Editor’s note: The May issue of PCT features the PCT Top 100 and articles relating to the list. We didn’t have enough room in the May issue for several articles, which we feature this month on the following seven pages.
As an entrepreneur for almost 40 years, I learned a few basic principles in small business finance. If I may, let me share them with you: Accounts receivable is VANITY, accounts payable are SANITY. However, cash flow is KING!
If a business is healthy, it should be flexible enough to allow decisions that help the success of your business. A daily decision is, “Do I need it and can I afford it?” Pest management companies are seasonal businesses with lean times in the cold months and plentiful times in the warm months. This makes each year end a time to spend profits on items necessary to help your business in the warm season continue to be successful.
In addition, those inconvenient things called taxes will force one to be wise or fail. If your fiscal year end is approaching, you will need to invest your profits or pay your tax obligations for them. If you don’t have profits from the previous season as you enter the next busy season, then you will need to either cut back and/or perhaps take a loan from the bank. Taking out a loan may be necessary and short term. It may mean, however, that you lose your flexibility to run your business the way you want (although it will keep your business afloat in leaner times). Remember, all banks that loan money will want collateral in the form of personal assets (i.e., house, car, building, bank account, etc.) which will be held by the bank as a guarantee that they will be repaid.
If you run your hobby (the business was not profitable for three of the past five years) or a business for a number of years, you will understand this feast or famine approach to business finance. Make money, spend money, pay taxes…repeat.
One important thing I have learned after almost 40 years as the owner of Insects Limited and Fumigation Service and Supply is that you need a great financial manager/accountant/bookkeeper) who can sort out your real finances and pay taxes on time. With attention to the latter, our CFO knew my primary concern was the former. Each week on Friday afternoon, our CFO would hand me a sheet of paper. The first column showed accounts receivable generated from invoices from products and services for that week. It is great to see those numbers soar but one cannot become overconfident quite yet. That report also contained accounts payable, cash flow and payroll. Receivables are only numbers in a column and as important as they are, they must not be taken too seriously.
For many years, terms of payment were 10 or 30 days. Now it seems companies are switching to 60-90 and even 120 days payment. European companies are even slower payers for the most part. Remember: You are not a bank and you need that precious cash to pay your employees and bills. Nothing can be worse than providing a useful service for your customers and then not receive compensation when they move out the door. Collecting debt is not a fun job but it is important and necessary.
Regarding profits, if a business owner is true to himself/herself, the profit margins will reflect all potential expenses down to the cost of turning on the lights. Services produce a higher margin than most product sales. I have always believed that it takes $5 of sales (product or service) to generate $1 of true profit. So if a sales trip or trade show costs $3,000 in transportation, hotels, meals, stand rental, etc., you need to produce $15,000 of business from this trip.
Again, regarding profits, a good financial report provides the ratio of payroll to gross dollars on a monthly, quarterly and yearly basis. I believe for every $1 you spend on company payroll you should produce at least $3 of income. This number will fluctuate seasonally but it is great to use it to look for trends with previous years corresponding to that month, quarter and year. If the number dips below 3.0, then two things need to happen: your labor costs are too high and need adjusting and you need to produce more income. Profit simply comes two ways: more income production or more expense reduction while maintaining the same quality of service or product.
Another ratio that I use to measure our company’s profitability to others in the pest management industry comes from PCT each year. The PCT Top 100 lists companies and their number of employees. By simply dividing the number of employees into the gross dollars you arrive at the amount generated per employee. Many of the Top 100 companies produce $100,000 to $140,000 per employee. Compare your company with some of these companies.
CASH FLOW IS KING! The real number that should drive your financial decision-making process in business is your cash flow. This is the availability of money that you have to pay your bills and to show a profit. You may need to purchase new service vehicles this year. That takes cash flow. You may need to give employee raises this year. That takes cash flow. You may need to put some of that profit in your bank account to pay for the past years when you took less to grow your business. That takes cash flow. And, finally, you need to understand that someday you will retire and spend more time with your family. So, don’t fixate on the receivables until they are deposits, and don’t play games with profit margins. But, do celebrate your weekly cash flow report and make good solid decisions based on trustworthy, consistent accounting practices.
Another important principle in this business one should always remember is that the goal is not only to kill pests, manage people and make good contacts with your customers; it is to make payroll. Good and valuable employees must provide for their own families and you want to retain them. Importantly, you are the last person in the company to receive a paycheck in your company!
I am proud to say, we (not I) have made 1,976 payrolls on time, retained quality employees, and produced quality products and useful services over the past 40 years. And our firm is debt free. I feel that these are my greatest accomplishments in business.
The author is founder of Insects Limited and FSS, Westfield, Ind.