Building service contractors have all experienced financial challenges during the recession, whether they have been brought on by cutbacks in service, minimum wage hikes, late customer payments or even the more rare, but rising, customer bankruptcies.
Any obstacle to consistent, expected cash flow can be an annoyance — and for BSCs that haven’t anticipated bumps in the road and built in some shock absorbers, it has the potential to be catastrophic.
For example, what would happen if your biggest customer hadn’t paid a bill for more than two months? Philadelphia-based Team Clean Inc., for whom public sector accounts make up about 70 percent of business, had to answer that question in September, when the city fell victim to the state’s budget stalemate.
“The state has not had a budget for over two and a half months,” says David Rivers, CEO. “State revenues are not flowing into the city coffers, so they don’t flow out, and we don’t get our payments.”
The company has relied on a line of credit to bridge the delay in payments. Also, it has slowed payment to creditors, but in a way in which both parties communicate regularly, creating a mutual understanding about the situation, and work together to make partial payments.
The company’s position, on both sides of the proverbial collections fence, gives Rivers a unique perspective.
“We’ve never been in a situation like this and we’ve been in business for 20 years,” he says. “It’s unprecedented. And it’s very, very stressful. It’s extremely stressful.”
Being prepared for unexpected sticky situations is crucial to managing cash flow. And during a time of recession, it’s even more imperative that cash is coming in as anticipated. When customers get behind, financial problems can build quickly. That’s why it’s so important to stay on top of collections.
“People are getting away with whatever you let them,” says Paul Senecal, president of United Services of America, Stamford, Conn.
But as BSCs advise, there are ways to proactively ensure a healthy cash flow, even during tough economic times.
To get paid, pay attention
The key to maintaining healthy cash flow is to pay attention: to the news about the economy and customer sectors; to uncharacteristic payment behavior and warning signs of trouble to come that customers may be exhibiting; and to a company’s own internal costs, specifically those that are labor-related.
Having that knowledge — enabling “active management” of cash flow — is the best way to stay ahead of the game, says Al Berry, president of American Services Corp. in Chester, Pa.
“We very actively manage our cash flow,” says Berry. “We bill our customers on the first of the month, we expect payment by the 15th and in a supportive but firm way, we follow up with customers that are falling behind.”
Terms for payment need to be specified in the contract. Most contracts require payment within 30 days of receipt of invoice, and some specify the date by which payments should be received.
“I think the keys to managing cash flow, whether it’s at this time or any time, is to agree upon how you are going to be paid by that customer before starting the contract,” Berry says. “And to ensure that whatever that agreement is meets your cash flow needs.”
It’s integral to figure out how customers’ payment terms fit into a BSC’s pricing model, Senecal says, before the contract is finalized. United Services even offers discounts for accelerated payment terms.
“What’s that worth to you? Might be worth more than the cost to carry money,” Senecal says. “You have no risk of bankruptcies or default, it frees up your line of credit and carries some of your other jobs.”
Financial savvy can also play a beneficial role in healthy cash flow. United Services will bill for the coming month before the 25th of the current month, he says. So, November bills will get sent out prior to October 25 — and because most companies send out checks on the last day of the month, sometimes, those payments will be made right away.
Most BSCs should bill by the first of the month so they can expect payment by the time that first payroll comes along. Sometimes, further up-front negotiation is needed, however, in order to ensure that cash flow needs are met. In dealing with a governmental or quasi-governmental entity such as a school district or municipality, payments can take longer to be sent out, Berry says. Rather than waiting longer, it’s better to bill early.
“A lot of times you’ll run into a situation where your customer says, ‘We get all the bills in for January and they have to be approved. And we cut checks the first week of February,’ which means that I’m probably not going to get that check until February 15 so I’m a month and a half out before I get paid,” Berry says.
In situations that aren’t contributing to healthy cash flow, contracts can always be revisited in order to specify payment terms. Top 2 Bottom Cleaning, a small BSC in rural Pontiac, Ill., had to do just that when a big corporate customer’s local branch was recently two months late paying a bill. While Owner Stephanie McCabe did have the reserves to pay her employees, it was frustrating to deal with the bureaucracy of a large corporation’s payment schedules, which did not contribute to healthy cash flow for her company.
To solve the problem, McCabe amended the contract to acknowledge the corporation’s payment schedule, but drew a line specifying that Top 2 Bottom would suspend service if they don’t get paid by a certain day each month.
“Everything has to be spelled out and I think that’s where I made a mistake with this particular company — I didn’t have all that information spelled out, the specifics,” McCabe says. “I just didn’t expect that to happen.”
Because of the inherent ramifications on cash flow, most BSCs don’t offer lines of credit to their customers. They do sometimes offer extensions, which are considered similar to a line of credit, letting customers go 45 or 60 days instead of 30 without ramifications.
While some contractors are on the phone right away after 30 days, others wait it out a bit. For Senecal, it’s not worth calling until 60 days.
“There’s nobody who can rationalize over-60-day payment terms unless that was a specific deal that you cut with them,” Senecal says.
It’s at this point that cash flow needs to be actively managed, he says, meaning customers should get some kind of correspondence, whether it’s a call or an e-mailed bill. And if BSCs don’t call customers at 60 days, they won’t pay at 90 days either, Senecal says.
“Once you call them they’ll generally get a check out in a reasonable period of time,” Senecal says. “But if you’re not calling them, you’re on the bottom of the pile — because they’re actively managing their cash flow.”
BSCs also should know when to put their foot down, and when to walk away from accounts that are not consistent and on-time with payments — especially during a time of recession, when delinquent payments can literally break a business. Some financial stress cannot be avoided: that of customer bankruptcies or cutbacks that force contractors to lay off their workers. But being proactive in accounts by participating contract negotiations and keeping in touch with customers can pay dividends.
It’s easier to do business with vendors and customers who communicate well and often about what their expectations are, and what their situations are. For many BSCs, at the heart of a healthy cash flow are their relationships with customers. Communicating the importance of timely payments during the contract negotiation and bidding phases is crucial.
“What I always tell our customers is that we’re not like a distribution house where we sell widgets,” says Art Rose, CEO of Mr. Clean Systems in Colton, Calif. “We don’t sell supplies, where we get 30 days from our suppliers to pay. We sell labor, and labor has to be paid on time. We’re about a $10 million-a-year business, and yet it’s still small enough that if some of our customers don’t pay us on time, that puts a real strain on our payroll.”
Customers are far more likely to pay once they understand how important cash flow is to a contractor, Berry says, but the cost of money needs to be built in for those customers that still do not pay on time.
“If I’ve got to float that customer’s check for 30 or 60 days then that’s eating directly into my profit on that job, so either I’ve got to increase my margin to offset that loss for borrowing the money that covers the payroll or I’ve got to tack on some kind of interest charge,” Berry says.
The recession has forced just a few customers of Environmental Services and Solutions Inc. in Urbana, Ill., to extend beyond 30 days. The mid-sized BSC is headquartered in a university town where the business community is tight-knit, creating a communal sense of responsibility to each other.
“We actually know the people who are our customers and they know us, so I would say there is some accountability there in a lot of situations,” says Paul Taylor, president. “We know who we’re dealing with.”
It’s inevitable that at some point, a BSC will have to deal with a late-paying customer. Some BSCs give customers a grace period of 10 days or so before calling, and others are on the phone the day after a payment is due, checking in with customers to see what’s going on.
Oftentimes, a phone call is all it takes to get a customer moving on a payment. Even if they can’t make the payment, the BSC is at least knowledgeable about that customers’ situation.
In small to mid-sized companies, it’s even the president or CEO who will make collections calls — underlining the gravity of the situation and increasing the likelihood of accountability.
“I make the call: ‘Can you give us something?’” says Rivers. “I let them know the status, the payment due, but if they say, ‘Dave I just don’t have it,’ then I’ll come back and ask them to give me 25 percent — can you give me something? And usually they can do that.”
Having a good business relationship with customers also helps them be more accountable. After all, a customer is much more likely to pay attention to a phone call or e-mail from a contractor with whom they have a good business relationship.
“The foundation of my business has always been to keep great communication lines open with my customers, I think that’s one of the most important things,” McCabe says.
Even for larger companies, such as American Services Corp., an exec’s involvement in accounts can be crucial. The warning signs that a customer is in financial distress — late payments, no payment, pleas for extensions — tend to be quite obvious.
“There are neon signs out there that tell you that your customer is in trouble,” Berry says. “And it is your responsibility as owner, CFO, or accounts receivable person in your organization, to do something. I think too often companies get into trouble because they don’t do something.”
Another reason it’s good for an exec to make the calls is that it frees up employees in billing to do their jobs.
“If you stop the person from billing to make collection calls, now you’re delaying your cash flow because that whole day she or he is not sending out bills,” Senecal says. “You don’t want them to look at a pile on their desk and get confused about what their priority is.”
The worst-case scenario is when a customer files for bankruptcy. This is another reason to not wait until an account is 90 or 120 days past due, because once a filing goes to court, it can be years before a BSC will see any of the money it is owed.
Though it’s hard to do, BSCs must determine for themselves when to suspend service, in hopes of eventual payment and reactivation of service, or to walk away from an account. McCabe, after her ordeal with not getting paid, is not afraid to draw that line.
“I’ll give them a couple days leeway but I’m to the point now where if it goes past that 10 days, then we’re suspending,” she says.
Business for contractors can be unpredictable whether the economy is good or not, which is why it’s wise to have a back-up in the form of a line of credit or cash reserves. Though lines of credit have been reduced for some businesses, others, like United Services, have managed to increase theirs — and they’re using it to help make it through the recession.