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Manasota Air Conditioning Contractors Association

Cash, Profits or Profitability — Which is Most Important?

Wednesday, May 12, 2021 10:13 AM | Anonymous

Many of you will say cash is most important. Yes, it is critical for survival, paying the bills and payroll. But, what if you have a false sense of security because you have cash in the bank?

What if you have more than $800,000 in the bank? Is this too much? A participant in one of my Building Profit and Wealth classes had more than $800,000 in the bank. Many people told him to take money out of the business, however, his company was hit with a lawsuit, where he ultimately prevailed.

Legal fees? Around $700,000 over a 5-year period. What if he didn’t have the money in the bank? That would have severely affected the ability to operate his business. Yes, the time was still a hassle. However, he didn’t have to worry about finding and paying for the best legal representation available. He didn’t have to worry about the company going bankrupt over the lawsuit.

What if Your Cash is Growing?
That is good, maybe.

Two partners started a company and grew it to $2 million in revenues over a 12-year period. The owners paid attention to the amount of cash in the bank and whether they could take their supplier discounts.

They did not pay attention to the company profit and loss statement or balance sheet.

When the company hit $2 million in revenues, growth leveled out. The lack of growth caused cash problems. Occasionally they had to struggle to meet payroll. Taking discounts on payables? Not frequently. They just didn’t have the cash to do it. They were smart enough to get help.

When I did the analysis, the company was losing a nickel for every dollar they took in the door for that time period. Their pricing was way too low. They didn’t pay attention to the overruns on materials. Cash, yes. Profits, no.

This story illustrates that just because you have cash does not mean your company is profitable.

Profits are Necessary
Profits turned into cash are even more necessary. Your company can be profitable and still go out of business. How? A bank calls your line of credit because management philosophy has changed and the bank thinks construction loans are too risky. This has happened to many contractors who were profitable, yet didn’t have the cash to pay back a loan in 30 days.

This past year, COVID-19 was the culprit. Contractors with restaurants or restaurant suppliers holding 80 percent of their customer base didn’t make it. Those who survived quickly found customers in other industries and had the cash saved to survive the few months before PPP loans took effect.

It’s much better that your company have the cash savings to be its own line of credit. Saving 1 percent of all revenues that come in the door and all residential maintenance prepayments will help you do it.

Never have more than 25 percent of your customer base with one company or more than 25 percent of your customer base in one industry. If a customer goes bankrupt or an industry dies, your company will suffer losses. However, they won’t be catastrophic losses.

Profitability
Even more important than profits are continuous profits, i.e. profitability.

Continuous profits, turned into continuous cash, give your company the best chance for survival and building wealth. It makes no sense to have a profitable month, then a loss the next month, then a profit, then a loss. Or several months’ loss and having to hope for hot/cold weather to make up for the losses. What if the weather doesn’t turn hot or cold?

It’s better to determine how your company will have continuous profits. Yes, there might be a month or two in the year when the company experiences a loss. However, year over year, the company is getting more profitable. It is building its profitability. Assuming this is happening, find ways to at least break even in the one or two months that never seem to be profitable.

A revenue contest for all employees works. When the company achieves the dollars in revenue that it needs to break even that month, then the owners take everyone, including their spouses, for a dinner at a nice restaurant and pays for the babysitters. Send the contest information home to the spouses and significant others. They will help get the company employees working toward the goal. They probably would enjoy an evening out! And, the company will at least break even in a traditionally unprofitable month.

Or, ask your team members how to achieve a certain revenue goal. Give them an incentive to achieve it. If everyone is focused on the revenue goal there is a high likelihood that it will be achieved (you determine the profits from those revenues and don’t necessarily have to share the profit goals).

The answer to the question posed in the title of this article: Profitability, then profits, turn those into cash. Save the cash. You will be your own line of credit and sleep better at night.

Originally published: 04.01.21 by Ruth King
https://www.hvacrbusiness.com/cash-profits-profitability.html

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