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Red Flags

Your business may be in trouble and you don’t even know it

I have been working with contractors throughout the trades for more than 27 years, and I have watched a lot of once-profitable companies go out of business. The process of going out of business is gradual, often taking three to four years, and most don’t even realize they are in trouble until it’s too late.

There are red flags that might be telling you you’re in trouble, however. As you review the danger signs, ask yourself, “Is that me? Am I in that situation?” If so, make some changes.

ARE YOU PAYING YOURSELF A REGULAR AND REASONABLE SALARY (FROM THE CURRENT INCOME AND NOT FROM BORROWED FUNDS)? If you are unable to draw a reasonable salary from the business on a regular basis, that is a danger sign. It may simply be a pricing problem or receivables problem, but take it as a red flag — and find out what’s going on.

IS YOUR LINE OF CREDIT GROWING? A line of credit is designed for one purpose and one purpose only: short-term borrowing against receivables. If you’re using it that way, your line of credit will be reduced to zero once or twice a year. If your total line of credit is constantly growing, however, there is trouble ahead.

CAN YOU PAY FOR NEW VEHICLES WITH CASH? Equipment replacement costs are typically the second-highest cost of doing business in a contractor’s company. When products and services are properly priced, cash will be available to pay for new equipment. If you are constantly borrowing money when it is time to purchase a new piece of equipment, chances are you are not priced properly.

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ARE YOU CURRENT WITH YOUR SUPPLIERS AND DISTRIBUTORS, OR ARE YOU USING THEM AS YOUR BANK? Cash flow P&Ls only measure real dollars in and real dollars out. Increasing money owed to suppliers (payables) will not be reflected in the P&L statement. Use the balance owed your suppliers as a red flag. Healthy companies pay their suppliers on time the majority of the time. Unhealthy companies owe their suppliers increasing amounts of money. How do you stand with your suppliers?

ARE YOUR TAXES CURRENT? Unpaid taxes are not just a red flag, but are a serious issue that can cost a company in penalties and interest — not to mention possible jail time. If you are not paying your taxes on time (payroll or personal), it is a giant red flag.

DO YOU HAVE REAL MONEY LEFT IN YOUR CHECKBOOK EACH MONTH? I don’t mean that your accountant said you made money, but rather if you have real cash dollars in your checkbook after you have paid your salaries? When your bills are paid; your line of credit is at zero; you are paying yourself on a regular basis; money is put back for the replacement of equipment; you are current with your suppliers; and you still have money in your checkbook, you are truly profitable. Cash is a real truth teller. Your accountant and/or accounting statement may or may not tell you that you are profitable, but if all of the above are in order, your business is healthy.

I often talk to contractors about attending our two-day Planning for Profit seminar/workshop, and they tell me things like: “We are priced right.” “Sales are increasing” or “Cash flow is not a problem.” I tell them I assume they have piles of cash lying around, then; the phone often becomes very quiet at that point. We have become masters at deceiving ourselves. Take time to review these red flags closely, and ask yourself if any of them are being raised in your business. If so, find out what the problem is, and find out quickly.

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