Rules for improved cash flow

BY RICHARD P. DiTOMA,
contributing writer

Money is to your business like blood is to your body. Putting it bluntly, without proper blood flow you die. Without proper cash flow your business fails. It is up to you, and you alone, to utilize proper intelligent business procedures at all times, especially regarding your cash flow.

The cause of poor cash flow

I shake my head in disbelief every time I hear about PHC service contractors that go to consumers’ homes or businesses, perform their services and send a bill at a later date. This practice is inane and the cause of poor cash flow.

Many PHC contractors use words such as Plumbing & Heating, Heating & Cooling or Plumbing, Heating & Cooling in their business names. Nowhere in those business names have I ever seen the words Savings & Loan. Yet, every time contractors leave the homes or businesses of the consumers for whom they have performed a service without payment, they are actually going into the business of loaning money.

Rules for improved cash flow

To control cash flow properly, contractors should follow some simple and sound business rules:

Rule #1: Know your true cost before quoting prices.

Rule #2: Choose a proper profit margin that will allow you to attain your goals.

Rule #3: Combine the factors of Rules 1 and 2 to arrive at selling prices that allow you to recover your cost and earn the reward you deserve for the delivery of excellence to your clientele.

Rule #4: Deliver excellence to your clientele.

Rule #5: Train technicians to address consumer requests in a thorough manner, which includes an explanation to the client of that which, in the tech’s opinion, should be done to remedy the client’s problem or tend to their request in a manner that delivers excellence.

Rule #6: Train technicians to quote upfront selling prices that will recover the costs associated with the service requested by the consumer, while giving the business an opportunity to earn a profit.

Rule #7: Use contract/invoice forms with specific areas for the client’s signature to show that the consumer agreed to and authorized the service to be performed as per all terms, conditions and prices indicated on the contract/invoice.

Rule #8: Supply your technicians with a price guide to assist them in quoting properly profitable selling prices and writing proper task descriptions.

Rule #9: Get paid at the time service is performed.

Rule #10: Give your technicians the authority and ability to get paid at the time service is rendered.

Exceptions to the rules

There is only one exception to those rules. That’s the rule concerning payment time. Extenuating circumstances can sometimes pop up regarding a contractor’s existing clientele. In that instance, and dependent upon the relationship between the contractor and client, I recognize the need to bend a rule. But, once rule bending becomes habitual and all-encompassing rules are bent, they are broken, discarded and, for all practical purposes, nonexistent. When you bend, break, discard or ignore the payment rule (#9), cash flow will suffer.

For most residential consumers, including those that have used your business forever, you should employ the ten rules. But some clients, such as commercial establishments may use your services on a frequent, constant and repetitive basis that requires a billing cycle tailored to their needs. If so, and if you choose to extend credit to them, make sure you are on top of the payment process. And keep in mind the fact that not all commercial customers are credit worthy.

When you break the rules

A contractor who only does plan and spec work broke rules # 6, 7, 8, 9 and 10. He did a time and material job for a commercial consumer he didn’t know. His bill for the job was $600. The consumer paid him $140 and refused to pay the balance. He wanted to know my thoughts on whether or not he should take that customer to court. I am not an attorney. I can’t give him legal advice. But, I’m pretty sure that 50% of attorneys lose, because the other 50% win. He might win or lose in court.

In my conversation with him, I felt that the process he used in dealing with this consumer was not the right way to conduct business. Even if he wins in court, judgments don’t buy groceries. You still have to collect the judgment. Keep in mind the fact that he couldn’t collect the original bill in the first place. His collection results to date are $140 and the additional stress and frustration due to his erroneous billing procedure. He said he’d let me know which way he chose to go and the results.

The remedy

To avoid this problem in the future, I told him it would be wise to change his procedures. There is an eleventh rule. By implementing what I call “the fast food rule,” he could have avoided this problem. When you go into a fast food establishment you always pay for the food before you get it. By quoting prices before performing services, contractors can get paid before they start the work, assuring their payment, as long as they perform the service properly.

If you would like me to show you how to change your billing process and utilize these rules, give me a call. I can train your technicians (those who are trainable) with regards to consumer interaction, design an invoice to expedite payment, provide you with my Readily Available Pricing Information Digest ©2012 for the Plumbing Heating Cooling Contractor customized to your labor and overhead cost factors and/or address many other of your business oriented questions.
As always, I wish good health and much wealth!

Richard P. DiToma is a contracting business consultant and active PHC contractor with more than 40 years of experience in the PHC industry. To receive more info about his Contracting Business, Coaching, Consultations, Business Books, Seminars with Solutions, Customized Price Guides and, Customized Business Forms, contact Richard by phone at 845/639-5050, via email at richardditoma@verizon.net, by FAX at 845/639-6791 or mail to R&G Profit-Ability Inc., P.O. Box 282, West Nyack, NY 10994.