As we have all seen, this current recession/depression has lasted much longer than anyone would have predicted. The harder part to accept is that it is impossible to determine when it is going to end. Depending upon which economist/forecaster you listen to, we are probably at least a couple of years away from a significant turnaround in the economy. They do anticipate that at some time in the future things are going to return to something that we will then call normal. We don’t know whether that normal will be anywhere close to our previous normal, but it will be normal for the times.
The key for each of us is to make sure that not only are we still here when that turnaround occurs, but that we are in a financial position to withstand that turn-around.
One of the disadvantages of be-
ing a veteran in the business is that we have seen our industry go through every cycle several times through the years. One of the things we have noticed as the industry has gone through these cycles is that typically more companies get in financial trouble and end up going out of business when there is an improvement in the economy than during a downturn. It appears that the major reason for this fact is that contractors use the capital they have built up during good times to weather themselves during the difficult times. As we know it takes a lot more money (read capital) to operate a business when the business is growing than when the business is slowing down. Therefore, often a contractor does not have the capital in reserve to be able to fund the returned renewal of business.
What makes this time even more difficult than previous downturns is the fact that since the downturn has lasted as long as it has, the contractor has used up even more of his capital reserves than in previous downturns to stay in business.
With those thoughts in mind, I believe it is imperative on all of us that we begin taking steps to make sure that we have the capital reserves necessary to keep us in business when finally the economy recovers. You may say, “What more can I do?” Well, my guess is that there are several things you can do in this regard. Remember my opening statement about the need for cash. Now is the time to start getting cash.
There are many steps that you can do to improve your cash position. Hopefully you are doing some, if not all.
First, make sure you collect on all of your residential service calls on the spot. When you go to a store and purchase something, you pay before you leave. Why should your store selling heating and air conditioning service be any different? We pay a bonus to all service technicians who collect on over 90 percent of their jobs. The bonus is much less than the cost of invoicing, and we get the money. We are now asking all of our replacement customers to pay the installers at the time they are finished. This isn’t working 100 percent yet, but we are collecting on over 50 percent, with most of the others calling us the next morning with a credit card for payment.
Now is the time to talk to your vendors about the possibility of extended credit terms. If you wait until you are already out of cash, it may be too late to expect them to help you. However, if you meet and prepare them now, the terms you set up at this time may be a big help in the future.
The point of all of this is that, in the past, we have lost a lot of good contractors as we have come out of an economic recession. I am concerned that with the length of this recession, the effects could even be greater than previously. Now is the time to make sure that you are prepared. Time to put some of that gold away!
Publication date: 10/10/2011
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