The story I am about to outline is based on real conversations with real CI dealers. Typically, the dealer has been in business for years and is deeply frustrated. The pain comes from chronic cash flow shortages. The harder the dealer works, the worse it gets. In many cases the dealer works with their spouse; tensions rise both at work and at home. Selling more only aggravates the problem, so the dealer purchases the latest software to help ensure good design, clear quotes and asset/inventory tracking. Nothing seems to be working.
I’m going to give our dealer a name, Sam. Sam has strong technical knowledge and experience. Sam has never learned to read financial statements, which are typically done once a year for tax purposes. However, if Sam prepared his statements regularly and looked at them, he would start to notice some interesting trends.
Sam’s labor rates are low, but not enough to explain the cash flow shortage. (He believes he needs to keep his rates low, because clients always push back on labor.) Equipment margins are in line, because Sam knows he needs good margins to make a decent profit. However, what he fails to realize is that his gross margin (GM) is too low.
Many things can contribute to a low GM. It could be timing; meaning costs and revenues are not properly matched within the period incurred. It could be a billing or collections problem. Both timing and billing seem unlikely because the equipment margins were in line. Comparing labor costs with revenue exposes a serious problem. Sam’s labor revenue as a percentage of sales is very low. In addition, the cost of labor is very close to the labor revenue being generated, so there is close to no real margin on labor. Sam also admits that he always discounts his work, knowing that clients need to see a deal to feel good about doing business with him.
As we know, Sam does not understand his financial statements, but the bigger issue is what he believes is necessary to close business. Here is what Sam believes (and what I’ve heard from many dealers): 1) Clients won’t pay what it takes, 2) Educating the client on labor is risky; it could cost me the deal, 3) Margins on the product will cover labor, 4) Clients expect discounts, 5) Fixed contracts are necessary to close business, 6) Increasing revenues, with low margins, will solve the cash flow problem.
Sadly, many dealers play these out, in whole or part. Cash flow shortages are always a symptom. If cash shortages are plaguing your firm, think hard about what ‘you believe it takes’ and pay attention to your financial statements.