Cash flow is crucial when managing a growing pest management firm. Pest management professionals (PMPs) who focus on cash flow have tight processes that allow them to anticipate most cash issues before they happen.
Managing your accounts receivables (A/R) is paramount in dealing with cash flow threats. If you have too much money tied up in A/R, you won’t have funds available to keep up with your payables and payroll, which will lead to difficulty with vendors and employees.
To get a firm grasp on A/R, a business must establish firm processes for inputting invoices, ensure correct contact information for customers or clients, and establish payment terms that may include subscription-based billing.
Many of us know how to manage a profit-and-loss statement. However, just because we show a profit doesn’t mean there is cash in the bank to pay the bills. We don’t pay bills from the bottom line; we pay them from cash in the bank.
Take, for example, “Brian,” a PMP whose monthly revenue is $50,000. If his technician labor, materials, vehicle costs and other direct costs amount to 50 percent, or $25,000, that leaves a gross margin of 50 percent. Brian’s sales and other non-direct costs are another
35 percent, or $17,500. That means Brian is left with a monthly net profit of 15 percent, or $7,500. Not bad.
But what happens if Brian only collects 75 percent of his sales, or $37,500? He is owed $12,500. That means he is short not only his net profit of $7,500, but he needs another $5,000 to pay his bills.
FORMULATE A PLAN
Most of us understand this concept, as it is fundamental to managing a business. But why do many of us have trouble executing an effective cash management program? Are we too aggressive in trying to make that sale by giving overly generous terms to our customers? Or have we designed our business to service mostly commercial accounts that take a minimum of 30 days to pay?
Under either scenario, we may not be doing the “wrong thing.” But we better have a plan to collect that money quickly, or access other funds or credit lines to fund the current expenses of our businesses. Consider the following factors:
- Process invoices electronically. Whether via email or apps that alert customers to payments due, electronic invoicing is much more efficient than paper-based bills that can get lost in the shuffle of daily work.
- Allow online payments. Most industry routing software programs offer electronic payments, either through automated clearing house (ACH) or credit card payments that can be accessed by inserting some script on your website.
- Implement budget billing payment plans. For customers who receive regular service, it’s beneficial to set up automatic drafts or credit card payments on the first of each month.
- Review A/R aging reports. What you do not know will hurt you. Keep up with which customers are routinely on the aging lists, and work with them to find a way to invoice and collect from them more effectively.
- Phone late payers. Paper-based late notices may be good for documenting your efforts to collect, but they don’t offer evidence of receipt by the customer unless sent via registered mail. Likewise, emails can get lost in spam folders, especially when they are from automated systems. Once the phone calls start, however, customers will be more aware of their debts, and usually are more responsive.
- Use both the carrot and the stick. Offer early-payment discounts such as X%/10 Net 30 (X percentage off if paid within 10 days; the full balance due in 30 days). On the “stick” side, enforce late fees.
- Last but not least, clean up the hopeless cases in your A/R. Get rid of deadbeats, and don’t do business with them anymore.
A/R management is one piece of the financial and management function of growing a business. When managed properly, A/R management allows PMPs to operate from a position of strength and make sound business decisions about expansion, cost reduction and efficient operation of their firms.
GORDON owns PCO Bookkeepers, an accounting and consulting firm that caters to pest management professionals throughout the United States. He can be reached at firstname.lastname@example.org.