Generating Cash vs. Making Money

Cash flow is important. And, Yes, Cash is king. Several years ago I had a franchisee that was doing $100,000 a month in sales yet never seemed to have money to pay the bills. In a financial review, I sat down with him and asked some probing questions.

Q: Are you having problems collecting receivables?

A: No, we get the check or credit card at the end of the job.

Q; Do you have any bad checks or charge backs on credit cards?

A: No, it is rare that we have a problem with a bounced check or charge back. It happens but it is rare.

Q: How much staff are you running?

A: We run lean. I have a firm fix on overhead. I manage that very closely. The financial statements verified this because his over costs were in line with expectations.

Q: Do you have any inventory for jobs?

A: No, it is all cash and carry. We do not carry any inventory.

Q: Since you do not have any outstanding receivables, no bad debt, manage overhead and have not inventory, there is only one place that could lead to cash flow problems….weak gross margins.

Q: Tell me the process of bidding you jobs.

A: I figure out my costs and then double that price. We have a lot of competitors and we have to be competitive. We make money on the extras.

Q: Let’s take a typical job. Walk me through the process.

A: An average job is about $1000. Labor is ~$500. The formula is to bid the job at $1,000. We average about $200 on extras.

Q: What are you really making on this job, if you include all costs, including the load on payroll, credit card charges and an allocation for overhead? Go and figure this out and then let’s talk in a week.

When we go back together for the first time he figure out that his actual labor cost was not $500 but nearly $700 plus the 3% on credit card charges and with an allocation for overhead is actual gross margin was about $200. We discussed about raising a price in a competitive market and that it might not be possible to do this in every case but that if he continued to this pricing model it was only matter of time before he was out of business because he was not generating the cash necessary to cover costs.

After some work on the presentation and selling value vs. price he was able to get his margins to a respectable 45% from ~20%. While it is true he lost some business, his ability to upgrade some of his staffing and follow through and provide outstanding customer service put him on the growth trajectory to start expanding his business and working on the business not in it.

What are your gross margins?