- July 8, 2021
- Posted by: Dan Gordon
- Category: Accounting Advice
Cash flow is crucial when managing a growing pest management firm. Pest control operators who focus on cash flow have tight processes that allow them to anticipate most cash issues before they happen. Managing your receivables is paramount in dealing with cash flow threats. If you have too much money tied up in receivables, 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 good grasp on receivables, a business must establish firm processes for inputting invoices, ensure correct customer contact information 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, the pest management professional with $50,000 in monthly revenue. If his technician labor, materials, vehicle costs and other direct costs amount to 50 percent or $25,000, leaving a gross margin of 50 percent, and his sales and other nondirect costs are another 35 percent, or $17,500, he is left with a 15 percent or $7,500 net profit. Not bad! But what happens if he only collects 75 percent of his sales, or $37,500? He is owed $12,500, and he is short not only of his net profit of $7,500 but another $5,000 needed to pay his bills.
Formulate a cash management plan
Most of us understand this concept because 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 either collect that money quickly or access other funds or credit lines to fund the current expenses of our businesses.
In terms of formulating this plan, here are some factors to consider:
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 pest industry routing software programs offer electronic payments either through ACH or credit card payments that can be accessed by inserting some script on your website.
Implement budget billing payment plans. For those customers who receive regularly recurring service, it’s beneficial to set up automatic drafts or credit card payments on the first of each month.
Review receivables aging reports. What you don’t know will hurt you. So, keep up with which customers are routinely in the aging lists and work with them to find a way to invoice and collect from them more effectively.
Call 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’re from automated systems. But a phone call is effective, and once the calls start, customers will be more aware of their debt, and they’re usually more responsive.
Institute incentives and penalties. Here comes the carrot and the stick. Offer early payment discounts such as X%/10 Net 30 (X% off if paid within 10 days, the full balance due in 30 days). Or enforce late fees.
Write off the hopeless AR cases. Clean up your AR. Get rid of deadbeats and don’t do business with them anymore.
AR management is one piece of the financial and management function of growing a business. When managed properly, AR management allows the successful PMP to operate from a position of strength and make sound business decisions about expansion, cost reduction and efficient operation of his firm.