Most HVAC Companies Do Not Have a Cash Plan. They Have Hope.

HVAC business owner Fred is looking at financial statements from the past couple months, feeling encouraged that his company has made so much revenue. In fact, he realizes that he's hit a new record.

However, when he compares the total amount in his bank account now to what it was before the busy season started, he's discouraged. He thinks to himself, "We've had the busiest summer on record. So why doesn't the bank account reflect that?"

Bank Account Doesn't Reflect the Busy Season

As discussed in our earlier post "Hope Is Not a Cash Flow Strategy", "Running on Hope" doesn't mean a business owner is constantly stressed all the time. In reality, they often feel relief when revenue comes in. Business owners like Fred tend to operate with the belief that once the bills are paid, the remainder is the profit. Unfortunately the bank balance is a poor indicator of the business's health.

Many owners, like Fred, hope that their business can earn enough during the busy season to cover the costs during the slow season. However, as the season changes and the work slows, Fred's hope disintegrates. Despite all the hard work his company has accomplished this summer, the bank account hasn't moved enough to cover the slow season expenses. To him, it seems that his company's hard work did not pay off.

What "Running on Hope" Actually Costs

In the previously mentioned blog post, we talked about what happens when business owners run on hope and don't put a cash plan in place. There are many symptoms that this is occurring, but in Fred's case, he discovers several things, the first being that he missed growth opportunities because cash wasn't ready.

Secondly, Fred also realized that he hired new technicians reactively rather than proactively. The business was so busy that he decided to hire more technicians to capitalize on more work. However, as he's looking at the bank statements, he's realizing that capitalizing on the opportunities was not as profitable as he had hoped. In fact, he had actually created a bigger problem during the slow season. If he'd calculated the additional cost of new techs, both training and ongoing costs, it would have shown how unprofitable chasing more work could be.

Another thing Fred discovered was that he began to chase jobs to keep his crews busy, rather than focusing on profitable jobs. This negatively impacted his cashflow as well as his ability to plan for the slow season.

Finally, Fred lived paycheck to paycheck, if he paid himself at all, at the business level. This has also affected his morale, leading him to feel depressed and burnt out.

What's a Cashflow Forecast?

In season 7 of her Cashflow Podcast, Pam Prior defines a cashflow forecast as a realistic picture of what's occurring in the near future. It shows when cash comes in and when cash goes out, allowing business owners to make financial decisions proactively instead of reactively. For example, if a business's cashflow forecast shows that the bank account will be overdrawn a few weeks in, the business owner can look for bills that could be paid later and/or ways to get paid sooner.

Fred takes some time to create a cashflow forecast for the next 13 weeks, and upon completing this task, he realizes that he has opportunities to save money to invest in company growth during the slow season.

Bringing It All Together

Fred looks through financial statements for the past year to determine when his company's cash position is at its lowest point and what month revenue peaks. Once he documents those two months, he implements new procedures to plan his future so he can make financial decisions proactively instead of reactively. These procedures include, but are not limited to, rescheduling bill payments and revising vendor payment terms.

Call to Action

Write down the month your cash position is lowest every year. Now write down the month your revenue peaks. The gap between those two months is your planning window.

If you need additional assistance, here's the link to our Slow Season Cash Planner. You can also book a complimentary consultation with Joseph.

Disclaimer: The information in this post is intended for general guidance purposes. For advice specific to your business finances or taxes, consult a licensed accountant or financial advisor.