The number one reason plumbing companies fail is lack of cash. Think about it. There has never been an involuntary closure when cash was in the bank. Here are eight ways to put more cash in your business on an ongoing basis.
1. Charge enough: The biggest reason plumbers run out of cash is they fail to charge enough to cover all of their costs. This may seem like a blinding flash of the obvious, but it happens a lot. This is because plumbers do not price based on cost plus or value delivered. Instead, they try to find out what the other guys charge and set their pricing a little lower. How do you know they know what to charge?
You know your labor and material costs for a task, or should know them. What’s missing is overhead and profit. Overhead is everything you spend that is not directly related to a service call. Your truck, fuel, tools, phones, etc. Add it all up, everything. Don’t forget taxes. And don’t forget to account for hidden overhead. If you operate out of your house, you should be paying yourself rent, so at least put the cost of rent in the overhead. If your spouse helps you without charging, you should include what she would cost if you had to hire her and pay a going wage, fully burdened.
Figure out all of your costs for a month. If you are not sure, estimate high. Divide it by the number of billable hours you expect. If you are not sure, estimate low. This is your overhead per billable hour. If the number doesn’t shock you, it’s probably too low.
Every hour you bill should include your overhead, the direct cost of the job (material, labor, etc.), and profit. Charge less than this and you are subsidizing your customers and depriving your business of cash. Do your customers need you to subsidize them? If so, maybe you need new customers.
2. Collect on delivery: Stop sending invoices. Collect up front. Zero out your accounts receivable. Accept cash, checks or credit cards. You are not a bank. Get paid at the time the service is delivered. This includes commercial accounts, which may be a challenge at first. Just remind the manager that this is a chance to get some miles with a credit card.
3. Offer financing, sell payments: While you should not finance your customers yourself, you should offer third party financing. The reason is people will spend more with financing. Multiple studies show that Americans, on average, have less than $2,000 set aside for emergencies. If you want to charge more and collect more, find a way to make your services more affordable. Financing lets you quote monthly payments, especially for larger jobs. It’s the way the auto dealers have sold for years.
4. Flat rate: Lots of plumbing contractors now use flat rate pricing. Basically, flat rate is nothing more than a pricing presentation method where labor, material, overhead, and profit are all combined into a single number. Flat rate helps you hold a standard price for each repair as opposed to your plumbers giving someone a discount. It also makes the cost of labor more palatable to homeowners since they cannot see it broken out (and have no business seeing it).
5. Pay for performance: While flat rate standardizes pricing, performance pay does the same thing for labor. In flat rate you charge based on the average time it takes to complete a task. With performance pay, you pay on the same basis. This locks in profit per task. More important, it rewards plumbers who act like owners. If they are better organized and make fewer trips to the supply house, they will make more money. If they make add-on sales, they make more money. And, so do you!
6. Require choices: Plumbers tend to project their world view onto the customer. It’s natural. They assume people wouldn’t want to replace a functional bathroom faucet with a more elegant one because they wouldn’t. They assume the customer would think a tankless water heater is too expensive, because they think it is. But they are not the customer. They cannot know what the customer wants to do until they present choices. On every repair give options to repair, replace, or upgrade. Most will choose the repair option, but some will choose to replace a toilet that stops up frequently, and upgrade a water heater to tankless.
7. Sell service agreements: When you sell a service agreement, you collect upfront or each month for work to be performed in the future and lock in the customer. Talk about a cash flow boost! Build your service agreements with your plumbers, so that they can see the value in the annual maintenance work.
8. Create a premium service: Offer different levels of service. A concierge service could include fixed appointment times. Could you offer set appointments for a premium?
Adjust your dispatch fee based on the speed of the service. Charge more for same day service, less for two to three day service, and wave it altogether for service when you can get to it (just make sure you correctly allocate all of your overhead against your standard billable hours). This boosts cash flow and lets your customers self-identify themselves as people willing to pay more for better service.
Cash on hand is oxygen for business. Without cash you are operating in an oxygen deprived environment. Symptoms of the oxygen deprivation include confusion, headaches, restlessness, a lack of coordination, etc. If your business lacks cash, the same symptoms appear. The steps outlined here will help you and your business breathe easier.