It was important to take every job we could get our hands on. With that attitude we took on jobs we shouldn”™t have; because of that we often operated on a loss. By this time this year we expected to be able to put away $350k of savings, so far we”™re at 40 percent of that. That makes cash on hand, or lack of it, a big obstacle for us.
Thoughts of the Day: The size of a job can make it tempting to take. Eating into savings in order to keep things going is dangerous. No business can afford to operate at a loss. Knowing what to do to shore up cash on hand is crucial.
Not all jobs are equal. And most businesses”™ accounting systems aren”™t set up to show an accurate, real-time picture of what”™s going on. The charges that relate to doing the work, cost of goods sold, deducted from the invoices to the client, gross revenue, should result in money left over after doing the work, gross profit.
If a job goes sideways with problems, if a customer doesn”™t pay, if the original estimate of what the customer would be charged isn”™t enough, then the result could be zero or even negative gross profit.
Gross profit from every job is what”™s used to pay for overhead. Money left over is net profit, which gets used to pay off balance sheet expenses such as principal payments, and to build up cash reserves. In order to pay off balance sheet expenses and build up reserves, plan on paying one-third of net profit to taxes. No avoiding it. To get ahead you have to admit to having profits and paying taxes.
Some will argue that it”™s worth taking low-margin jobs just to keep people working. After all, profits just go to taxes. That attitude can run the business into the ground. Every business needs cash on hand, or reserves. Well-run businesses make enough to eventually get debt free.
If current reserves get used to fund a loss, the business loses out big time. It uses up money that could have been used to promote the business to a better quality of client or that could have rewarded employees for jobs well done, or kept on the sidelines to keep the business safe.
Business owners are inherent risk takers. They look for opportunities and find it hard to turn down work. They hope to be able to figure things out as they go along, but there aren”™t a lot of options. If there isn”™t enough money coming in, you can either shortcut the job, use lower quality labor or materials, pay your people less or not pay your vendors what you owe them. None of these are reputation builders.
Most business owners want to do good work and be of service to their clients. To do that, they need to find quality clients and help them to understand and respect the quality of work they can deliver. That includes walking away from bottom-feeder clients who are none of that.
Having a model to use to estimate the profit on every bid is essential. Figuring out how much gross margin is typical and how much overhead to charge to each job takes a bit of work but is well worthwhile. Test the model with a number of completed jobs to find out if it works. Knowing ahead of time that a job is a loser gives you the option to renegotiate or walk away from work you”™ll come to regret.
Clue your employees in as to what you”™re looking to do: make more and spend less. Review every expense and ask if it”™s necessary. Pay employees bonuses out of profits rather than handing out pay increases at review time. Be tight fisted in order to build up the one thing every healthy company needs: profits.
Make it your mission to build up cash on hand and to protect that cash once it”™s there. Put extra cash into money-market accounts. Tell your bookkeeper that the money is unavailable. Even the business owner needs to show restraint when taking distributions. At the end of the year, pay taxes and keep the profits inside the business.
Looking for a good book? Try “Indispensable By Monday: Learn the Profit-Producing Behaviors that will Help Your Company and Yourself” by Larry Miller.
Andi Gray is president and founder of Strategy Leaders, Inc., strategyleaders.com, a management and business-consulting firm dedicated to working hands-on with owners of established, privately held businesses. The firm is focused on the top five goals of most business owners: profitability, growth, predictability, stability, peace of mind. She can be reached by phone at 877-238-3535. Do you have a question? You can reach her via email at AskAndi@StrategyLeaders.com. Answering questions that are top-of-the mind for business owners, Andi provides timely information and practical advice for the entrepreneurial community. Please visit AskAndi.com for more articles.
