Every business has four areas that owners and managers must control to profitably survive and grow. Make sure you are tracking them and taking action when they are not trending the right way.
1. Understand proper pricing and costs
The customer writes your paycheck. He writes your salaries, your bonuses, your worker’s compensation expenses, your rent check, etc. The most important thing you must do is to PROFITABLY take care of the customer. This means understanding how much it costs to operate your business each hour. If your overhead cost per hour is $50, then each hour must generate at least $50 plus the direct costs of creating your products, performing project work, servicing customers, etc. Charge the customer accordingly and provide value to the customer that exceeds the cost that he is paying. A customer must feel that he got a good value for the work performed. If not, he will use one of your competitors next time.
2. Positive cash flow
This means billing and collecting for your profitable work. I had a client who built his business from zero to $2 million. Once growth stopped, he started having problems paying his bills. The reason? He was losing a nickel for every dollar that he took in the door for 12 years!
Growth masked the problem because he always had cash. The cash from one completed project started the next. As long as the dollars were increasing, he never saw the cost problem. Make sure you collect on profitable work!
It’s easy if you can collect COD. However, many companies can’t, so you must bill. If possible, get a deposit. If possible, progress bill. If that isn’t possible, make sure you understand—and your customer understands—payment terms.
Bill customers on the day the job was completed. The longer it takes to bill, the more convenient the memory of the customer. They start questioning invoices when they don’t get them immediately upon completion of the work.
After billing, the next critical area is collections. Take the time to call customers who have not paid within 30 days. If you don’t become the squeaky wheel, then you will be put at the bottom of the list for payment. Sometimes when it gets busy we don’t take the time to do this very important thing because cash flow is usually good and it hides that fact that some customers are not paying when their bills are due.
3. Employee time
How productive are your employees? Are they putting 8 hours on their time cards and only producing revenues for 4 of those 8 hours? If they are salaried, are they billing a project cost for the true number of hours worked on that project or do some “slip in” when they are engaged in personal activities on company time?
Make sure you are not paying them to drink coffee, surf the Internet, or other non-productive activity. For companies with field vehicles, make sure travel time is kept to a minimum. Global positioning system (GPS) devices track where your company vehicles are at all times. This minimizes the number of times an employee does personal errands on company time or uses the truck for personal reasons during non-working hours.
Meeting time, vacation days, holidays, and sick days, while you cannot bill a customer for them, are benefits that most employees expect. So, the costs for these benefits must be included in your overhead cost per hour calculations and pricing.
When at work, they should work. Increasing productivity decreases overhead. The more productive your employees are the more revenue you can generate.
4. Inventory
Inventory is a bet. When an employee purchases a part for a product, a vehicle inventory, or the warehouse, he is betting your hard earned dollars that part will be sold. I’ve seen a lot of “bets” on warehouse shelves. However, you don’t want your employees running to suppliers every day because they don’t have the proper parts. Better yet, learn the delivery cycles of your suppliers and keep only enough inventory so that it can easily be replenished within the order and delivery time.
If you take care of the customer, understand the costs of doing business, bill for your jobs, keep an eye on collections, and watch employee productivity and inventory purchases, you’ll have control over the most crucial business activities necessary for business survival and profitable growth.
Published: August 7, 2013
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