No. 1 on the list is profits.

In grade school, or perhaps apprenticeship training classes, we learn about the combustion triangle: Fire = Fuel + Oxygen + Ignition Source. Take away any one of these and it is impossible to have a fire. The titles are often varied - for example, the terms oxygen/oxidizer/air may be used interchangeably - but the concept is still the same: Remove any leg of the triangle to kill the flames.

I believe business has a fundamental triangle as well. Each leg is so important that, without it, the business fails to ignite. Let’s explore each leg that I’ve identified and see if you agree.

All three legs of the triangle are equally critical to business success but, in my experience, the most neglected leg is profits, which is why I’m placing it first on the list. If your business is already profitable, or you qualify for a taxpayer bailout, then you can skip this month’s column.

My working definition of profit is: Bring in more dollars than you spend.

The Sharecropper

When a farmer sows seed, he’s betting on harvesting enough to get his seed back, plus enough to feed his family and still have some left over to sell for a profit. Contracting is similar to farming, but the question is: Are you a farmer or a sharecropper?

Sharecropping is a system where a landowner allows a tenant to farm his land. During the planting season, the landowner will typically cover the tenant’s expenses, even providing a place to live. At harvest time, the tenant pays the landowner a percentage of production to cover the land rent and whatever expenses the tenant incurred. It sounds like a good plan on the surface, but this system was used to enslave sharecroppers long after the emancipation proclamation was signed.

To keep the sharecroppers behind the curve, the landowner would exercise considerable control over the prices of the commodities the sharecroppers purchased through the season. On top of that, the landowner would also have sway over the selling price of the produce. The result was that the sharecroppers always had a hard time covering the cost of living through the planting season. By harvest time, they would just break even. The next year, even after working much harder, the same result would trap the hapless sharecroppers again.

Contractors play the same game on a different field. In the past several years, free-flowing credit numbed many businesses into thinking they were flourishing, when the reality was that credit allowed them to keep rolling losses over to the next year and the year after that. In some cases, inflated home equity was used like a windfall, pouring even more cash into the illusion of a successful business.

But if the profits were slim, or missing when the day of reckoning came, there was no leg to stand on. “You have to spend money to make money” is the mantra “sharecropping” contractors chant. No doubt, sharecropping contractors can produce some big crops, but when harvest time comes along and it’s time to settle accounts, they’re right back where they started, if they do well.

Do not confuse “sales” with “profits.” Sharecroppers could plow 100 acres or 1,000 acres, but at harvest time, if there were no profits, the “big” sharecropper would simply be more exhausted than the “small” sharecropper. What is the point of working 10 times as hard for the same result?

You May Be A Sharecropper If …

Below are some signs that you may be a sharecropper. Note that each of the “symptoms” may also be used profitably.

  • You may be a sharecropper if you try to make up for weak cash flow by increasing your sales volume. This is especially true if “sale pricing” is the tactic you use for increasing sales. You will erode your profit margin even further; increasing capacity and risk exposure costs even more money.

  • You may be a sharecropper if you are offering delayed payment terms. “Net due 30 days from invoice” is a common practice, which means that your customer holds on to your money for a month (or more, much more!) after you’ve done the work. This makes it easier to get a sale but obviously, there’s a lag in the cash flow. Technically, you may have earned a profit on the job but your profit dollars are sitting in your customer’s bank account.

    It is not uncommon for me to find contractors whose entire company profit can be found sitting in customer’s bank accounts. But the bills keep coming in, so the contractor taps the line of credit to keep things moving. More erosion of profits.

  • You may be a sharecropper if you turn to “factors” to solve cash flow problems. Factoring is a process where a third party will buy accounts receivable from the contractor. The price a factor will pay depends upon the quality of the receivables.

    If a huge, well-known corporation, or maybe a government entity, owes you for an invoice less than 30 days old, then the factor may pay you a reasonably high percentage for the invoice. You might get $95 for a $100 invoice. Circumstances may result in stiffer discounts. A riskier receivable may fetch only 70 percent, so that a $100 invoice only pays you $70. You may need the $70 right now instead of a month later, but if your company is only running at a 10 percent profit, you’ve just paid 20 percent for the experience of doing the job.

  • You may be a sharecropper if you have to use collection agencies. C.O.D. companies rarely have to call collection agencies since their collection problems usually come from bad checks or fraud. But if you’ve been taking chances by offering credit terms, then you will end up with invoices that don’t get paid.

  • You may be a sharecropper if you grumble about paying bonuses. If employees earn bonuses, it should be a cause for rejoicing. If your company is not profitable, you’ll hand those bonuses out with a clenched fist.

  • You may be a sharecropper if you find yourself paying late fees on tax reports. Late fees are among the most expensive forms of borrowing. If you don’t catch up quickly, you may find out what a sharecropper felt when the locusts invaded their fields.

  • You may be a sharecropper if you carry a balance on your credit cards. Another expensive source of credit. If you can’t get them paid off, it’s probably because you aren’t clearing enough profits to begin with.

  • You may be a sharecropper if you have to race to the bank to beat payroll. Just see what happens if you lose that race once.

    The big secret to earning profits: Know your costs and sell for more than that. I believe that most of the time, contractors find that their cost actually exceeds their current selling price. This is typically where denial kicks in. “There’s no way it costs that much to be in business!” or “My customers would never pay that much” or “All my competitors charge less than that but they’re still in business.”

    This is the mentality that enslaved sharecroppers. But I have a very serious question for you: If the evidence is that you are a sharecropper; if you rely on banks, credit cards or your uncle Ted to keep the bills paid; if your money is tied up in receivables all the time, then do you really own your business? Or do others own you? And if others own you, are you not a slave?

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