you receive payment should be part of the proposal, explained from the beginning, and carefully laid out in all of your agreements. Deposits and expected payments depend on the size of the job or deliverable. The bigger the job, the lower the overall percent you will need to get the first few weeks of work started. Some jobs you may be able to collect only the material costs up-front and spread out payments as you need them. In many instances you should get half the agreed price up-front.
Regular and prompt invoices.
Again, this depends on the size of the job. For smaller products, invoices need to be delivered and collected the day of completion. On larger projects make sure you are billing monthly or every 15 days. Billing this way eliminates lags in your cash and also prevents sticker-shock for the customer. A side benefit is how much more closely you watch your material and supply costs associated with each job.
This is not just to help you win large proposals – this includes the services, materials, and supplies that you provide. A 2% change in your net revenue can mean a 30% change in your profits.
Here is a profit and loss that I analyzed for a small contractor and how I suggested he make changes.
By increasing what he charged for labor and materials by 20% we were able to more than double his gross profits.
He was concerned that this would lose him bids – it didn’t. Instead he found that he was no longer in a bidding war. His customers were less likely to nickel-and-dime him on every little thing because they could see that he did not cut corners.
What profits are you missing out on by not pricing appropriately?
Review your overhead regularly.
I was sitting with a client not long ago and had suggested to him that he needed to raise his hourly rate. Over the months that we worked on his leadership and organization, he continued to resist raising his price. One day he had an epiphany. He wasn’t making enough money to cover his overhead and was not including his overhead costs in his bids. He decided he needed to raise his prices.
You would be surprised how a 2% change in an overhead cost like insurance can drastically impact the bottom line. Take your P&L and your cash flow statement and take it line-by-line and create a strategy on how to trim 1% from each expense.
While this is not an all-inclusive list, these are some of the easiest areas to review and keep in line.
- Labor – Do you have a staffing model that ties labor hours to production/revenue? How often is your staff going into over-time? Are you leveraging your own efforts by delegating properly?
- COGS – Do you know exactly how much of your raw materials go into your product? For restaurants this means portion control and strict recipes. For a contractor this means knowing how much material will be scrapped and how much of it you can “up-cycle” (or use in creative new ways?).
- Taxes – When was the last time you had a CPA check your taxes and not just prepare them? If your CPA or tax preparer is only preparing your reports and returns and not suggesting tax savings, it’s time to find one who does.
- Insurance – Whether it’s your liability, worker’s compensation, or employee benefits, having this reviewed and bid out to several providers every year can drastically reduce how much you pay.
- Facilities/Equipment – How much you pay in up-keep and repairs might be more than what it would cost to get new equipment.
By regularly reviewing your overhead as you look at your budget, you can increase your profit by tens of thousands of dollars every year.
A word of caution: Cutting expenses is good stewardship of your business and can really help you focus on what is most important for your continued success. The danger here is that a short-term gain in profitability by cutting expenses can hurt your long-term growth potential if you aren’t careful. Do your research to make sure you aren’t cutting yourself off at the knees.
If you are going to have a successful business, control your money. Don’t be ashamed to get paid what you’re worth. collect it quickly, and then be fastidious about how spend it. Cash is the fuel to your business. Don’t starve it to death.