A common mistake made by security contracting businesses

Are you in complete control of your finances, or are you still guilty of ‘looking in the rearview mirror’ and hoping for the best? Bright Business Advice Founder & CEO, Emerson Patton, reveals where most Security Contracting businesses get it wrong - and the simple changes you can make to master your money.

Listen, none of us start a business because we love dealing with the finances. The accounting software. The invoices. Chasing payments. The spreadsheets. That’s what accountants are for, right?

Many of the contractors I work with are guilty of doing the same thing:

They spend all their time looking in the ‘rearview mirror’ instead of looking at the road ahead.

You see, most of us produce a P&L or management accounts that give us an idea of how the business performed in the last month. If you’re not producing this already, you need to start today!

While having a P&L is important, it only tells part of the story. The reason I say it’s like “looking at your rearview mirror” is because it only tells you what’s already happened.

And if you’re only looking backwards while you’re driving, it’s not going to be long before you crash…

 

That’s why it may not come as any surprise that 96% of the businesses that fail in the UK each year, fail because of CASH FLOW issues.

 After all, it’s all well and good winning a £100k job, but if you’re not getting paid for 6 months (but you’ve got to buy the materials up front) - you can easily find yourself in serious trouble.

Same goes for ‘unexpected’ tax bills, late payments, and cancelled jobs.

 

Without looking out your front windscreen at the road ahead, it’s impossible to spot the potholes and problems before you get to them. Making it impossible to prepare.

Ideally, you want to have a 3-week rolling forecast in place. Month 1 is your ‘basic’ forecast - based on invoices you’ve sent, month 2 is your ‘intermediate’ forecast - based on work in progress, and month 3 is your ‘advanced’ forecast - which is harder to predict, and relies on your sales forecast.

The good news is, you don’t need to do all this yourself. With some half-decent accounting software like Xero, and a bookkeeper/accountant, producing these should only take a few hours each month - but will potentially save your business!

 Xero now has the ability to use AI to predict when customers will pay based on their previous history. SimPRO, who we partner with, allows you to automatically work out margin on the fly by looking at parts and labour - instead of waiting ‘til the end of a job and HOPING you’ve made some money!

Remember - if you’re only producing a P&L annually, you’re only doing it for the tax man. Doing a monthly helps you spot trends and predict what might happen - helping you make better decisions and increase your profits.

 

Doing this will also help you close the cash gap.

 Think about it this way. If you’ve got a new job on 30-day terms, you’ve got to cover the costs of that job for 30 days before you even raise the invoice, and it could be another 60 days before the money comes in. That means potentially covering all labour and material costs 90 days BEFORE you’ve been paid.

 Having your cash flow forecast sorted will not only give you peace of mind, but it can also help you ‘close’ the cash gap by better monitoring cash in and cash out.

If you combine this with more structure around your receivables - so invoices are sent on time, with clear terms, and chased relentlessly if paid late - you’ll massively improve your own cash flow.

 Remember, the squeaky wheel gets oiled… so be the squeaky wheel! Also make sure you understand the client payment cycle and who signs off their invoices, so you can chase the right people.

 

My advice? Don’t be too tempted by invoice factoring.

 Invoice factoring - where you receive around 95% of an invoice upfront by ‘selling’ the unpaid invoice - can help cash flow, but it will also have a HUGE impact on your profits.

 It’s no different to discounting - which when I show security contractors this chart, they soon stop doing!

 You see, because your fixed costs don’t reduce when you offer a discount, any ‘money off’ you give has a much greater impact on the amount of profit you end up making - because you’re only eating into your profit.

 

 

As you can see, giving a 10% discount actually reduces your profit by 25% - because you’re only giving away your margin!!

 On the other hand, increasing your prices by 10% increases your profit by 25%.

 If you’re unsure about putting up your prices, ask yourself this: if you’re providing an above average service, why are you charging an average price?

 

To receive 2 free videos on how you can master your business finances - without spending hours creating spreadsheets - using my A.S.S.E.T. model, download my Bright Business Toolkit today and claim your free 20-minute coaching call by visiting https://toolkit.brightbusinessadvice.co.uk/bsia