cashflow is a liar

Your cash flow is lying to you. All of it. It's so abundant--at times. It accumulates throughout the summer, and makes you feel all warm and cozy inside, but do not believe your feelings! I'm warning you. Your cash flow has problems. Big problems. It's a pathological liar.

Cashflow does not measure growth. Cashflow does not measure profitability. It measures nothing. And until you have a full account of your revenue, and you know where every penny should be allocated, it will deceive you to no end. This is a common mistake made by the most seasoned hvac owners. I've personally witnessed some look at the balance in their checking and make an emotional or "experienced guess" of the health of their business by the amount of money in the bank. What they didn't know, is that they have been told a lie. The lie is that that balance means anything at all.

Look, if the amount of money in your bank account told the whole story the average NET profit of hvac businesses would be much higher than 3.5%. Think about that for a second... Theoretically, if the average NET PROFIT of an hvac business is only 3.5%, a balance of $100,000 in your checking means that only $3,500 is actually profit. Here's another scenario... If you have a balance of $200,000 and you operate on a healthy 10% NET PROFIT, you are theoretically sitting on only $20,000 of net profit on a rolling year-over-year basis.

THE BIG MISTAKE happens when an hvac guy turned hvac owner, thinks he can grab some profits out of that $200,000 balance and buy a new truck, or boat, or camper, or motorcycle without ever job costing, or running a true audit on his financials. Why should he? That's a lot of frickin' cash, right? In fact, that might be the meatiest bank balance he or she has ever seen in their life! Heck, she can operate on $100,00 in the bank!

UNTIL... Until, the light bill comes due. Until the contractor insurance comes due. Until the rent comes due. Until Payroll is due with last week's 20 hours of overtime for the guys comes due. Until the quarterly taxes come due. Until the fuel card comes due. Until the auto insurance comes due. Until the vendor's extended terms from 60-days ago comes due. Until your personal car insurance comes due. Until your promise of a starter car for your seventeen year-old daughter comes due. Until you realize you already spent an unexpected $1,500 of the profits on a transmission rebuild for one of the trucks, and had to buy $3,000 in tools for the new guy. Until you remember you put new tires on your F-250 last month which cost way more than you thought, and until you spent a good portion of your "Lifestyle business' profits in the Florida panhandle back in March, but it was worth it because it was family time.

You get the point. But do you really get the POINT? When is the last time you job costed your installs? What is your monthly NET profit YTD? You price your work for a 50% margin, but what are your actual install margins? How much did you lose on call backs from the crappy installer you just fired? What are your service margins? What is your average install sale price this year, verse last year, verse an average inflation rate of 3%? What percent of your revenue do you budget for the shoulder season? What was last year's NET profit?

Listen, I know I'm just a territory manager, but I pay attention to my accounts. Maybe more than I should. And I can say with a fair level of accuracy that the majority of my accounts do not know what their NET profit was last year. Nor do they job cost to assure they are hitting their margins. They guess. They leave the accounting to the accountant--"She tells us if there are any problems". They look at their checking balance and make a lot of assumptions. Too many assumptions. They believe that lying sack of cash flow, until... You get the point. You cannot improve what is not measured. And if you cannot improve, you could be losing money every year, especially when adjusted to inflation. And inflation is probably 4X in 2021 what is was in 2020.

What are the long-term costs of not measuring year-over-year profitability, and job costing?

1. Cannot accurately make pricing adjustments.

2. Cannot accurately examine if jobs are planned well or not.

3. Task of adjusting pricing is overwhelming and doesn't get done in a timely fashion

4. Staff gets overburdened as more responsibilities are added, because no cash available to hire.

5. Fewer staff means even less measuring gets done.

6. Slow seasons bring intense stress to owner. Cycle repeats.

What are the benefits of measuring your profitability?

1. You're working ON your business, instead of only IN your business.

2. You can make improvements to your pricing in real time, which is better that fixing a problem that started 6 months ago.

3. When you measure NET profit/loss, you can accurately adjust pricing and processes.

4. When you measure your NET profit/loss you can use profits more wisely.

5. When you measure, instead of guessing, you can build a business and not just a stressful job.

Thanks for reading. If you appreciate this content, please share it and leave a comment, or let me know what other topics you'd like me to write about.