Improving cash flow!
Every business owner’s favourite topic.
In another article I’ve spoken about 7 key levers that any contractor can focus on and use to improve their cash position – you can check that out here - But right now, I’m going to talk about just one of those…
And that’s accounts receivables.
Accounts receivables are just a fancy word that accountants and bookkeepers like to use when talking about money owed to you from customers.
It’s money that you’re expecting to be paid based off of the goods and services that you have provided.
Now here’s the bottom line…
On average, 5-15% of revenue goes uncollected every year!
And that’s A LOT of work being delivered for FREE.
Let’s say you do $1,000,000 in sales, and just 5% of that goes uncollected.
5% of $1,000,000 is $50,000.
Now, you might be thinking, "well what’s $50,000 in comparison to $1,000,000? Right? This doesn’t seem like a whole lot of money… you now… I can live with that".
But let’s break it down.
Say you have a gross profit margin of 25%.
This means that $250,000 of that $1,000,000 should be your gross profit.
But because of the lost $50,000 worth of sales, your gross profit is actually only $200,000…
Suddenly that uncollected $50,000 seems like a lot of money, right?
Especially considering that this 5% of uncollected sales is the equivalent of 20% of your entire gross profit.
To make up for that lost $50,000, you’re going to need an additional $200,000 worth of sales – just to get your gross profit back…
And that is a serious number of additional sales that you wouldn’t have needed in the first place…
Which is crazy!
Now, think about the impact that lost $50,000 would have on your NET PROFIT.
That could very well be the difference between your business making a profit or not.
A sale only ends once money actually exchanges hands!
This is why accounts receivables is a critical lever to understand and pull in business.
Shortening your average collection time WILL dramatically improve your profit and cash position.
So, here are 5 simple strategies you can use to do this:
ONE: Communicate price and payment terms upfront.
You need to talk numbers upfront, period!
Hourly rate, quoted price, inclusions/exclusions, whatever it is, you need to have that conversation up front… and you need to communicate clearly what your payment terms are.
This is all about educating our customers how we do business and what we expect from them.
TWO: Get approval and a written signature before starting ANY works.
You shouldn’t be doing ANY work… until you have approval and a written signature first… and this goes for variations too!
If you’re doing any work without getting written acceptance first, you are literally shooting yourself in the foot…
I hear too many horror stories of contractors completing major works and multiple variations without having a signed contract in place, only to have the client refuse to pay once everything is finished.
And in some instances, it sinks the business, in others it leads to hefty ATO penalties and payment plans, and in others it sets businesses back years…
So be smart about this one and cover your arse.
THREE: Get a deposit.
One of the best ways that you can manage your receivables and protect your cash position is to get a deposit up front prior to starting work…
Now, this isn’t always possible depending on what you do… but if it’s a larger project, take progress payments.
Whatever it is… aim to reduce the amount you need to collect from the customer at the end of the job – that is the ultimate aim of the game.
FOUR: Take payment on completion.
Your goal should be to collect payment on completion, and if that’s not possible… shorten your payment terms, and get them down to a 7-day account!
You might not always get paid within 7 days but shortening them and chasing up after the 7 days will more often than not lead to faster payment!
And if all your work is with builders with low margins and 60-90-day payment terms… then you need to find other customer groups! Protect your cash…
FIVE: Follow up relentlessly.
You need to have an effective system in place that you can deploy to actually follow up and chase your money… you’ve already done the work… so now, you deserve to be paid!
Do NOT just assume that because you’ve sent an invoice, everyone will automatically be inclined to follow your payment terms and pay.
This is YOUR income, and YOUR cash flow… be on the front foot.
Now a bonus tip…
INVOICE your customers as soon as possible!!
Far too many contractors aren’t invoicing quick enough…
The faster you invoice, the faster you get paid!
We need to train our customers to pay on our terms.
So stay on top of this and aim to reduce your accounts receivables…
For every day that you collect sooner…
Every day that you reduce your accounts receivables…
Your cash position will skyrocket.
If you're an electrician, plumber, painter, carpenter, or any other tradie business owner who is looking for assistance with your tax, accounting, and bookkeeping - click here to learn more!