5 Cash Flow Problems That Field Service Businesses Face
Businesses that provide field services know the importance of maintaining a healthy profit margin.
Every field service business needs cash to provide quality service to their customers. Qualified employees must be well paid and work equipment must be available and maintained.
All these contribute to expenses that the business makes regularly while trying to maintain a healthy cash flow.
What Is Cash Flow?
Cash flow refers to the money you have flowing in and out of your business on a monthly basis.
Businesses receive cash from clients for goods or services that they provide. On the other hand, businesses also lose money monthly to rent, taxes, salaries and utilities.
The success of a business depends on having a positive cash flow. This means there's more money flowing in than flowing out. This helps build a healthy profit margin.
In this article, we will consider some problems that can lead to a negative cash flow.
5 Top Cash Flow Problems of Field Service Businesses
1. Delayed Payments
It's great to have a lot of clients. However, if they don't pay quickly, it’s going to be tough.
It's common occurrence for customers' payments to delay. This is true especially for commercial customers. However, if you can't predict when payments will come in, it'll be hard to make decisions about expenses.
You want to buy materials, hire new staff? If you aren't sure of when your clients will pay up, your decisions will remain hazy. Growth and progress will be stifled.
2. Taking on High Overhead Costs
All indirect expenses a business incurs are referred to as overhead costs. These expenses are not connected to the service you provide. Examples include rent, utilities and insurance.
It is not advisable for a small business to allow high overhead costs. Spending a lot on rent, car leases and other expenses can create a hole in your profit.
When overhead costs are high, you have to struggle monthly to cover your expenses and make extra profit. This becomes a problem if you end up making more expenses than you're receiving payments.
3. Upgrading for Better Contracts
Growth is an important marker of business success. However, in trying to grow a business too quickly, you may end up hurting your cash flow.
Field service businesses may take bold steps to land better clients and bigger contracts. From hiring employees with broader skills to investing in new equipment that meets the requirements of your target client, these expenses are geared towards growing the business.
The upgrades tell on the business when it's time to pay employees' salaries. If the new client's payment hasn't been received, this can hurt cash flow.
4. Purchasing New Equipment
Your business may rely on tools, machinery or other materials to provide its service. These have to be maintained, upgraded and replaced when necessary.
It's very inconvenient and bad for business to have your tools of trade give up on you in the middle of a job.
If you want to avoid such occurrences, you have to keep a close eye on your equipment. Make expenses towards replacing or repairing them when there's trouble.
These expenses may have to happen before you receive payments for the month. This can create an imbalance in your cash flow.
5. Lack of a Cash Flow Budget
When you have a plan on how much money to spend or put aside monthly, it saves you a lot of headache. You will always channel money towards things that are important and necessary.
A cash flow budget estimates how much you expect to receive and how much you expect to spend within a given amount of time. You can create one for a 30-day or monthly duration.
Without a cash flow budget, you may lose track of how much you expect to receive in a month. This can lead to unchecked expenses that go above your receivables and create a negative cash flow.
How to Avoid Cash Flow Problems
- If you have ongoing clients that release payments late, you can choose not to hand over the next deliverable until they have paid for the last one.
- Ensure to protect your right to payment by filing appropriate preliminary notices and other legal requirements.
- Only extend service on credit to customers who make prompt payments.
- To finance upgrades to your staff or business, you can access short-term credit from the bank. Make sure you clear your debt immediately your new client pays.
- Reduce overhead costs as much as possible so that you can accumulate enough profit to grow your business.
- Create a cash flow budget to help check your spending and keep track of your payments.
A business without sufficient income to settle bills and repay debts often loses its competitive edge. There is not enough to finance required operations that would give an edge over your competition.
Poor cash flow is a liability. It can threaten the very existence of your field service business. Keep your business afloat and remember to maintain a healthy cash flow today.
About the Author:
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.