As much as I love covering marketing & sales topics, cashflow seems to be a popular trend. My post from several months back, Staying In The Black As A Contractor is by far the most read on here.
Keeping the momentum going, we’ve got 17 service and contracting business experts (at least – some were late to the party), with their quick tips for ‘Staying In The Black’.
By the end of this, you’ll realize a few common trends.
Greg Wittstock
Know your break even. It’s great to job cost but at the very least understanding your yearly overhead and setting a budget you live by and adjust as accordingly gives entrepreneurs the brains to guide their guts!
Corey’s Comments:
Boom break even is a great number to know that many people over look. Direct materials, and direct labor is fine and dandy, but a handle on how much you need to continue operations is a necessity, especially once you reach a size of scale.
Randal Dehart
My best advice is the Five KPI Reports ( #1 Cash Available #2 Accounts Receivable #3 Accounts Payable #4 Profit & Loss #5 Balance Sheet). Have them installed on QuickBooks Desktop and view them once a day. There is something in our brain called the reticular activation device which helps us focus on what is important. We have a program for listeners of our podcast to install the Five KPI Reports for FREE
Corey Philip
Simple but effective. An eye on this will keep you in the black. Personally speaking my favorite KPI is the labor efficiency rate.
Ellen Rohr
“1. Charge more than it costs. If you don’t KNOW, you can convince yourself that the “going rate” will work, or that you must charge “what the market will bear.” Those are myths! You have to charge more than it costs, so learn how to read and use financial reports. That helps you break through any denial.
2. Raise your prices. Most contractors think they can just cut overhead to make more money. While mathematically true, the problem is most need to increase their overhead…because owner’s salary is an overhead account. 🙂 Want to make more money? Raise your prices to cover an increase in overhead to cover all expenses, including you. Double em. Triple em. And then BE better. That’s not so hard to do in contracting. Show up clean, sober, on-time, dressed right and use a checklist. ”
Corey Philip
Good one brought up by Ellen here… owner’s salary. Once accounting for a proper salary to ‘replace the owner’ many small businesses would be in the red. Start budgeting for that now. Or improve your margins to account for a profit after reasonable salary.
Quan Ly
“Underquoting. It’s a common issue especially with those new to the business. Some might do it to get a job, and some just lack the experience to provide a realistic quote. Either way, it’s a bit of an art and getting this right is critical to your success. Don’t be tempted to earn a quick buck, there are always opportunities out there and it’s important that you take the “”right”” opportunity and not the first one.
Poor money management. I like your suggestion of having a separate bank account to segregate what needs to be paid out. It’s really critical to understand that a dollar of sales is not a dollar of income that you can pay yourself, some people have a tough time understanding this and typically have to learn the hard way. You really have to understand your inputs and costs to make sure you’re charging enough to earn the work. If you don’t have a healthy enough margin to cover your fixed expenses, that’s when you end up in the red and start running into cashflow problems. ”
Corey Philip
Good one brought up by Ellen here… owner’s salary. Once accounting for a proper salary to ‘replace the owner’ many small businesses would be in the red. Start budgeting for that now. Or improve your margins to account for a profit after reasonable salary.
Al Levi
You need to do a budget to arrive at the right selling price for what you sell whether it be products or services or both. What the market will bear means you could be following other contractors into bankruptcy. The fastest way to account for all your costs is to do what I call a “Fast 3-column Budget”.
Column #1: Take the expenses from yearend that you get from your accountant and look at each line and decide what might go up in cost next year like insurance, IT costs, gasoline or vehicles.
Column #2: What are you willing to invest in this year to take your company to the next level and what are those costs? Ex: Building a Training Center, buying better software for dispatching, buying trucks that can carry the right inventory and be rolling billboards with the right truck design
Column #3: Is to add the first two columns and arrive at what you need to reach breakeven and then add in the gross profit you want.
Then, divide that total amount by the number of Techs rolling every day and the billable hours each can sell (typically 1,000 billable hours/year) and arrive at what is your “better guestimate” selling price. This will help you avoid no profit and not being able to quote a price at the time of service and collect the money on the job which affects your cash flow. [work sheet available from Al’s website — does require an email address]
Tom Reber
Get rid of anyone who is not delivering the outcomes you hired them to deliver. This is costing you thousands of dollars.
Market 365 days per year. Never take your foot off the gas (especially when you’re busy and think you can coast).
Corey Philip
Tom gives something outside of the box, yet very practical, in his first bit. Labor is generally the largest expense for a home service operation. When people want to ‘save’ money the last place they look (if at all) is what kind of return they get on labor, although it is generally the largest drain.
Larry Janesky
“A contractor has to get good financials for his business and learn how to read them. You need to understand your direct costs and gross margins. Then you have to pay attention to your G&A expenses. It sounds overly simplistic but if you want to make a 12% profit then all you have to do is only spend 88% of your revenue in the operation of your business.
Many contractors don’t understand their cost. If you do not understand your costs how can you price anything?”
Mark Buckshon
The best advice for any contractor concerned about viability and cash flow comes from consultant Michael Stone, who advocates that you really should know your numbers and margins, and never take jobs below the level where you can be profitable. And the best way to avoid believing you need to accept business from low-ball “clients from hell” is to develop an effective marketing and business development system.
Mike Agugliaro
The best way to stay in the black and solve all cash flow inconsistencies is to sell more. Period. Here’s a simple 4-step strategy that you can do immediately…
- Make a list of all your products and services, and then beside each item write down a related product or service you sell. (For example, beside “HVAC system installation” you might write down “annual HVAC system inspection”.)
- Build an outbound team to phone your existing customer list.
- When the outbounder talks to a customer, have them find the item on the list that the customer already bought and then offer the product or service that you wrote down next to it. For example they might say, “ Customer, I see you invested in a new HVAC system from us last year. Most customers who purchase an HVAC system also invest in annual HVAC system inspections to keep their HVAC investment at peak operating condition. We have a special running right now for an HVAC system inspection. When can we schedule yours? We have some openings in the next 3 days.”
- The target for all outbounding is to fill up the next 3 days of work for the techs to minimize downtime. (Of course if a customer can’t schedule in the next 3 days, the outbounder should still schedule the appointment for a time that is convenient to the customer but ideally the outbounders schedule fill up the next 3 days.)
This can have a massive impact on your cash flow and keep you in the black because you’re increasing sales without incurring a high marketing cost, PLUS, you’re using your outbounders to minimize your techs’ downtime.
Corey’s Comments
There’s the age old question, which is more important marketing or accounting? Those that have built businesses know it is marketing ( and sales). You can outsource the cash management but you need to be able to generate the revenue. Mike’s strategy of cross-selling is low cost but requires a step out of our comfort zone to drum up some more cash, hence it is something many would just skip over — no doubt fruitful for those persistent and ambitious.
Kenny Chapman
Learn how to say “No” effectively. Most owners and operators say yes to so many things they’re never operating in their true sweet spot where it works efficiently, serves the right client avatar, and attracts the right-fit team member.
Corey Philip
I really like this one. While it’s evident that you need to “know your job costs” to operate profitably, it is impossible to know your costs on every single service out there. What this leads to is operating and estimating on what you ‘think’ it is –> and that generally doesn’t work out well for you + It is impossible to do everything efficiently —> Specialize for the win.
Jake Harris
Have a solid budget with all facets and variables of the business and then stick to it. I refer back to my budget regularly to track what we are spending and where we are spending it. Secondly, we run 4 crews at Jake’s Designs and have 4 jobs going on at a time. There are too many contractors with 1 crew and 6 jobs “in progress” because the owner wants to get that first payment. In the end not much gets done on any of the jobs, creating a terrible client experience, because the owner is robbing “Peter to pay Paul”.
Ben Surdi
“Each morning, I review my financials. I want to know where my money is at all times. We review our A/R’s and make sure that our money is in our bank account and not somebody else’s.
We set specific benchmarks for each expense line so that we know when we are running to high on an expense item.
IE: Labor rate should never exceed 25% of gross revenue – so when we run our reports, we are watching that line. If it goes above, we know something needs to be adjusted. ”
Corey Philip
Boom. Daily eye on the KPIs, with a emphasis on labor. Labor is a huge cost driver, and generally the largest expense in our businesses.
Nick Slavik
Treat overhead like your worst enemy. If you have to question whether or not you should add overhead, you don’t need it. It should be abundantly clear and there should be an immediate and obvious benefit when you do actually add over head.
Laura Reale
Don’t spend money you get on prepays before you do the work. People in our industries often get paid a deposit up front and then spend the deposit before they get the job. Force yourself to put it in savings.
David Moerman
Invest money into sales and marketing rather than buying brand new shiny equipment. Once jobs are booked and you have some deposits / small jobs getting produced and there is some cash flow then invest into equipment. My my company, I buy used equipment that works well and will spend money upgrading down the road.
Josh Abramson
“Make sure you have at least 2 months of your monthly overhead saved in the bank in a reserve account to cover any unexpected events
Start small if you have to, but start saving a set monthly amount for a development account for future growth.”
Anthony Lannarino
First, don’t take marginally profitable business. Two, ask for a deposit and reasonable payment terms. Third, don’t spend money you don’t have. Fourth, have more business than you think you need. No secrets here.
There were a few obvious trends; know your job costs, keep a regular tab on some KPI’s, and sell more.
Job costs; throw some people off. The real challenge arises when you have such a wide array of services that you can’t possibly know your job costs in order to accurately quote each project or complete them efficiently. Pick a target service. Focus and specialize. Build your market content around that. Optimize for efficiency.
KPI’s. Find out what matters most to you. This varies from company to company, but for most contracting companies keeping a tab on cash, and current liabilities (including unearned revenue deposits), is a good regular place to start. Make sure the net (cash – current liabilities) is positive. On a monthly basis check the labor efficiency rate.
Sell more. Sales pump blood through the business system. No matter how good you are managing the cash, and job costing, you’ll never get into the black if you don’t sell enough to cross the break even point! Having systems in place that generate sales a strategic cost is a great way of doing it. Cross-selling and content marketing are two free ways of doing that. Facebook advertising is one of my favorite ways of doing it. Even better content marketing and cross-selling can be leveraged up quickly with Facebook Advertising. Here’s my plug; we’ll be covering all that in my course the Home Pro Success Formula For Facebook Advertising.