Have you ever heard the statement cash is king? One thing every contractor needs to be aware of is that you will not be forced to close your business because you’re not making a profit, if that day comes, you will have to close your business because you have no cash flow. If you have no cash you have no business.
I like to think of cash flow as the air we breathe and profits as the water we drink. Without air we only last a few minutes and without water we can last a few days. You have to have both but cash flow is definitely king.
Many air conditioning contractors shun residential AC work because of the intense customer relationship that is required to be successful. With commercial work you can deal much less with the customer and more with technical issues in the field. The problem with commercial work is you typically have to finance receivables for 30, 60 or 90 days and that will make a significant hit on your cash flow. If you plan on growing in the commercial business, you must consider where that cash is going to come from. If you invoice $50,000 a month in commercial work and have to finance it or 90 days, you need $150,000 cash in the bank to ride that out.
Residential work on the other hand can actually add cash flow to your business if you charge on a COD basis. You pay for your parts on a 30 day basis and you pay your payroll on a weekly basis so you’re actually getting paid in advance and can use the cash for up to seven days for payroll and up to 30 to 45 days for parts. If you are in the residential business and you closed your business today income would stop today. Your cash flow out would continue for 30 to 45 days.
Be aware that if you don’t set up your service agreement program properly, you may not have a positive cash flow. You must make the conscious decision whether your service agreement program is going to be a loss leader used to generate leads for replacement sales or if your service agreement program is going to be a profit center and make a profit or a combination of both. In either case, you will have a negative cash flow in the beginning or before significant growth. The tool used for making this decision and exposing the amount of cash needed is the budget template and budget process along with a cash flow forecast.
You need to know that growing will require you to purchase additional assets such as tools, trucks and inventory. Will you pay for these assets with cash, finance or lease them? You need to know if you’re charging enough to positively cash flow your payroll. You need to know if you’re going to finance receivables or if you’re collecting upfront. If you don’t have additional capital available to finance receivables then you must do residential work and you must charge for it up front. This work must be priced for profit and positive cash flow if you don’t want to sell yourself out of business.
If you have funds available to finance an investment in a service agreement program to be used as a loss leader for replacement sales, you can take a different approach. Growth can be much faster and you can secure leads for replacement projects that will result in significant growth.
You need to know all of this in advance, not after it’s too late.