Fred is sitting in his office, shaking his head at the array of financial documents scattered across the surface of his desk. He's just realized that, while his business made $4 million in revenue, somehow he's missing $40K.

"Where did all that money go?" He asks himself. "How did I lose 1% of the company's revenue?"

Record Revenue Year, Cash Crisis in November, the Forecast Would Have Caught It in June

In one of our previous blog posts, "Most HVAC Companies Do Not Have a Cash Plan. They Have Hope.", we talked about HVAC business owner Fred. He was encouraged that his business hit a record of the busiest summer yet. However, that encouragement turned to discouragement when he noticed that the amount of money he had in the bank hadn't changed much from before the busy season started. How is this possible?

We also discussed how many business owners, like Fred, run on the hope that they'll make enough to pay the bills. However, a cashflow forecast helps business owners know what money comes in, what money goes out, and when that all happens.

To connect this back to Fred asking why he's missing 1% of the company's revenue, a cashflow forecast would've shown him more clearly where the $40K went.

What the Financial Review found: Three Timing Gaps that Compounded Across the Slow Season

Fred discovered three timing gaps in his business's finances, the first being that he hadn't saved money during the busy season to cover the bills during the slow season. Things like vehicle insurance and rent are fixed expenses regardless of the time of year. And there are several variable expenses, like advertising, that Fred could choose to invest in during some months and not others.

The second thing Fred realized was that the current job pricing wasn't going to sustain the business. Labor went up since he'd hired another technician, and his break-even point had changed.

The last thing Fred discovered, which we alluded to in the previous paragraph, was that he had hired reactively instead of proactively. Because he had to pay another technician, he was unable to pursue growth opportunities for the business.

Bringing It All Together

Fred implements new procedures for all three timing gaps mentioned above. First, he made a note to set aside six months of fixed and variable expenses for the slow seasons during the busy seasons. Secondly, he updated the prices on all the jobs his company offers so that they accounted for the increased cost of labor. Finally, he documented a new procedure that required him to check the business's finances before hiring another technician to ensure he could afford to.

Call to Action

Look at last November. What was your cash position? Now look at last June. How much of the summer surplus was still in the account? The difference is your planning gap.

If you need additional assistance, 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.