Cash flow alone can give you a false sense of security

BY RICHARD P. DiTOMA, L.M.P.

Many contractors have good cash flow and are not successful. The fact that a contractor has good cash flow does not in of itself mean that the contractor is profitable. Unfortunately, it often just means that the contractor is bringing in revenue at a faster pace than his/her creditors are billing the contractor for the costs expended to bring in that revenue.

That’s why so many contractors eventually fall behind when it comes to paying their bills. When the bills catch up with the revenue stream, outgoing liabilities often surpass cash on hand. Then, the “borrow from Peter to pay Paul” principle comes into play.

Your total operating costs should be identified and calculated before those costs come to fruition. By itemizing all projected costs, you can have an idea of the amount of money that will be needed to pay your fiscal year’s obligations. This will help in the control of your cash flow.

By basing the budget on the annual maximum available hours you have to sell, and a profit margin which takes into consideration the risks you take in the delivery of excellence to the consumer, and the reward you deserve for the delivery, you can have a sense of the maximum revenue that can be brought into your business.

Armed with the knowledge of the costs going out and the potential incoming revenue, you will be able to map out a game plan. But remember that game plans have to be monitored and altered during the game to assure that you stay on track.

Other than the liars and those contractors who foolishly sell far below their true cost of operation, no contractor sells all their available technician hours all the time. Therefore, when the amount of business diminishes, the cash flow also decreases. But the cost of operating the business remains constant.

When you attempt to find more need for your services at properly profitable selling prices you are doing your job. However, you must keep in mind the fact that you cannot fix the problems wrong numbers create by looking to the future in an effort to find more work just to bring in some cash so you can keep the revenue flow in front of the ever deepening debt hole you may digging.

I am of the firm belief that one service technician with a service truck costs contractors in the United States at least $100.00 to $200.00 per hour inclusive of that tech/truck’s proportionate share of the business’ overhead cost. This means the annual cost range to the contractor per service technician/truck is $170,800.00 to $341,600.00 based on 52 – 40 hour workweeks, two weeks vacation, six holidays, and 244 annual hours of non-productive preparatory technician time. That gives contractors a maximum 1,708 annual potential productive hours per technician to recover costs and hopefully earn a profit.

The middle of the annual tech/truck cost range is $256,200.00. Figures 1 and 2 show the annual results (rounded off) per tech/truck of a sample business when:

1. the annual cost per tech/truck to the contractor is $256,200.00;
2. the annual hours sold [in blue] are as indicated in the first column; and
3. the profit margin is as indicated in blue above the dollar amounts.

Figure 1 indicates the annual amount of revenue brought into the sample business. The first column (in blue) designates the annual hours sold. The second column (in red) shows the constant operational cost the contractor must pay. Columns three to 11 give you the amount of revenue brought in when the number of hours in the first column are sold at the profit margin indicated at the top of the column. Black numbers indicate that the revenue is above the contractor’s cost. Red numbers point out the fact that the revenue brought in is less than the money the contractor must pay to bring in that revenue amount.

Figure 2 shows the same as Figure 1 except that columns three to 11 show the amount of money the contractor gets to keep (before paying taxes) after all expenses are paid, or loses because the contractor chose to use wrong numbers. Green numbers show that the contractor made a profit. Red numbers reveal the fact that the contractor lost money.

As per the examples in Figure 1 and 2, a contractor who sells his/her services at a 10% profit margin must sell at least 92.86% of the annual maximum available technician time to earn the profits shown. If the contractor only sells 1464 hours at a 10% profit margin the result will be a loss. The breakeven point at the 10% profit margin is in between at 1537.2 hours. The losses begin when less than 1537.2 hours are sold at a 10% profit margin.

As you can see, you can increase your chance of earning a profit with a higher profit margin even if you don’t sell all your hours. The reverse is also true. Low profit margins increase the opportunity for failure especially since no contractor (other than the liars and fools) sells all his/her technician hours all the time.

Bringing money in does not mean you are making money. It means you are moving money. In order to have the opportunity to earn a profit you must first identify, calculate and include all of your operational costs into your selling prices as they proportionately apply to the service you will perform before quoting any price.

Next, you must choose and blend a proper profit margin to your cost so you can attain your goal and earn the reward you deserve for the risks you take delivering excellence to the consumer. It’s very simple. If you need help give me a call.                                   

Keep in mind the fact that as a good technical person you would never consider installing equipment and/or materials that could not result in a completed job that would accomplish the purpose intended before the task was contemplated. That’s why you are a good technical person. Bad technical people are too lazy, ignorant and stupid to care.

In the same vein, you should never consider charging prices that could not give you the opportunity to attain the only result for which business exists. That is profit and success.

For the last 30 years, I have been, and still am, a contractor. I come across the same everyday problems you encounter in your business. However, I also have been a contracting business consultant for 18 years. And, there’s the difference. I not only encounter problems, I solve them in a logical and fair manner. Don’t get caught up in that false sense of security that emanates from cash flow that doesn’t keep up, and surpass, cash outlay.

It’s time for you to be certain that you are acting like a good business person. Cash flow for the services you perform must surpass the cash outlay you incur to perform those services. As always I’m here for you if you want assistance in facing and solving your problems. It’s easy, painless and can lead to better profitability. All you have to do is give me a call at 845/639-5050. It will more than likely be the best call you will ever make.

               

Richard P. DiToma is a business consultant and contractor with 36 years of experience in the P-H-C industry. He conducts seminars, evaluates business operations, publishes customized price guides for contractors and offers continuing support.

His book -- “Solutions Management Theories & Methods for the Contracting Business” -- deals with solving pr-oblems contractors face; identifying & calculating costs; developing proper profitable prices; addressing consumer questions; hiring and evaluating technicians; and logical management procedures

It’s also available as a “Workshop On Demand” for individual businesses (from one person to multi-person businesses); contractor groups  (organized or informal); trade associations; and wholesalers to the trade.

Date: Arranged according to your schedule

Location: Wherever you wish. Richard P. DiToma will come to you -- or you can come to him. Contact Richard to find out if there is a workshop coming to your area.

His other book -- “Readily Available Pricing Information Digest 2006” -- for the plumbing-heating-cooling contractor service price reference book is available with plumbing &/or heating &/or cooling section(s). To receive more info about his services, to order his books or to contact Richard at 845-639-5050, by fax at 845-639-6791 or via email at richardditoma@verizon.net