On paper, cash flow is a simple concept. Your business should be bringing in revenues, and its expenses shouldn’t be exceeding those revenues. In other words, there should be more money coming into your business than going out.
That’s easy to grasp, but sometimes reality gets in the way—and business owners find that their cash flow isn’t as strong or as consistent as it should be.
There are a number of potential reasons for this. It’s helpful to know what some of those reasons are, and to prepare for them accordingly. In this post, we’ll highlight just six of the most common sources of cash flow tension.
See if this sounds familiar: You invoice a customer for $800, and immediately start planning what you’re going to do with that money—whether investing in employee training, buying supplies, or putting it aside as profit.
But then, the money doesn’t come. A month later you send a follow-up invoice, and it still doesn’t come. You had high hopes for that $800, but now it’s nowhere to be found.
Of course, this is ultimately a problem for your bill collections department—and something you can address through better invoicing software, among other things.
Pricing Model for Products and Services
A common problem we see in the service trades is that businesses are not marking up their products and services to cover their costs, overhead expenses, and desired profits.
If your pricing model is not sufficient you will find you will constantly be struggling with having a positive cash flow.
Billable Hours vs Actual Hours
Are you paying your service technicians to clean their trucks, pick up parts at the warehouse, or attend meetings? Of course you are!
Consider the time you are paying your technicians for non-billable hours on a daily basis. Do the math and consider the costs it adds to your products and services and PRICING MODEL! Yes, you have to add these costs to your pricing model and markup to cover your costs, overhead expenses, and profits.
A 50 percent Billable to Actual Hour is generally accepted as a good Key Performance Indicator for the trades.
Tip: measure this in your company for a month by having the technicians track their time spent on jobs and tasks. You may find that lack of billable hours could be a reason to change your marketing to increase leads; or, you may need to determine why your billable hours are below that 50 percent KPI.
Sometimes the problem is as simple as declining revenues. This could be due to economic conditions deteriorating, but it could also be due to something like insufficient marketing, a bad online reputation, or a new competitor who’s siphoning your business.
If you notice a downturn in revenues, it’s important to explore the possible reasons why; in the meantime, anything you can do to decrease expenses will be helpful.
Depending on your business, you may file taxes monthly, quarterly, or annually—but no matter when you file, it’s important to be punctual.
If you’re late, or if you file improperly, you could find yourself hit with some big penalties—and that can obviously cut into your cash flow!
Make sure you don’t create cash flow problems for yourself; work with an accountant who will be rigorous in timely and proper tax filing.
Too Much Spending
Low revenues are bad, but so are high expenses. If you’re spending more than you’re bringing in, that’s obviously going to stifle your cash flow.
This is where the Profit First mentality becomes invaluable. With Profit First, you always set aside some savings first, then adjust your spending in kind. It’s a simple accounting paradigm shift that can transform any business from a cash-gobbling monster into a money-generating machine; at Contractor in Charge, we can coach you through it! Just give us a call to learn more about adopting Profit First.
Addressing Cash Flow Problems
As a service professional, you’ve gone to great lengths to master your craft. Likewise, we’ve gone to great lengths to master ours—namely, helping small businesses become profitable and successful.
No matter your cash flow problem, we’d like to help you take a look and develop a solution. Start the process today. Contact Contractor in Charge!