According to the IRS, two-thirds of all businesses fail in their first five years. One of the major reasons this happens is not from a lack of business, but from a lack of cash.
Here’s a math question for you: how many jobs can you take on and complete without any payment from the insured or their representative? The answer is pretty simple…until you run out of your own money. The only one that really cares about cash flow is the owner. If a sub isn’t paid on time, oh well, next week. If a vendor isn’t paid on time, oh well, next month. If an employee isn’t paid on time….now we have a serious problem, because they might not stay around for the next payroll. Which means you cannot get the work done to earn the money you need to operate on and pay your debts.
Let me suggest some steps that might help you better manage your cash and make a profit;
- Start no job, other than an emergency, without a signed, written draw schedule.
- Pause work on any job when your draw schedule isn’t adhered to.
- Do not ever give up your lien rights without a very GOOD reason.
- Operate your business on a Win-Win or No Deal premise.
- Stop doing business with people who don’t pay you per your agreement with them.
Let me suggest some rules of thumb for cash flow in your business. In order for a company to function properly and profitably;
- A company needs 10% of its total gross sales volume in cash inside of their company machine to lubricate the business process. As you have less and less cash in the business, the company will heat up just like an engine running low on lubrication. Some indicators are subs not getting paid and vendors cutting off your purchasing ability. The owner’s blood pressure goes up and the owner becomes upset more quickly than normal.
- A company needs 20% of its total gross sales volume in available cash in order to be able to thrive and compete in business. So if you are doing $1 million a year in sales volume, you need $200,000 available in cash to the business. The owner needs to be able to loan the business $100,000 personally and the owner needs to obtain a $100,000 line of credit from the bank for the business to use.
Every time you have taken on a job that gives you no money until the job is done, you’ve had to manage the cash float on the entire job for a period of time. If you used any vendors or subs, they also were waiting to get paid when you get paid. Sounds familiar doesn’t it? What happens when they don’t get paid as agreed? That’s when you begin to feel the heat from the two sources that you cannot do future business with until you get paid. Now you have to pay them or find new subs and new vendors. All because you decided to do work without any money and usually no written payment schedule! If your subs and vendors continue with you in this situation, they will begin to factor in your slow payment in their future bids, thus raising your costs. All because you decided to extend credit to people you didn’t even know.
Let me describe a good company and how they’ve learned to handle their cash flow:
- They worked at knowing exactly where the business was financially. From their business beginning, they sought outside help from a CPA. This allowed them to have their accounting numbers checked and reviewed by someone who was qualified to do so. It also helped them to make plans for the future growth of their business.
- At the end of each month, they took 2% from their total money received for the month and placed it into their building fund. After they completed building their new building with this money, they changed the name to their capital improvements account. This allows the company to set aside 10% of their sales volume in cash for the future growth of the business. It also sends a very strong message to their bank that they are a company that banks want to do business with.
- The company set a net profit goal of 10% of their gross sales before taxes. This allowed them to get a grip on their job cost processing of their job costs. It also set the goal in the employee’s minds that profit was not a dirty word and that without a profit, there was no future for any employee in the company.
If you want to talk to a company that is doing a lot of the things I’ve been talking about, you can email Gail Yanker at Buffalo Restoration (email@example.com) and chat with her. She’s very knowledgeable and knows her stuff.
Wishing you a reasonable profit for all of the efforts that you put into your business! Remember, if you do not ask for a reasonable profit, you will not get a reasonable profit!