The biggest barrier to profitability in most contracting companies today can be described in two words: accounts receivable.
In my experience of consulting with fellow plumbing contractors, it's not uncommon to see businesses with accounts receivable doubling or even tripling monthly revenue. These businesses constantly fight against deadly currents of negative cash flow, struggling to keep their heads above water, in danger of going under any month. Cash flow becomes so tight in these businesses that owners borrow money to meet payroll or routinely skip taking a paycheck for themselves and their family.
The good news is this is one of the simplest business problems to turn around for the motivated business owner. If you and all your employees - from the customer service reps to the techs - are truly aligned behind this goal, you can reduce your accounts receivable to nearly zero starting today.
Surprisingly, the weakest link in this chain often is the company's owner. Few customers have the audacity to ask the receptionist, the technician, or even the general manager to stray from company policy and extend them credit. But the owner routinely gets these requests from business associates, friends, friends of friends, shirt-tail relatives and the like.
It's not so much an earnest appeal for financial help as an unspoken assumption that their buddy the plumbing contractor would never be so crass as demand payment at the completion of the job - much less to pester them about an outstanding bill.
And those of you with relatively large AR numbers won't be surprised to hear that the customers who feel comfortable enough to assume we'll accept their credit also feel comfortable in letting that bill slide month after month.
Often, the owner even brings this problem on himself. In a misguided effort to maintain goodwill, the owner may waive discussion of money at the job while heroically solving his neighbor's plumbing problem. What this owner fails to realize is that any goodwill generated by this no-problem attitude about money will rapidly dissipate when the customer eventually gets the bill - the size of which comes as a shock because cost was never discussed upfront.
Credit CrackdownSo how do you avoid this trap?
First, keep the owner off the phone. This will dramatically reduce any requests for credit from the owner's associates - and will keep the owner from making those grandiose, and costly, friendly gestures.
Next, instill throughout your company the absolute importance of getting paid the day the work is performed. Tact is important. State your payment conditions politely and positively. You don't need to turn off potential customers by abruptly notifying them that "we work only for cash on delivery."
Instead, train your customer service reps to explain that before you begin work, you will price the job for them so there will be no surprises - and that your field techs are fully trained to estimate the job and to accept payment while they're there on the site. That's a convenience for the customer, you might add.
Most customers will readily accept these conditions. For those few who still ask you to send a bill, your customer service reps must hold fast. Train them to politely review the options - cash, check or credit card payment - while explaining your company has found that customers prefer to know their costs upfront.
Teach them to explain that you base your competitive pricing on accepting payment at the job, but that you would have to increase prices for extending credit. Further, you are able to respond faster when you don't have to run credit checks before starting the job.
Obviously, the ability to take credit card payments at the customer's door is critical. If you lack that ability now, get to work on it right away. It will more than pay for itself by decreasing your costs for collections and write-offs.
Another good practice is to contract with a check guarantee company, which functions like an insurance policy to protect you against bad checks.
After making sure your technicians understand the importance of getting paid on the job, you must train them in estimating work - or better still, in implementing your flat-pricing system.
In addition, you must train them in the techniques of receiving payment and handling problems. For example, they must learn never to leave the job without payment. If they encounter a problem, teach them to call the office from the job so that you or your senior managers can work out a payment plan.
It's also advisable to establish a relationship with a financing house so you can guide customers there for a home equity loan to pay for the project. Remember, if this customer does not qualify for financing at the bank, why would you extend them credit?
Reducing your accounts receivable is not only sound financial management, it's also good marketing. It ensures that your customers judge you on the quality of service, which you can control, not their subsequent billing experience, which you can't.
If your customers understand the price going in and understand you expect to be paid upon completion of the job, they will be happy with your performance as long as you deliver what you promised. But if you later get into an extended collection battle, your customer will wind up hostile toward you no matter how good a job you did.