Despite all of the best intentions and grandiose business plans that look impressive on paper, the bottom line is that contractors can’t stay in business if they don’t have a positive cash flow. It is one thing to be making money but it is another to be making enough money. I am amused by the business owners who think they are successful because they are busy. A lot of people are busy but aren’t necessarily successful.
You don’t need to be busy to be successful - but you need to be paid.
Hundreds of contractors close their doors every year because they couldn’t make enough money to pay their suppliers, employees, and creditors. I’m sure many of these failed businesspeople intended to pay their bills and have a little left over for reinvesting in the company or to enjoy some of the material things that profits can buy. But the cash spigot dried up long before the bills were paid.
Where do you place the blame?
THE FUDGE FACTORI recently asked some contractors about how they handle cash flow, i.e., if they C.O.D. on their service calls or if they offer on-the-spot financing for replacement equipment. Should contractors give favorable treatment to good customers? What about taking a percentage down and getting the balance later?
One contractor said he never invoices service work for his current clients. He said they all get 30 day invoicing with discounts for early payment. To do anything else seems unprofessional to him. But he said that if it’s someone he hasn’t previously worked for, he does request immediate payment.
Another contractor agreed with this practice, but he shortened his billing cycle. He said he gets 40 percent down on all installs with either payment upon completion on small jobs or progress billing due within 14 days on larger jobs. He noted that on service calls first time customers are invoiced at completion of the service call and established service customers are billed due within 14 days. Using this method, he’s only had one job that went to collection in almost five years.
It may not be fudge, but one business owner prefers to call it trust. He is a small business owner with about 90 percent “excellent” clientele who are all on 30 day credit. He said he has no problem extending credit to these customers. He added, “Personally, I don’t like C.O.D. but I do it because I don’t trust that particular person.
“And then there is that almighty pride. I have my share of callbacks, and once a C.O.D. person has paid you for a repair, they seem to be a lot more agitated and mouthy as compared to my credit customers who merely shrug the callback off.”
IN BENJAMINS WE TRUSTDoes preferential treatment work for regular customers? Sure it does. But sometimes contractors have to stick to their guns and avoid the old cliché that “nice guys finish last.” One contractor said that on installations he requires 1/ 3 to 1/ 2 down, no exceptions. He noted that all balances are due upon receipt of invoice, not 30 days. “This business is hard enough without having to chase money,” he said. “I have zero tolerance for that.” I can understand that. Contractors are too busy to go chasing accounts receivables. Having a solid cash flow policy is imperative. It can keep a business afloat - and avoid the following scenario, which was one of my favorites.
One contractor said, “There was a time when I have had to remove equipment for non-payment. I had this slick talking real estate person come into the county 20 plus years ago. He tried beating me and everybody else out of money.
“I caught him one night in a men’s restroom and assured him that either he was going to write me a check or he was going end up head first in the john. After the second dunk he wrote me a check and it cleared the bank.”
I guess you could say that his cash flow didn’t crap out.