Question: What method of billing should we use for the best profits?
Gary Elekes; Founder, EPC Training:
Well, Drew, it’s another one of those “best” questions. “Collect your money,” is the answer. You can decide which market segment that applies to, but in residential change-out it’s payment upon completion of the job. All jobs ought to be finished in the same day unless bid otherwise. So we’re going to collect our money.
Services, you know, same thing. We should be up front in pricing discussions and collect our money when we’re done.
Maintenance can be either the monthly debits, or we favor the prepay. I used to be a lot more of an advocate of the monthly debit, but when I got successful at doing it I realized that it was actually more administrative costs than it was worth. So we just offer a cash discount now on the prepays, so we collect our money in advance. I like that method, that’s a very profitable method. So that money then can be invested in rolling 90-day T-bills or any type of a safe financial instrument. So you can actually make some extra money if it’s prepay.
Commercial and new construction are going to be – hang on as long as you can to collect your money. A lot of the major builders now will prepay, but they sort of control the pricing systems since the manufacturers have released their pricing to those folks. So you’re really working for labor and recovery of overhead. So that’s a tough model. Typically they’ll pay as much as 90% up front and 10% when you’re done. But unfortunately there isn’t a lot of margin or profit at the end, unless you’re a very efficient, scaled business. There are some of those companies out there, but they’re becoming fewer and fewer. So the rich get richer in that segment. But it’s a very slim margin – like the grocery business – a one-percent margin is considered to be successful for people like Kroger and Publix and Safeway and so forth. So you’re spending a lot of resources and not recovering a lot of profit dollars, although they can be scaled.
And then commercial services is 30 days, so we typically have an agreement. I think the most important thing in the commercial services market is to have a receivables report, have somebody in charge of collecting the receivables, and make sure you have clear, consistent terms up front. I think the big issues with commercial projects are how you set up the terms and conditions initially with your client, and their expectations of they’re going to pay. And how, in a lot of cases, they don’t want to pay. So I would then make sure that you file liens and have a process behind that for the opportunity to make sure you at least get in line to get your money in case something bad happens.
So for me it’s all about understanding the business mix. This question is less about collecting the money and understanding which portions of your business are flowing in and are timely collections, versus which portions of the business that you’re selling that are flowing in that are not timely. We’ve always advocated no less than a 70% positive cash flow model to support the growth of a 30% billing model. That’s just us, looking at the business in terms of profitability. That has nothing to do with what your personal philosophies, your personal interests, what your competencies are; where you want to grow the business. If you’re great at chillers, and you’re fantastic, and you can sell a $3 million chiller but you’re not going to get paid for a year, you’ll get paid in a year and you’ll get that $3 million and might make a lot of money, but you have to be willing to accept that based on that’s what you sold as a competency.
So the 70%-30% threshold — if you look at cash flow, and you look at how to be profitable in a business – being able to grow a business and increase the gross profit dollars is part of how you increase your profit overall. So if you’re cash-starved and you’re working capital-starved all the time, which many businesses in our trade are, you’re limited – you don’t have the opportunity to do business with a company that might help you grow. You can’t pay Drew Cameron and pay him his consulting fee to come in and show you some of these great financing tips and sales process, and Wally’s training, and so forth.
So the cash flow coming in by virtue of you controlling your mix is part of that question, as far as I’m concerned, and not just “what’s the best way to get paid?” Obviously up-front and getting paid on time according to your terms is the answer to that question, depending on the mix.