Ask the Experts | Maintaining Cash Flow In Slow Times

Question: How do you maintain good cash flow during the slow times?

Gary Elekes: Cash flow is the key to driving the business in its growth pattern. We usually have good cash flow during our peak seasons, and then the transition periods are kind of “hold on, buckle up and keep saving what we created during our peak period.” So there’s a number of issues.

I think the first thing would be that we actually have a planned cash flow statement, and that’s a mystery to a lot of contractors. They can log-on to the website [egia.org], or put a search function in for cash flow, and there’ll be a simplified as well as a more detailed cash flow template that will pop up. So typically what we’d do is project the sales for each of the businesses – for demand service, maintenance, replacement, new construction, commercial etc. And then the collections that come from those sales are not always timely. Some of those are collected at time of completion; some of those are collected over a period of days, weeks or months. So what we do is we lay in when that money comes due to us, when we expect it, and then there’s an expense pattern – there’s basically cash-in and cash-out. So we want to project our cash-out and really what we want to be able to do is maintain liquidity in the business.

So that’s a misunderstood metric inside of the trade. A lot of companies don’t really understand “how much should I have around?” Typically we would recommend about 10% of your yearly sales be in some form of operating cash flow. So that’s going to include cash, that’s going to include immediate receivables — what we call current receivables in the 0 to 30 day call. So as long as that divided by the sales revenue is somewhere around 10% — we’d like to see 15, but in your slow period that’s kind of going to be a struggle – that’s really the secret: being able to understand that.

Then the second layer of that is being able to understand your expense pattern; how businesses are actually burning money. What we call the burn rate. And that really comes down to two basic variables.

There’s a fixed type of an expense, something like rent or an insurance payment. Those are going to be very difficult to change in a week to week, month to month, even — yearly is when we can start making those types of adjustments. So those we’re kind of stuck with. And those are typically about two-thirds of the expense pattern of the overhead of a business. And that’s just 20 years of history doing budgets and financial planning and all that good stuff.

The other one-third is variable, and that’s stuff that we can control like gasoline and the number of events that I might have an a service call, or a two-day job vs a one-day job requires me to be there twice. So what we want to do is look at the expense patterns and be conservative as much as possible and set limits and live within your means, if you will, during those transition periods. So we understand that cash coming in is going to be tough to find and get, and cash going out is going to be really easy to spend. So we really need to pull both of those levers.

The third lever – the one that’s probably most interesting to our participants today – is, “Hey, how do I actually create some leads and create some sales revenue in a period when maybe leads are tough to find?” So we have to expand maybe how we’re looking at promotions, we have to think of creative ways that we might get consumers, as a call-to-action, to actually buy something. So financing is a big key in that.

We’ve found that if we have a great promotion that includes financing, that’s a tremendous opportunity to get a customer to buy something when they may not have necessarily wanted to spend their personal liquidity. And in addition to that, we create a call-to-action that’s almost silly for a client, or a potential service agreement customer, to not want to say yes to. So we’ll extend warranties to 16 years, we’ve even gone so far this year as to go to a 24-year parts and labor warranty, on a 16 or 18 SEER system as long as they’re buying a furnace and air conditioner. There’s a lot of question about how to do that, but that’s too much to get into in this discussion. But suffice it to say that, if I create that promotion — I create that financing program, and that call-to-action — is strong enough, what I can do is get a customer who might be a replacement customer next July to buy something in, say, February or March, when my transition soft selling season is on me and cash is tight. So I get additional cash flows by filling up the labor board.

And that leads to the fourth point which is that we need to have a forecast for how many crew-days we actually need to sell and how many service calls we need to create to break even; so that we don’t dig a hole during our cash-tight period, we at least maintain a level playing field. So the budget process is there, certainly we teach those classes physically in workshops, but also online and certainly you can ask an expert and use egia.org/University to understand the breakeven calculation. So over the last two weeks I’ve been doing that with most of my clients, planning for 2018, saying “Hey, these are breakeven numbers for each of your departments. So what we have to do is do whatever we can promotionally to create at least that minimum sale — gross margin, gross profit dollar — to be able to cover up the overhead sins, so that we don’t give back all the money we intend to make during the peak season.

And the final point on that is, just having a general understanding of pricing and service agreements and how you want to manage your existing customer base. So the larger my customer base, the more service agreements I have, typically the more opportunity I have to have an intelligent conversation without being in a competitive situation with other companies. And I can get customers to agree to buy a new system, give them a deal, so I can use pricing as a strategy to my advantage during my offseason. I can use my service agreement customer base to sell some accessories and essentially manage that process.

The real key is that you have a plan going in and you don’t get trapped during the actual slow season and say, “Oh, I’ve got a problem, I need more leads.” This is something you have to budget and plan ahead of time. There’s probably some other things, but those are the main four to five items.

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