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Positive cash flow is the lifeblood of any business. A blog post in Forbes stated that “the primary reason 8 out of 10 new businesses fail is that they simply run out of money to pay the bills.” This problem is also one that impacts the HVAC industrial and commercial contractor. HVAC contractors frequently experience challenges with business growth and sustainability, so what approach separates successful HVAC contractors from those that fail? One of the keys to success is avoiding the following profit-killers:
- No Cash Flow Forecast – Each month, HVAC contractors should forecast cash flow requirements. You can’t monitor what you don’t know. Adjust your spending during tight periods, and when cash flow is good consider saving for a “rainy day.” Ask vendors if they will offer you a discount for paying early. If cash flow allows, pay early and take the discount.
- Poor Pricing – Know your numbers. Charging too little is one of the biggest reasons HVAC companies go out of business. Before deciding how much to charge for a job, you need to calculate your break-even. Calculate the number of hours the job should take, how much your installer costs you per hour (don’t forget to include hidden costs such as health insurance and workers’ compensation), how much you charge per hour and the cost of materials. For example, if you pay your installer $50 per hour (including hidden costs) and charge $100 per hour for labor, that’s $50 toward your break-even point. If you need a profit of $100 per job to stay in business, mark up the HVAC materials to make up the other $50. Raise prices if necessary.
- Credit – Quite often large projects require extending credit. When that happens, make sure you hold the customer to the negotiated terms. Your terms should be stressed to the customer and adhered to as much as possible. You may also want to consider providing cash discounts based on early payment. If client corporate policy delays payments 90 days or longer, tell them you accept credit cards. When payments are infrequent, cash flow problems can occur. Before accepting large project work, budget project expenses to identify the cash flow requirements.
- Not Collecting Money Due – You should be able to generate up-to-the-minute reports for any outstanding account, including: due dates for project payments, the date the last bill was sent, the date the last payment was received, the current balance, and the number of days for any overdue payments. Customers should be contacted soon after. Find out why the payment has been delayed. Have the customer commit to a payment date or schedule. Delays in payment for work performed can weaken a company’s cash flow. Without working capital, an HVAC contractor may not be able to take advantage of future opportunities as they become available.
- Expenses Overload – Many small HVAC contractors make the mistake of putting family members on the payroll who don’t carry their weight and/or pay for too much for overtime. Both drain cash from a business. Your business will never fully take off and reach its maximum profit potential with inflated overhead expenses.
- Capital Investment Overload – You can get into cash flow trouble when purchasing too many new vehicles, computers, machinery and other equipment all at once or by moving into new space that they can’t afford. Don’t overspend. Other areas for overspending may include maintaining excessive inventory and paying with cash instead of leasing or financing for large purchases.
- No Cash Reserve – A cash reserve helps cushion any gaps between payroll and receipt of payment from the customer. This is especially important for contractors who offer a line of credit to their customers. Held in a separate investment account, a cash reserve is the best insurance policy against cash flow problems.
Failure isn’t just going out of business. For many, it’s the end of a dream. Review these common profit killers and make sure you do everything possible to keep the cash flow flowing and your industrial HVAC contracting business thriving.