It was a bright summer's day in January and our friend Bob the builder made a new year's resolution to start his own business. He worked for XYZ Builders but knew if he worked for himself, he would get more money and be able to work when he wanted to - he could be his own boss. Bob knew how to build and was damn good at it, he could put up a house quicker than most, his work was top notch and customers were very happy.
A few months later Bob took the plunge and went out on his own. To get started he undercut other competitors in the market. There wasn't much profit in it, but it was work, and it felt good to be busy and on the tools. A couple of years went by and he had grown from a one man operation to a team of eight, but the market was tight so he found that to get jobs he often had to reduce the price to be competitive.
The days were long, so by the time Bob got home he was too tired to do the paperwork, like invoicing, paying the accounts, checking the bank accounts, etc. He just didn't enjoy this part of the job, so it was often left to the last minute or sometimes was just not done at all.
Although cash was a little tight and some bills were a couple of months behind, he had plenty of jobs and lots of money to collect - things would work themselves out - nothing to worry about, or so he thought.
Things were lean for a few months, but the newspapers were saying the economy would pick up soon, so he just had to hang in there a bit longer. Suppliers were getting a bit tougher with overdue amounts and told Bob he had to pay them up to date before he could get more supplies. He decided to chase a few outstanding invoices himself, to discover that some of his customers had gone belly up, resulting in $189,000 in bad debts - money he was never going to see again.
To make matters worse, his accountant showed him that although he had plenty of sales, there were a few jobs he had lost money on and that he was looking at a loss for the year of $259,000 (that's without the bad debts he was scared to tell his accountant about). Now he was running out of money fast and needed a loan from the bank just to keep going. The bank said NO, as he had no security left. Bob's dream was starting to crumble in a pile of debt.
Bob was a great tradesman, but not so great at business. Let's look upstream and see some of the areas that first started to go wrong.
- Bob had not learned how to get better prices for his work. He did a better job than his competitors, but was not getting paid what he needed or what he was worth.
- Bob didn't know how to attract better customers who would pay top dollar and also pay him on time.
- Bob didn't know when he was making money or losing it. So each month he was not sure if he was ahead or behind. A dangerous place to be.
- Bod didn't understand margins or know if they were high enough. He was competing on price without knowing what he needed to charge to make a good profit. If your margins are too low, it is almost impossible to make money.
- Bob wasn't invoicing on time, so the money wasn't coming in on time either. (I have seen some businesses not bill jobs for 12 months - a crime against business.)
- No one was checking to make sure customers were paying on time and chasing them up. (You did the work, so you are entitled to get paid).
- Bob was not paying his suppliers on time. (Important because, as Bob found out, without the materials, you can't complete the job.)
- Bob probably didn't keep in contact with his bank manager, so the bank assumed the worst.
A few adjustments upstream can make all the difference.