Pricing Your Services
Inadequate cash flow is the reason for most business failures. To survive long-term your business requires adequate cash flow, which requires you to know your cash flow needs.
Ask yourself this: Do you know how much money you will need today, down to the penny, to run your business? What about nine weeks from today? Can you tell me what expenses you will have then? If you do not know, do you have adequate cash reserves in the bank to pay for your company’s expenses if your cash flow dries up? If you can not answer all of these questions with a yes (an honest yes) then you have got some work to do.
Contractors are often guilty of spending more money than they earn. The result is that many contractors have more bills coming in at the end of the month than money to pay them. It doesn’t take long for a situation like that to put you out of business.
If you can recognize that you have a spending problem, you need to put yourself on a very tight budget. Make a budget, and stick to it. You might be wondering, “how can I expect to make a budget if I don’t know how much business I will have coming in?” Well, it isn’t easy. But to be fair, nothing about running a business is easy. If it were, everyone in the country would be doing it. It takes time, effort, work and a lot of projections to create a workable budget. It is important to keep accurate records and do a super thorough analysis of each job that you do.
Once you commit the discipline and energy required to set a budget, the hardest part will be following it. Cardinal Rule: You will honor your overhead budget at all times, and not spend otherwise. It does not make a difference how badly you want something, if it isn’t in your budget then you don’t buy it. Remember, if you really needed it, you would have included it in your budget for the year.
Since you didn’t, you will have to rent that piece of equipment or do without that new truck for a while. But I promise you this, next year you will remember to put it into the budget. That is the type of discipline it takes to make you money. Stick to your budget and collect enough jobs to match the volume your markup is predicated on, and the end result will be a nice profit.
Predicting Cash Flow
In this line of business, things don’t always go as planned or happen when they are supposed to. You consistently have to do some refiguring here, recalculating there and reshuffling someplace else. Essentially, you start with your best guess and then you fine-tune your procedure until you get it down to a workable formula for your company. Knowing your cash flow needs is essential.
Keep a Reserve Account
This is the money that you set aside to tide you over when expected funds don’t come in on time or when you have taxes due (sales on payroll) and no other money set aside to pay them. In addition to predicting your cash flow needs, you should also develop a method of setting up and maintaining an Operating Capital Reserve Account, or O.R.C.A.
An O.R.C.A. is your best solution for dealing with the type of cash flow problems people experience in this business. It will give you the ability to keep your bills and taxes paid when there’s little or no money coming in. An O.R.C.A. should be funded with at least five to seven months of total overhead expenses for your company.