I have been working with contractors throughout the trades industry since 1987.
Since then, I have watched a lot of once-profitable companies go out of business.
Business failure is not an overnight occurrence.
The process of going out of business is gradual—often taking three to four years—and most don’t even realize they are in trouble until it is too late.
I want to discuss a couple of red flags that might just be telling you you’re in trouble, without realizing it.
As you review the danger signs below, ask yourself “Is that me? Am I in that situation?”
If so, you may be in trouble and not even know it. If some of these red flags apply to your business, take time to make some changes.
- Are you paying yourself a regular and reasonable salary (from the current income and not from borrowed funds)? If you are unable to draw a reasonable salary from the business regularly, that is a dangerous sign. It may simply be a pricing problem or receivables problem, but take it as a red flag and find out what is going on;
- Is your line of credit growing? A line of credit is designed for one purpose and one purpose only—to be used for short-term borrowing against receivables. If that is actually how it is being used, your line of credit will be reduced to zero at least once or twice a year. If, however, your total line of credit is constantly growing, this too is a red flag telling you “Trouble ahead!”
- Are you able to pay for new vehicles with cash? Equipment replacement costs are typically the second-highest cost of doing business in a contractor’s company. When products and services are properly priced, funds will be available to pay for new equipment with cash. If you are constantly finding yourself borrowing money when it is time to purchase a new piece of equipment, chances are you are not priced properly.
- Are you current with all your suppliers—especially your distributors (or are you using them as your bank)? Cash flow P&Ls only measure real dollars in and real dollars out. Increasing amounts of money owed to suppliers (payables) will not be reflected in the P&L statement. Use the balance owed to your suppliers as a red flag. “Healthy” companies pay their suppliers on time the majority of the time. “Unhealthy” companies owe their suppliers increasing amounts of money! How do you stand with your suppliers?
- Are your taxes current? Unpaid taxes are not just a red flag but are very serious business that can cost a company owner a bunch of money in penalties and interest—not to mention possible jail time. If you are not paying your taxes on time (payroll or personal), it is a GIANT red flag. Trouble is on the way!
- Do you have REAL money left in your checkbook each month (Real dollars in your checkbook after you have paid your salaries? When all of your bills are paid, your line of credit is at zero, you are paying yourself regularly, money is put back for the replacement of equipment, you are current with your suppliers, and you still have money in your checkbook—then, you truly are profitable. Cash is a real truth-teller. Your accountant, and/or accounting statement, may or may not tell you that you are profitable, but you can bet if all the things we have discussed are in proper order, your business is healthy.
We, as a people, have become masters at deceiving ourselves. Take some time to review the above red flags a bit more closely and then ask yourself if any of them are being raised in your business.
If so, find out what the problem is, and find out quickly.