Is Cash Flow a Problem in Your Company?
It's a simple question: Do you send monthly statements to customers who have not yet paid their bill? The obvious answer is, Of course we do. Doesn't everyone? Well the answer is, Actually, no; everyone does not send out monthly statements. Before we get into that, though, let's talk about why contractors go out of business. It will set the stage for our discussion on sending statements.
Yes, there are lots of things that can cause a company to fail. However, there are two very specific things that cause most contractors to fail.
Improper labor pricing. The number one reason most contractors go out of business is that they don’t know how to price their labor. Most new companies start by charging pretty much what everyone else in town charges. But when a company grows, overhead goes up while pricing stays relatively constant. Before long, the company doubles in size, and now it’s losing money. The overhead has increased, but because most contractors don't understand the business side of business, they don’t set the proper hourly rate for the actual cost of doing business. For a Grandy & Associates sample worksheet on proper labor pricing, click here.
Cash flow. The second reason most contractors go out of business is that they don’t maintain a steady cash flow. Busy and slow times are a reality of the trades industry, which can, to some extent, be modified by an outstanding marketing program. However, if the hourly rate is set properly (taking into account the real billable and nonbillable time and slow times of the year), then it boils down to discipline. When you are busy and making money, you simply build up a cash reserve to use during the slower times. It's a great theory, and it works, if you are collecting your money in a timely manner. However, many contractors do not.
Now back to our original question: Do you send out monthly statements to customers who have not yet paid their bill? Again, the answer is that most companies do not. I continue to be amazed as I talk to contractors during our three-day Basic Business Boot Camp. Many contractors send the original bill, and then simply wait for the customer to pay. Some customers do; many do not. Turn the table around for a moment. Assume you are the customer and you receive an invoice for perhaps $189.50. You get busy and neglect to pay the bill. Next month's bills come in, and you pay them; but you don’t pay last month's invoice. You didn’t receive a statement as a reminder, so you conveniently forget about it. You figure the contractor will send a statement at some point to remind you, and you’ll pay the bill then. However, the statement never comes, and before long you have forgotten about the contractor's invoice altogether.
Now it's wake-up time for the contractor. "Gee, we need cash to pay our bills. Let's send out statements on that $54,000 we have in receivables." You send statements for work that was done six months ago (or longer). What do you think the probability is of getting paid at this point? I'll answer that one—slim to none!
Failure to send monthly statements is a major problem in the trades industry. I know of numerous companies that don't even invoice the customer for 30, 60, 90 days or more! When the normal seasonal dips and valleys come, there is no money in your reserve account, and you’re facing cash flow problems that can literally put you out of business!
Statements are great, and you really do need to send them out on a regular basis . . . but that is not the real issue. The real issue is, Why are you invoicing the customer at all? Let's look at some of the specific departments within your business and talk about the way to avoid receivables altogether.
Service is the bread and butter of any trades company. It is somewhat recession proof and should produce the highest net profit of any department within the company. It should also really help your cash flow . . . but only if the right systems are set up. Do not give the residential customer the option of being invoiced. Before the technician is dispatched to the customer's home, the customer service representative should be calling the customer and saying, "Mr. (or Mrs.) Jones, we are ready to dispatch John Doe to your home to perform your repair. We want to be 100% sure someone is home to let John in, and we want to confirm your method of payment. Will you be paying by cash, check, or credit card?" Notice the option of being invoiced was NOT given. If customers say they will pay by credit card, get the information right on the phone, especially if the customer won't be home and will be leaving the door open for the tech. Bingo! the cash is collected. No need to invoice!
Here again, collections should not be an issue. Although few contractors do it, you should be asking for a deposit up front. The customer actually expects you to ask for a deposit, but if you don't ask for it, you won’t get it. What about the balance? Nearly every contractor who gets a deposit on the front end also has an agreement with the customer that the balance will be paid upon completion of the job. A policy like this has wonderful benefits—you get paid on time; no need for invoicing or statements!
I started out by asking if you send statements each month. But in reality, if you have the above policies in place, you get paid; and therefore you will seldom need to send out statements. I am not completely naive. I realize that sometimes invoicing is necessary, even on residential work. The question is, Do you have a collections policy in place? Most contractors do not.
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