It’s no surprise that running a business is like being on a diet. For you “calorie counters” out there, you know: calorie in, calorie out -- but with a deficit is the name of the game.
Well, business is very similar. Money in, money out -- except the idea is to keep as much money as possible, not burn it as in calories. This process is called cash flow. Sounds easy, right? It's not, and it is usually the reason that according to the SBA, 66% of businesses fail within 10 years.
How can you manage cash flow and help your business succeed against the odds?
First thing up is getting the work. Most of us are natural entrepreneurs, so the knack of selling is a no brainer. You need to sell your firm’s services to the best of your ability. This is called marketing and something we will discuss in another column. Once you create sales, then you will have money coming in -- and going out to pay expenses. This is where it can get tricky.
See, in our business, the amount coming in can often be very large sums, so it's easy to get lost in the “illusion of money.” Proper job costing will help you control your costs or “outbound” cash flow, but what I want to discuss here is ensuring that the money you have earned makes it way inbound to you initially. Sounds crazy, but many businesses fail because of bad cash flow, starting with not being able to collect their money. Let's look at a few examples of why your cash may not make it to you.
1. You don't send your invoices on time. You would be surprised at the number of contractors that have a problem with invoicing. We work with several really good subs, but for the life of me, several just can’t seem to invoice properly. Sending your invoice is the first and most-critical step to collecting your money. I was guilty too -- when I first started. I remember sending invoices that were for jobs completed six months prior. If that sounds like your company, that practice needs to stop now! Currently our clients receive an invoice the last day we are on the site.
2. You don't follow up on past-due invoices. Great, you sent your invoice. Now you wait….and wait. The problem occurs when those receivables exceed 30 days (the industry standard), yet you don't do anything to collect. As I have outlined in several of my presentations at National Pavement Expo, we follow up within a week to make sure they received that invoice, and we ask if they have any questions. We continue following up until we get paid. I have found the lack of follow-up offers the client loopholes to drag payment out. There have been too many examples of guys sending an invoice, waiting 30 days, only to call and find out it was never received. If you’re dealing with a large company, that may mean an additional 60-day wait for you!
3. You have a warranty issue with your service/job. And the client is holding the funds, pending a mutual remedy. By following up as I suggested, you can be alerted to potential problems. Sometimes a customer has just a simple issue with the job, and one that can be fixed in an instant, yet they will hold payment until it's done. If we ever have issues, we are right on them to correct any problems. This not only helps us to keep an excellent reputation but is makes sure our money is not held up. If you wait 30 days, then call just to find out there’s a concern, you’re already a month in, don’t have your money, and potentially will have to spend more to fix a problem. That’s a cash-flow killer.
4. Your customer pays on their payment terms, not you. I’ve seen instances of 120+ days to payment. This is completely unacceptable. Honestly, I would love cash on completion, but that is not going to happen with most commercial projects. The best thing you can do is to have a firm contract with mutually agreed upon payment terms before you start the job. Your contract should never exceed 30 days -- no matter how badly you want the job. We are not a bank, and neither are you.
5. You have agreed to retainage but failed to account for it. This is where a General Contractor will hold a percentage of your money to account for warranty issues. In some instances, retainage can exceed 12 months. The jobs requiring retainage are always spelled out in advance. Retainage is okay to deal with, but it needs to be factored into your bid so that the money you collect on completion covers your initial bid, while the retainage amount (plus interest) is something you factored in and are okay to wait for.
I know these are all simple things, however most business fail because of a disruption in cash flow – whether it’s not knowing your costs and having too much money flowing right back out or not having a handle on collecting and managing what you’re owed. Take the time to polish your policies and help yourself avoid becoming one of the 66% of those businesses who fail in the first 10 years.