|Posted on May 29, 2012 at 2:00 PM|
Unless you are the butt of some cruel joke conspired by a universe where 42 is *not* the answer to the ultimate question of life, the universe and everything, then you probably did NOT get into the audio/video business because of an overwhelming love of the BUSINESS part of things.
As a rule, the custom audio/video installation industry does not seem attract the finest accounting minds and top-shelf Wharton graduates. Or people who love calculators, Lotus Notes and bandying about terms like "quantatative" and "horizontal financial analysis."
And that’s not to say that this industry isn’t filled with tons of smart, creative thinkers. Rather, people typically get into this business fueled by love and passion; the kind of love and passion that music and movies has on you. (Sure, I imagine some people love numbers in that same Beautiful Mind kind of way. They gleefully produce flowcharts and forecasts and ogle rows and rows of spreadsheets vertically and then – oh so naughty! -- horizontally like they’re checking out Miss June.)
My partner, Allen, started Custom Theater and Audio because he loved audio. He had followed the Grateful Dead around for years, perfecting the craft of mic placement and taping techniques to try and make the perfect live recording. He then expanded that love of recording music to playing back music, learned about high-end audio, started selling high-end audio systems, and ultimately opened our store.
I got into this business because I loved movies. After being exposed to the possibility of having a surround sound experience at home – thank you, Speed on Laser disc! – I knew that I had to have a system of my own. When I found out that I could make a living designing and installing surround systems for other people, I knew that was what I wanted to do.
And I can assure you that never once did either of us think, “Wow! It would be SO great to get a job at a custom installation company! The billing and all of the accounting stuff is gonna be so awesome! Who’s supervising inventory and generating invoices and costing from the job worksheets? This guy! I’m just gonna manage the crap out of our cash flow!”
But, no matter how great you are at the cool side of this business – the demonstrating, the designing, the installing, the integrating, the programming – if you don’t have a handle on the BUSINESS part of this business – the accounts receivable and payables part that manages the flow of money going in and out – chances are you aren’t going to last.
Because for all of the cool technology we get to play with, for all of the fun that our job leaves behind in the home’s of our clients, it is still most definitely a business.
Here’s six simple things that I thought I’d share about what I’ve learned about managing the finances of our company over the past years that have helped us to remain in business. I’m no graduate of
business school anything, so these are simple, common sense things that anyone can employ.
#1 Limit Your Exposure
On some big jobs, you can have literally hundreds of thousands of dollars hanging out there. If something bad were to happen – the client dies or decides they’re just not going to pay or suddenly goes bankrupt or something – you can be totally on the hook for this. This can almost surely put a small company out of business.
The way to limit your exposure is to set up payment schedules and get deposits.
And quite simply, no deposit, no work.
“I’m sorry, Mr. Client, but I really can’t proceed on your project until we get that next deposit. We need that to be able to order in the equipment required for your job. If you need to delay the project for a bit, we certainly understand.”
People understand this concept. They certainly wouldn’t do all the work for YOU without expecting to be paid, why should you do it for them? And no one would expect to order dozens of TVs from Best Buy or Amazon and then have them all show up at their home – and be installed! – and then pay at some arbitrary point they choose in the future. Never happen. Those guys get 100% of the money up front before the product even leaves the store. Why should you be treated any differently?
Sure, you might not be able to avoid getting burned on that last 10-15%, but being on the hook for $10,000 is a lot easier to swallow than for $100,000. And generally the client that has been timely on making scheduled payments throughout the job is not going to stiff you at the end. Conversely, if you have a chronic slow paying client – always with some “Oh, I misplaced your bill” or “It’s in the mail” excuse on each payment – then you might want to limit your exposure even further.
#2 You Choose
It’s a business and you have the right to choose who you do and don’t work with. You ever just get a bad vibe about someone? Just get a feeling that they are going to be a problem client? Nothing says you have to work with every client that comes through your door.
If you feel that someone is going to be especially difficult to work with, set up the job on the front end to be in your best interests. Bid install labor and “project management” fees appropriate to what you feel will make the job worthwhile.
And then ask for 100% payment up front. If they are willing to work with you on these terms, then you’ll be insulated at least from a financial standpoint. If they balk, then just explain that you’re sorry but that is your policy and know that you probably just saved yourself a headache.
#3 Invoice During the Honeymoon
I have a saying that my partner has heard frequently over the years. He’ll tell me how has sold this or that and then I’ll remind him, "Until we get paid for it, you haven't sold it. You've donated it." It's not sold when it's installed; it's sold when it's paid for.
Invoice people as soon as the job is done!
There is a “honeymoon” period when people have a new system installed. The gear is fresh, it’s shiny, it’s new, and they love it.
“Oh, our new home theater is so great!”
“We just love listening to the music system that you installed in our house!”
“I never knew how much we would love this lighting system!”
This is the time when they are at their most receptive state to pay. All of the work you did is fresh in their minds and they are still in that glow of, “Gee! Isn’t our new system swell?!”
Trust me, other trades don’t wait 30 or more days to see how the homeowners “like” the system or that “everything is working OK.”
I had a new roof put on my house, about $9500 worth. Think the installer waited until a few rain showers rolled through to see if there were any problems? No. He was at my door the next morning looking for the balance due. I had my roof, he wanted his money.
Same with my air conditioning install. Think they waited a few weeks until it got nice and hot to make sure the system was gonna do its job? No. They wanted payment before they left my house.
And I can almost guarantee you that if you wait weeks/months to send an invoice that the final payment is going to come with some kind of condition. “Well, we’ve noticed that the system isn’t doing a few things that we were hoping it would. If you’ll just set up a time to come out and go over the system again and explain a few things, then we’ll pay the bill.”
#4 Manage the Money
My dad instilled – brainwashed? – me with a real sense of money management. I have always lived well within my means personally, and I try and run our business finances the same way. All spending goes through me and I look over every charge. Improper management of cash flow is one of those things that can kill a small company.
And running a company with the “rob Peter to pay Paul” mentality is ultimately going to end in Peter coming back to whoop your ass.
For example, you get a customer to sign on for a big job and they give you a nice deposit check. A lot of companies take that big check and immediately go on a shopping spree; buying new vans, tools, maybe a nice bonuses, whatever. Then something happens and the job falls through and the client wants his deposit back. Or someone else doesn’t pay and then when it comes time to use that original deposit to actually buy the equipment for the job you’re short. Now what?
When you get a deposit for a job, use that money to buy the components FOR THAT JOB. That way you know that the gear is paid for – and in stock – and don’t have to worry about it.
The time to buy vans and tools and give bonuses is at the end of the job. Assuming, of course, that the business has stored up a rainy day war chest of capital reserves and can afford to do so.
#5 Schedule Bill Paying
Paying bills is one of those chores that no one really associates with the glamorous world of audio/video installation. But, it’s a necessary evil. You need the gear, you ordered the gear, now you need to pay for the gear.
Instead of being haphazard with this, schedule a time when it will be done. Then do it.
This will not only insure that you don’t fall behind on paying it will also keep you from that chest clutching "Gasp! I owe how much?!" when you have to go through a huge stack of month's or more worth of bills.
Also important is that by being regular in your bill paying, it will allow you to take advantage of things like paying bills early and taking prompt-pay discounts. This is like free money! Why pay $1000 in 31 days when you can pay $950 on day 30? And this is real money that can add up to thousands of dollars over the course of a year. Not to mention that it keeps you on good terms with your suppliers.
#6 Little Things Add Up
There are little things that you can do to save even more. Things like scheduling on-line payments with vendors or utilities that will allow them. This can drastically cut down on the amount of postage and saves the time of stuffing and sealing envelopes. (Another one of those awesome side perks of the A/V industry!)
Same with billing clients via e-mail. It's faster and cheaper on your end and they get the bill instantly, and often respond quicker. Win-win.
We switched to direct deposit for our employees a few years ago and that has saved us on check and printing costs. With 6 employees being paid weekly, that is over 300 checks per year that we have eliminated. Plus our installers no longer have to worry about whether they will be able to get to the bank in time on Friday, meaning we’ve been able to get more productivity out of them.
Also, find a rewards credit card that makes sense for your business. We routinely end up spending around $30,000 a year on a credit card, and this is money that can result in a cash back bonus or a free airline ticket. Why not let the spending you are going to do anyhow help to buy you a plane ticket to CEDIA?