Covid, Cash & the Coming Contractor Conundrum
The Covid-19 era brought us the most unexpected result. Historic demand.
And while there was a brief period of time where excitement created the mood, we quickly moved into emotional purgatory. A time of record sales that has been met by ever-increasing prices and production lead times.
“I’ve got more business than I can handle! But I can’t get products. And the products available are increasing in cost, every damn month.”
To say these times are unprecedented, is no longer a platitude.
And those times…they are a-changin’.
Let me introduce you to the elephant that crept into the room in late 2020, and has been growing…and growing…and growing: CASH FLOW
You see, there’s a dirty little secret in our industry: A majority of contracting businesses in this country depend on a steady flow of new business to cash flow their enterprise. In simplest terms: Customer deposits are used to pay for company expenses before jobs are completed, and before materials are secured.
(Don’t worry: If you’re one of the few this never applies to, I’ll soon tell you why this is still of vital interest to you. But let’s focus on this unfortunate dynamic, which is the real epidemic.)
When an organization uses new business for cash flow, survival becomes dependent on time. The quicker the time between contract and completion, the healthier a company is…financially. The longer that time, the more financially extended a company can become.
Imagine your company needs $50,000.00 per month to pay all operating expenses. If you’re collecting $50K in deposits per month, you’re essentially ‘neutral’. And when you turn a job in 1 month, you collect your balance, pay your vendors and installers…and move forward.
Now imagine that same company, but with a production lead time of 4 months. 4 months without collecting the ‘back end’ of your business. 4 months of $50K in expenses. Now I’m no mathmetician, but seems you’ll need to collect $200,000.00 in deposits to operate, no?
We don’t have time in this article to dive into all the ways this can effect your business, but I hope that this at least creates a visceral reaction for you. What I will tell you is this:
Interest rates are rising, demand is cooling, and as such…manufacturing capacity is returning, shortening lead times. And I’m seeing two types of companies as we emerge from this:
Type 1. Companies that entered the pandemic with sound cash flow principles. These companies have used this time to increase their cash position, to build their ‘warchest’.
Type 2. Companies that a more similar to our example above. For many of these companies, their receivables (A/R) have increased dramatically, their production pipeline is long and full, and while they are ‘busy’, they’re not necessarily fortifying their cash position.
In fact, in many cases…their inflated A/R has been subsidized by either their increase in new business demands, or by depleting much of the cash they had on hand prior to covid.
And when these companies are faced with slowing new business, and manufacturers that now want to ship and bill for products much sooner than expected…there becomes a new cash conundrum. A period of reduced incoming cash, and increased outgoing cash. Think about that.
So for Type 2 Companies: It’s time to recognize this dynamic, and start to adjust. Look at your overhead structure. Look at your current ratio. Look at your margins. How is your company going to react if demand falls 30% and lead times fall by half or more?
And for Type 1 Companies: What could this dynamic mean for your business? What strategic advantage might you have if your competition is struggling to meet cash flow demands, and you are not?
Well…since I’m not sure what ‘type’ of company you have, I’m not sure I’m inclined to answer that question!
Instead, I’m going to the white board. Because I see opportunity on the horizon. Do you?
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PS – If you’re reading this blog, chances are that you’re a home improvement entrepreneur. So my question: Why do this alone?
Why not join a group of like-minded people that share ideas and best practices, that negotiate together and help one another generate leads? And there’s so much more! I hope you’ll explore our website further.
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