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Overcoming a Cash Flow Crunch

Do you really know your costs?

Many small firms run into cash flow problems and are surprised when it happens. The owner or senior managers look at job margins and just scratch their heads. The margins are good, so why is there not enough cash?

Let’s look at five common reasons for this “mysterious” cash flow crunch:

One. In reality, the margins are not good. You must define “good,” and that doesn’t mean eking out 2 percent. Nor does it mean “this job” did as well as “that job.” Often when looking at job margin issues, small firms compare their recent margins with their historical ones and use the historical ones as the measure of “good.”

But if you’re getting better at what you do, then over time you should see greater margins (all else being equal). You work more efficiently, so there is less cost in a job. And if you have earned a solid reputation, you don’t need to set a price as if you are just starting out and will take anything you can get. If your margins are holding the same or even going down, find the hidden costs (e.g., wasted materials) and look for improvement opportunities (e.g., better equipment).

Except in “lowest bid” situations, the price you quote is just one factor in deciding which firm gets the job. If your cash is tight, look first to whether your margins are as good as you think they are. Probably, they are not.

Your business has fixed and variable overhead. An amount for overhead should be a line item in each job estimate. If you’ve left that out, then the margins you are looking at are higher than your real margins; you’re basing decisions on numbers that are not real. This common mistake is most often made by firms that “saved money” by not investing in good estimating software.

Two. You have excess inventory. If you have a stockroom that is full to the gills or that contains expensive equipment you aren’t likely to install soon, free up that capital. You may have to give some of it away (e.g., offer it at little or no charge to select customers), but first try to work out a return for refund (even if partial) with your suppliers.

Keep inventory sufficient, but lean. Otherwise, it is a black hole for capital that is impeding your cash flow.

Three. You are working with worn or outdated equipment, making your job costs higher than they should be. It seems counterintuitive to spend more to save more, but the math usually works out when it comes to the equipment your crews use to earn your revenue. Start looking at what you can purchase to make work run more efficiently, accurately, or smoothly.

Four. Your people are inadequately trained, resulting in rework, bad work, and inefficient work. Which tasks do your crews perform most often? You may be surprised at the large variance in methods for performing these tasks. Do you know which people perform them at the lowest error rate and why? What about the highest error rate? Completion speed?

Five. You cut costs in the wrong places. Every business needs to keep its overhead down. But don’t blindly cut; the last thing you want to do is save money at great cost. If your firm provides electrical services, don’t try to “save money” with cheap-looking, uncomfortable uniforms. Don’t try to “save money” by winking at the lack of equipment safety inspections.

You will save money by replacing paper-based reporting, billing, and payments with electronic. How else can you make operations more efficient? What about doing panel wiring on a pre-fab basis in the shop rather than under less favorable onsite conditions? Have you discussed kitting with your suppliers? Do your jobs end up with quite a bit of scrap material? Find out why there’s so much waste.

When you are looking at cost-cutting, focus on preventable waste and needless costs. Cutting anywhere else is unlikely to produce positive results over the long term.


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