Lead Times, Cash Flow and the Financial Destiny of your Business
We all know that we’re living through unprecedented times…and on several fronts:
1. Consumer demand
2. Consumer makeup
3. Product Cost
4. Labor Cost
5. Lead Times
Yep…just about every damn thing that matters for the financial health of our business.
And consider this: You have almost ZERO control over any of them.
This is why you’ve got to pay particular (and better) attention to the things you can control.
Today I wanted to drop you a note about CASH FLOW. (Where is your cash? How are you using it? Where is it going, and where is it pledged? How much do I need?)
Here’s the most important question you can ask yourself: If I stopped selling today, will I have enough cash to satisfy all of my open jobs? (and to be very specific, can I finish all jobs that I’ve taken a down payment on?)
Remember to factor in the money you’ll collect when the job is completed. But do the exercise…based on cash requirements to run your business, amounts you’ll collect, and how long it will take.
Because the commitment of a down payment by your customer, represents your obligation to fulfill that job. No matter what.
I will not sugar-coat this: Anything short of completing a job for which you’ve accepted a down payment, is theft.
Worded harshly? Perhaps. But it sounds obvious, right? Should be. But we don’t often look at it in such plain terms.
We don’t often connect those dots, because we’ve rarely been forced to navigate supply chain dynamics that force us to.
Historically, the cash you need to run your business is determined by these factors:
1. Cash on hand
2. Fixed overhead cost(s)
3. What you currently owe vendors
4. The payments you are owed by customers (present and future)
5. The cost(s) you will incur to finish open jobs
6. The TIME it will take you to finish those open jobs
All of this remains the same, except for…#6.
It is the TIME it is taking from contract to completion, that is the most radical change in our businesses over the last couple of years.
Increases in cost can be quickly adjusted for, but extended lead times present a much bigger challenge.
You see…the longer the job lifecycle, the more of your cash that’s going to be “tied up”.
Let’s say it costs you $20,000.00 per month to operate your business. Rent, utilities, insurance, salaries, marketing, etc…
2 years ago, you could sell a job and collect on the balance in 6 weeks. That means it would theoretically cost you $30,000.00 to operate your business until you collected on that job.
If these were finance jobs, and you collected 100% on the back end…then YOU had to come up with that $30,000.00.
But what happens most often…is that DEPOSIT MONEY is used for operating capital. So instead of coming up with that $30K out of pocket, many (who am I kidding…most) companies utilize those deposit funds.
If you sold $60K over the course of 6 weeks, the deposits (assuming 50%) cover your entire cash demand.
And THAT is how most home improvement companies get started.
Then the ball is rolling, and no one notices the difference…even as the business scales.
But what happens when the job lifecycle goes from 6 weeks to 24 weeks?
For most, the answer has been SALES.
Increased sales (and deposits) have helped to cover your cash demands as you’ve waited 4x as long for product to arrive, for installs to happen, and to be PAID.
Then the ball is rolling, and no one notices the difference…even as the business scales.
But there are several dynamics that you must be aware of, and that you must be preparing for. And some are not as straight forward as you think.
What happens if (when) demand slows?
Consensus (and history) says that we’ll see a dip in demand at some point. But there is no agreement or prediction on how fast that dip will come. We all hope (and I actually believe this) that there will NOT be a “cliff”.
My belief is that demand will ‘cool off’, but that we’ve entered a new era in home improvements. Fueled by a work-at-home environment, by millennial consumer shifts, and by a return of new housing demands. So while I don’t believe we’ll sustain as much growth, I don’t think we’ll see spikes (in the Y axis) when it comes to demand and growth for our services over time (the X axis).
That said, we must still be conscious of how much our deposit revenue is fueling our cash demands. The more that you’re using deposits to cash flow the business…the greater your company is at potential risk.
I go back to the most important question you should ask: If I stopped selling today, will I have enough cash to satisfy all of my open jobs? (and to be very specific, can I finish all jobs that I’ve taken a down payment on?)
If you haven’t asked yourself this question…ASK IT. And ANSWER IT.
What happens if you run out of crew capacity?
This is probably a new concern, for most. But I’ve seen some companies grow so rapidly that their job lifecycle has been extended not only by manufacturer lead times, but by their own inability to install what comes in.
If this is happening to you, there are two things you have to consider when it comes to cash flow:
1. At what point do you bring on another crew?
If you’re engaged with sub-contracted crews, then this probably isn’t as much of a cash flow issue, as it is a commitment issue. Most either can’t, or don’t want to bring on a crew without knowing they can supply a steady flow of work. This can be a delicate balance, as you seek to do right by people while avoiding the burning of any bridges.
The only real way to handle this is through communication.
Communicate with your existing crews. Understand their capacity, Understand their desire to take one more and more work. Ask them what they want. Ask them how they’d approach the backlog situation. You may be surprised what they say, or come up with.
They may want to work weekends. They may have some other crews they’d prefer you give odd jobs to. They may even have a suggestion for being more efficient with scheduling.
2. At what point do you stop ordering product?
This is something that probably seems odd to think about, but it is an important dynamic when managing cash.
When you order products, manufacturers expect that they can produce the products, ship them out, and bill you for them. That’s the normal cycle.
And if that happens, they’re either expecting immediate payment (which comes from your cash), or the clock is ticking on how much you OWE. Both come with cash flow consequences.
Further, when products get produced and shipped, those manufacturers have already spent the money that it took to acquire inventory, pay workers, and produce. And if they can’t automatically ship them to you (perhaps because your crews are out of capacity), it hurts their cash flow.
If you can’t take product, it will sit on their warehouse floor. That warehouse will fill up, and prevent other orders from being staged, or even produced. It can be a real nightmare, financially and logistically.
So if your business is at capacity, you need to understand when NOT to order product. For the sake of your cash flow, but also for the sake of your supply partners.
We often talk ‘partnership’ with manufacturers. This is our chance of being a better steward of our business, and the entire supply chain.
Here are my suggestions:
1. Bring in your manufacturer reps and ask them for help. Many can help you forecast WHEN to order products based on ever-changing lead times. If you get their input on when to place an order, and combine that with your own forecast of crew capacity…you’ll be managing better than most of your competition. It doesn’t have to be perfect, but when you’re paying attention…you’re helping the entire supply chain.
2. Be conservative. You should already be painting a conservative (and proper) expectation with your customers when you sign a contract. Homeowners understand that lead times are long right now.
If you start to see lead times come down, don’t rush to reduce the expectations of your customers. See how it goes. Over-perform if you can, and be the hero.
Don’t rush to order more product just because you think that supply is starting to flow faster. Base it on your own capacity, and more importantly…your cash.
What happens if you have a large financial dispute with a customer?
When you’re utilizing deposit cash to run the business, any ‘pause’ or ‘hiccup’ in cash flow can be a disaster. And while this can come from personal circumstance, an accident with a crew, etc… I most often see this with project work.
The only thing that can be done to mitigate this risk, is to understand your cash position before taking on a large project. You’ve got to understand what it takes to run your business, what you owe to whom, etc…
And you know an easy way to get a handle on that? Ask this question: If I stopped selling today, will I have enough cash to satisfy all of my open jobs? (and to be very specific, can I finish all jobs that I’ve taken a down payment on?)
If the answer is no, and you’re short on cash (“negative” or “upside down”) after answering this question, be wary of large projects that can tie up more cash.
But more importantly, work towards moving that answer to a “yes”.
What happens when lead times come DOWN?
I’ve already alluded to this when talking about crew capacities, when to slow/stop ordering product, etc… But it’s a real dynamic that you can prepare for.
Make sure you’re in constant communication with your product representatives about lead time. Make sure you don’t get caught ordering ‘too much’ because you “know” that it’s going to take a long time.
What happens if you get that product sooner than expected? Can you warehouse it? Can you pay for it?
Communication is the key first step. Crews, manufacturers, etc…
Like I said, it isn’t easy…but if you’re mindful, you’ll be that much better. And you’ll be better than most of your competition, believe me.
These are different times we’re living through. But if we’re smart…we’ll use these times to better understand our business. We’ll use them to build a stronger foundation. And we’ll emerge stronger than ever.
Understanding your cash flow is part of maturing as a business owner. And frankly, it’s a damn super power…because most do NOT.
I challenge you: Set aside an hour per week to analyze your true cash position. Decide right here, and right now, that your business is going to be impervious to market slow down…even if it never comes.
Decide that you’re going to sleep every night KNOWING that your business is financially strong and stable.
The things you must consider, especially during these strange days, can be a little overwhelming…but I promise, if you just start asking yourself some critical questions on a routine basis, you’ll be started down the path of understanding your business better than ever.
If I can be of any help, please contact me.
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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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