I have been working with contractors throughout the trades industry for over 27+ years. Over that period of time, I have watched a lot of once profitable companies go out of business. Business failure is not an overnight occurrence. The process of going out of business is gradual – often taking three to four years – and most don’t even realize they are in trouble…until it is too late!
I want to discuss a couple of red flags that might just be telling you you’re in trouble, without realizing it. As you review the danger signs below, ask yourself, “Is that me? Am I in that situation?” If so, you may be in trouble and not even know it. If some of these red flags apply to your business, it’s time to make some changes.
- Are you paying yourself a regular and reasonable salary (from the current income and not from borrowed funds)? If you are unable to draw a reasonable salary from the business on a regular basis, that is a danger sign. It may simply be a pricing problem, or a receivables problem, but take it as a red flag and find out what is going on.
- Is your line of credit growing? A line of credit is designed for one purpose and one purpose only. It is to be used for short-term borrowing against receivables. If that is actually how it is being used, your line of credit will be reduced to zero at least once or twice a year. If, however, your total line of credit is constantly growing, this too is a red flag telling you, “Trouble ahead!”
- Are you able to pay for new vehicles with cash? Equipment replacement costs are typically the second highest cost of doing business in a contractor’s company. When products and services are properly priced, funds will be available to pay for new equipment – with cash. If you are constantly finding yourself borrowing money when it is time to purchase a new piece of equipment, chances are you are not priced properly. Check it out.
- Are you current with all your suppliers – and especially your distributors (or are you using them as your bank)? Cash flow P&L’s only measure real dollars in and real dollars out. Increasing amounts of money owed to suppliers (payables) will not be reflected in the P&L statement. Use the balance owed your suppliers as a red flag. “Healthy” companies pay their suppliers on time the majority of the time. “Unhealthy” companies owe their suppliers increasing amounts of money. How do you stand with your suppliers?
- Are your taxes current? Unpaid taxes are not just a red flag but are very serious business, which can cost a company owner a bunch of money in penalties and interest–not to mention possible jail time. If you are not paying your taxes on time (payroll or personal), it is a giant red flag…Trouble is on the way!
- Last but not least, do you have real money left in your checkbook each month (I don’t mean that your accountant said you made money, I mean, do you have real cash dollars in your checkbook after you have paid your salaries)? When all of your bills are paid, your line of credit is at zero, you are paying yourself on a regular basis, money is put back for the replacement of equipment, you are current with your suppliers and you still have money in your checkbook, you truly are profitable. Cash is a real truth teller. Your accountant, and/or accounting statement, may or may not tell you that you are profitable, but you can bet if all the things we have discussed are in proper order, your business is healthy!
Often, I talk to contractors on the phone about attending our two-day “Planning for Profit” seminar/workshop and they tell me things like: “We are priced right,” “Sales are increasing,” “Cash flow is not a problem,” etc. When they are through telling me how great things are, I then respond to them by saying, “I am glad everything is going so well for you; I assume that means you have piles of cash lying around, right?” The phone often becomes very quiet at that point.
We, as a people, have become masters at deceiving ourselves. Take some time to review the above red flags a bit more closely and then ask yourself if any of them are being raised in your business. If so, find out what the problem is, and find out quickly!
EDITOR’S NOTE: This article was written by Tom Grandy. Grandy is the founder of Grandy and Associates and has worked with contractors and green industry professionals for over 30 years.