One Unique Cash-Flow Strategy of Highly Profitable Plumbing Contractors
Use Other People’s Money (O.P.M.) To Finance Their Plumbing Projects
Working Capital – The definitions for working capital as it applies to a Plumbing Contractors Company, small or large, is fairly complex and can take a lot of room to explain and since we are primarily concerned about helping your Plumbing Company generate more cash flow and profits I will keep it nice and easy.
Plumbing Companies – Need short term liquid working capital such as cash, lines of credit, loans, owner financing, credit cards, supplier accounts and other forms of money to conduct daily operations.
Small Plumbing Contractor Companies – With annual sales volume less than $10,000,000 enjoy some benefits that are not always available to larger firms. Likewise larger firms can leverage economies of scale.
The Larger Your Plumbing Company – The more likely you could end up operating like a bank without the hundreds of ways to generate revenues from fee income and interest income that banks use.
The Most Popular Method – Designed by investors and developers and shrewd business people who understand the concept of divide and conquer is for Plumbing Contractors to get little or no down payment for a construction project, do all the work, including change orders and then try to collect their money.
Most Plumbing Contractors Labor Under The Misunderstanding – That profit comes from installing pipe and fixtures and everything else is overhead. Nothing could be further from the truth; however, like most myths and misunderstandings it is easy to grasp and will slip by the amygdala without hesitation because it “Sounds Right”.
Overhead Is A “Trigger Word” – With many different definitions and depending on who you are and your paradigm or profit. The word “overhead” triggers a neural link which searches the far reaches of your mind to bring forth a mental image, sound or feeling into depending on how you process information which will prove or disprove your preconceived notions.
Your Mental Reasoning Power Is Like A Lawyer – It will determine what your core beliefs are and gather whatever historical evidence you have stored in your short and long-term memory to argue with intensity for your preconceived notion.
We See It Happen Day In And Day Out – A contractor will contact us for help because they are on the verge of going out of business. They will upload a copy of their QuickBooks file and we have a process which takes roughly 20 minutes to research their QuickBooks file and issue an internal report about the financial health of the construction company and the likelihood they will be open to change.
To Paraphrase A Quote – And adapt it to Plumbing Contractors “It is not the strongest, toughest, hardest working Plumbing Contractor that survives, nor the most intelligent among them. It is the Plumbing Contractors that are most adaptable to change.”
The Internal Report We Generate – Is an opinion of the current state of the Plumbing Contractor’s Company based upon data we find in QuickBooks:
- Percentage of direct and indirect cost of goods sold as a percentage of income.
- Percentage of field labor cost including payroll taxes as a percentage of income.
- Industry comparison reports of similar sized firms in their geographic area
- Ratio of field employee as a factor of gross sales.
- Ratio of field employees to material costs to estimate how much material is being used for side jobs.
- Debt to Equity Ratio
- Current Ratio
- And a lot more…
Most Plumbing Contractors Hate paperwork – The more profitable a Plumbing Contractor is the more likely they are to be
outsourcing the contractors bookkeeping service to a construction accounting firm that understands their industry and focusing their time and effort to understand and interpret the financial and job costing reports to update their business strategy. The medium profitable Plumbing Contractors tend to have in-house bookkeepers and have heard of business strategy but don’t see the value in it. The least profitable ones do everything including their contractors bookkeeping services themselves until something happens to cause them to grow their Plumbing Contracting Company beyond their level of construction accounting competency and go bankrupt or they get to old and tired to keep plumbing and quit.
There is Nothing Like a Joke About Collecting Money
Most Plumbing Contractors – And other contractors prefer to keep everything in their head. Then when it comes time to collect their money they find themselves having to re-sell the job and talk their customer into parting with their money after the services have been performed. It is similar to the old bartender joke:
Step #01 – Man walks into a bar and says “Hurry up bartender, pour me a double before the trouble starts!”
Step #02 – Bartender pours the man a double which he gulps down and repeats “Hurry up bartender, pour me a double before the trouble starts!”
Step #03 – Bartender pours the man another double which he gulps down and repeats “Hurry up bartender and pour me a double before the trouble starts!”
Step #04 – Bartender says “Wait a minute I have poured you two doubles and you haven’t paid for either of them to which the man replies “Uh-oh the trouble has started!”
The Plumbing Contractor – who does a lot of work without getting deposits and progress payments, is like the bartender.
The More Time That Passes Between a Service Performed and Payment is Collected the Less Valuable That Service is Perceived
It’s Been Said: “The value of services rapidly diminishes after the services have been performed” which is why highly profitable companies like McDonalds gets your money before they deliver your meal. Compare the success and profitability of a McDonalds franchise to most restaurants where the meal is served and then they get paid.
The Least Popular Method – Is getting work orders and contracts signed and deposit checks before starting the project because most of us were conditioned from childhood through adulthood and beyond not to ask for money.
Contracts With Clear Simple Language – All Change Orders will be documented with a scope of work and be Paid In Advance before the work begins. Again we recommend you hire a good construction attorney and have that person write your contracts.
Contractors That Finance – Working capital with their own money and whatever they can borrow will earn less profit and put themselves at higher risk of failure than contractors who use Other People’s Money (O.P.M.). It is a given that to start your construction business you need working capital and we have formulas that can work with you to estimate how much you will need. If you need assistance calculating this ask your accountant and if they don’t know how to do it call Sharie 206-361-3950 or email firstname.lastname@example.org and be sure to let her know you found us here on The Plumbing Info.
There Are Risks – In doing this the most important is understanding the money you have from your customers and clients that has not been used to perform work is a liability to the company and needs to be reflected properly in your bookkeeping system and you should never use any unearned dollars to buy anything frivolous like a new F-350 Pickup truck or a vacation.
Bookkeeper Theft – Is another risk to be aware of because Bad Bookkeepers and Incompetent Bookkeepers have been known to re-distribute your wealth if they believe you are earning too much money.
We Have No Issue – With contractors earning lots and lots of money. Our bookkeeping system is setup so that we NEVER HAVE ACCESS TO YOUR MONEY. We simply handle the day-to-day contractors bookkeeping services and provide 24/7 online access to your financial reports and as much or as little mentoring as you want.
Your Construction Accountant – Is a valuable key component in setting up QuickBooks to help you keep track of it all. And as needed we can help with ongoing bookkeeping services and Strategic Management Process Development.
About The Author:
Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington, www.FastEasyAccounting.Com He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Plumbing Contractor, General Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist and Bill.Com Guru.
I leave you with this heartfelt blessing – “You are the right person for the task, now is always the right time, be bold, be strong and know that you are guided by your best friend and mentor who was there for you before you were born. He is there for you now and always will be there for you long even after you have left your mark on this world. He will never leave you regardless of your triumphs and illusions of failure. He always has and always will believe in you. He has a purpose for your life and rest assured you are on the right path. In the end it will all work out and everything will be revealed to you and you will have complete understanding of everything that has happened and it will make sense. That is why you are here; BE the person you are, DO the what you know deep within you is right and good regardless of what happens and you will HAVE it all.”
Randal L. DeHart, PMP, QPA