He said that financials should be the number one thing to think about, more so than marketing or sales. Collier identified three key elements of financials:
1. Proper pricing.
2. Monthly profit and loss (P&L) report and balance sheet.
3. Cash flow.
He stressed the importance of timely cash flow reports. "If you don't know how much money you have made until the end of the year, you've waited twelve months too long," Collier said. "Lack of cash flow is the number one reason why contractors go out of business."
As important as sales are to a company, Collier said that cash flow is even more critical. "Selling doesn't pay the bills. Collecting pays the bills," he said.
Another key aspect to managing cash flow is to have a budget, according to Collier. "A budget is a very important word that is seldom used and applied in business," he said. "Without a budget, you can be very profitable and still go bankrupt."
He said that it is important to factor in price adjustments in the budget, preferably by adjusting the prices every six months during the designated months of February and September. Speaking of September, Collier added that contractors usually "feel the richest" in September, thanks to a summer selling season and the fact that it usually takes an average of 47 days from installation of equipment until it is paid for.
On the opposite end, Collier said that cash flow problems typically happen during the first few months of the year. And, ironically, he said that cash flow problems are on the busiest day of the year, since more money is spent on labor, equipment and supplies during that time.
BudgetingWhen determining a budget, Collier stressed that contractors should calculate their return on investment (ROI). He said that ROI multiplied by net worth (the balance sheet) should equal net profit. A quick way to determine ROI this year, he indicated, is to divide your net profit total at the end of 2004 by the your net worth at the beginning of 2004. Collier said the average HVAC contractor's ROI is 14 percent, but it should be at least 25 percent.
The key to maintaining a budget is to have up-to-date information on the "breakeven" sales figure, which is fixed overhead costs divided by fixed overhead percentage and net profit percentage.
"You can figure your breakeven sales down to each day or even each hour," he said. "Typically, if you are a $1 million company you need to make at least $4,000 each day to break even."
Collier noted that some contractors might be paying too much attention to P&L sheets and not enough attention to a planned budget. "If you are looking at your P&L, you may be going bankrupt at the bank," he said. "Changing the way you collect - i.e., from 45 days to current - can increase your profit by four times."
He said there is a software program called Financial Forecaster that not only figures out financials put can also plug in a lot of "what if?" scenarios.
Collier listed five ways to improve cash flow almost immediately:
1. Raise prices. "If you raise prices 2.5 percent, it has the same effect as doubling sales to the bottom line," he said. "You make money through pricing, not through volume."
2. Go back and sell "stuff that you don't need." In other words, clear out the unsold inventory.
3. Don't delete your cash supply. "Buy a truck in installments instead of paying cash," he suggested.
4. Assign someone in the company to manage the accounts receivable.
5. Accounts receivable should be no more than one month of sales.
For more information, visit www.drhvac.com.
Publication date: 05/03/2004