Positive business cash flow is the lifeforce of any company. However, cash flow problems are rampant among businesses across the globe, including the HVAC industry. In fact, Jessie Hagen says 8 out of 10 businesses fail within 5 years because of poor cash flow management. Although a general insight, it’s possible that the HVAC business failure rate is also somewhere along those lines.
It’s easier to pin macroeconomic hurdles like recessions, inflation, and pandemics for dips in revenue. However, the truth of the matter is that micro aspects are the more common reasons behind failing business cash flow. For an HVAC contractor, it’s pivotal to understand the root cause of their cash flow problems. Only then can they take preventive and restorative steps.
Are you an HVAC contractor who is struggling to keep your business afloat? If yes, then read on to discover the four primary reasons behind your failing HVAC business cash flow. Moreover, learn what measures you can take to prevent or fix the issues.
4 Common Reasons for Failing HVAC Business Cash Flow
Understanding the culprits behind failing business cash flow is as important as learning how cash flows work. Cash flow is one of the three financial statements that is used to measure a business’s liquidity. It articulates the actual cash inflows and outflows of a business within a given period. In other words, it’s the cash that customers pay for your services which you also use to fund your operations.
Your cash flow statement is not a measure of profitability per se. A business cash flow gauges your ability to operate in the short-term using liquid cash. Without access to liquid cash resources, you obstruct your path to profitability.
That’s why it’s necessary to see how the three financial statements complement each other. An income statement demonstrates how much profit you’re making in a period. It is not telling you how much cash your HVAC company is flowing in and out at a given moment in time. That’s what your cash flow statement is for.
Here are the four most common reasons behind failing business cash flow:
Lack of Paying Customers
Non-paying customers are all too familiar with many HVAC contractors. Whether your business has slow-paying customers or is sitting on a volume of account receivables, a lack of paying customers is the bane of an HVAC business owner’s life. They don’t only disrupt your positive cash flow, but also give you an undesirable headache.
The presence of existing clients is not necessarily equal to good business cash flow because of three possible reasons:
- They’re on an accrued payment schedule (account receivables)
- They’re genuinely unable to pay (bad debt)
- They refuse to pay (bad customers or shoddy workmanship)
Reasons number 1 is fairly understandable and is common in the industry. HVAC installations and repairs can be expensive, on top of being grudge purchases. That’s why many HVAC contractors offer finance options for the services they render. This will reduce the burden fairly on the collections part albeit you won’t have the full cash flow instantly.
A genuine inability to pay is still not an ideal scenario but is quite understandable. Engaging in a strategic conversation or a compromise with the customer in question can help resolve the issue. Most of the time, there’s no need to seek a debt collecting agent in these cases. They’re willing to pay, but their current circumstances limit their ability to do so.
However, there are times when customers refuse to settle payments for often made-up reasons. This is where it gets tricky. You might end up hiring a debt collector which could cost you a significant amount of money. Not to mention, the whole process is a drain on your money, energy, and time.
The best way to go about collecting cash flow is by being proactive from the get-go. Drafting a contract that both parties can sign is perhaps the most foolproof way to avoid these kinds of issues. In the contract, make sure to include details of the payment option that both you and the customer have agreed upon. This will hold both parties accountable and spell out the consequences if someone doesn’t uphold their end of the bargain.
Inaccuracies in Pricing and Invoices
Another common reason for a business’s cash flow to suffer is inaccurate pricing and invoicing. This can happen for a number of reasons. Often it’s simply because the business owner doesn’t have a firm handle on their costs and desired profit.
Estimating isn’t only for customers. HVAC contractors should also estimate, or project how much “cash cushion” they need for the rainy days. If you underestimate your fixed and variable overheads, you put your business at risk of insufficient liquid cash to sustain your operations.
The most common inaccuracies committed that lead to failed business cash flow is when providing quotes to clients. We have to remember that we’re human, we commit errors. Sadly some errors can cost us.
For example, failing to mark up that CootieBlaster 6000 enough to account for the 100-day 100% no-risk guarantee. Worse yet, promising to supply it with a new system, but leaving it off the contract altogether can cost your business cash flow dearly. There’s nothing customers hate more than believing they have been bamboozled. Sadly, demanding a fair price for your own miscalculated quote could have legal repercussions, let alone a hit on your Google reviews. In that case, either you plead your case or bite the bullet and charge it to experience — ugh.
Unavailability of Payment Options
It’s 2022. Everyone can fulfill their transactions without any cash or cards with them as long as they have a phone. The world is drastically changing at a fast pace, and the HVAC industry must be willing to participate too.
Your customers will be frustrated when they want to pay with credit cards or financing but see that you only accept cash or checks. The absence of card readers or online payment methods will impede your business cash flow. Not that customers won’t pay. It’s just that nobody is in a rush to withdraw a stack of Benjamins or issue checks nowadays.
Most HVAC owners fear the accompanying fees associated with online payments. The thing is, those are overheads you have to accept in the twentieth century. If you haven’t yet, update your payment methods to reflect the times we live in. If you’re not sure where to start, there are plenty of payment processors out there like PayPal, Square, and Stripe. You can also add finance options from Goodleap, Service Finance, or GreenSky. Find one that works for you and start reaping the benefits of improved business cash flow.
Not Charging Clients’ Deposit
Another common reason behind HVAC business cash flow issues is not collecting deposits or promissory notes from their customers. This can be a touchy subject. However, it’s one you need to broach if you want to see your business cash flow improve.
Customers are more likely to pay if they have skin in the game, so to speak, and a contract isn’t legal until consideration has been provided by both parties. By requiring a deposit, you’re ensuring that they’re committed to the project, both mentally and legally. This is because they already have money invested. This can go a long way in getting them to actually follow through with payment once the job is done.
The same goes for deferred payments, typically documented with promissory notes. Work out a payment plan that allows your customers to spread the cost of the project out over time. This will increase your likelihood of getting paid in full. This can be a great option for larger projects that may be outside of your customers’ budgets.
What Can You Do To Improve Your HVAC Cash Flow?
Business failure due to cash flow can be avoided if you work around the common problems listed above. However, there’s more to asking for deposits, setting up deferred payments, or pricing invoices correctly. There are other key things HVAC contractors can do to improve their business cash flow. Below are 5 of the most effective methods:
1. Create a Cashflow Statement
The first step in managing your business cash flow is understanding where your money comes from and where it’s going. This can be done by creating a cash flow statement.
A cash flow statement illustrates all the inflows and outflows of cash in your business over a period of time. This could be on a monthly, quarterly or annual basis. Having this financial statement at your disposal will help you pinpoint where you’re business is at, financially. This will then be useful for your decision-making affairs.
2. Develop a Cashflow Forecast
Similar to a cash flow statement, a cash flow forecast lets you project the ins and outs of a period. The data you use in a cash flow forecast will come from your business’s actual performance. They will also consider assumptions you make about the future.
A cash flow forecast can take some time to put together. But, it’s worth the effort as you’ll be able to track your progress. Plus, you can make necessary changes along the way.
3. Keep a Record of Your Inventory
Your inventory levels have a direct impact on your cash flow. That’s why it’s important to keep accurate tabs on what you have moving in and out of your warehouse. Poor stock management can negatively affect your cash flow. Without effective inventory control, you may hold too many stocks when you could invest them in other revenue-generating pursuits.
4. Consider Leasing or Financing Expensive Equipment
Instead of waiting for your capital equipment to depreciate, you can finance or lease them out. This includes trucks, machinery, tools, and even signage. This way, you can free up some cash that can be used for productive ends. This will ensure money goes out regularly in small increments to help out in the shoulder season.
5. Automate Payments
One way to encourage prompt payments is by automating payments. This way, customers will be charged on time — exactly when their payment is due. Frankly enough, no one wants to remember their liabilities. Without this, missed payments can put you in a bad position.
This will help you eliminate the need to offer discounts for early payments. This will help to ease the strain on your cash flow and motivate clients to pay earlier.
While your cash flow isn’t indicative of your long-term profitability, it’s a testament to your short-term stability and functionality. You want to protect your business cash flow to prevent your HVAC business from getting boxed into a corner when payroll comes around. This is especially important when you are short on liquid funds.
By following the tips we’ve outlined, you can take control of your cash flow and ensure good levels of liquidity. Managing your cash flows can be daunting at first, but with a good amount of dedication, you can overcome it.