Wheeler on HVACR: How to avoid bankruptcy losses
A reader contacted me recently asking some advice, and I'm always willing to try and help if I can. His problem is that his company was in the midst of an expansion mode when a couple of key customers went bankrupt, depriving the HVACR distributor of large amounts of owed money at a critical time. Now, regardless what I told him, the first thing any supply-house owner/manager has to do is to try to minimize bankruptcy losses while not alienating and chasing away good customers. How do you do that?
First of all, keep in mind that a certain percentage of HVACR contractors will go bankrupt every year, even in good financial times such as these. The secret is to recognize those who are most likely to fail and cultivate other customers. No, you don't really want to sell to everyone who walks in the door, especially when it comes to offering an extensive credit line. Remember, about two out of three new companies will fail within the first five years.
How can you tell which ones will survive and which ones will fail? Former technicians who have never taken a business class are always a credit risk because they don't necessarily understand margins, the bottom line, successful management techniques, bookkeeping, collections, and a host of basic successful-business principles. Yet the vast majority of HVACR contractors are former technicians or engineers. Give me a successful businessman entering our industry as a contractor any day to one who started out just knowing how to fix air conditioners.
Does that mean you have to let go of any contractor as a customer just because he doesn't have a business degree? No, you just have to work harder to teach them to be better business people.
What? You teach them to be better business people? You aren't in the business to teach, just to sell parts and equipment, right?
Wrong! Realize that every customer who buys from you on credit becomes your partner. In fact, they're your partners even when they buy for cash. You see, you company's future, growth and profitability is directly linked to the future, success and profitability of your customers. So if they have a bad year, you have a bad year. If they go bankrupt, your company is going to feel the effects.
Now, let me lay out some basic truths of HVACR wholesaling:
- You have to learn to know and like your customers because they are your business partners;
- You have to know something about your customers' businesses because their business success or failure is your business's success or failure;
- Your customers have to realize that they are partners with you and that you are the business expert in that relationship; and
- You have to be willing to train bad business people to become good business people.
And while all this can be done by others in the company, your customers must come to know, trust and communicate with you.
I'm sure that all the above sounds a little too parochial and "fuzzy" to some, yet it can be the successful edge that differentiates independents from chain-store supply houses. Personal relationships work! Not many contractors are likely to lose a lot of sleep when their companies go belly up and leave some blood-sucking wholesaler holding the bag, but it's harder to do that to a friend. And the fact is, there would be fewer HVACR contractors failing if they had more professional businessman friends like you to rely on.
So what do you do to help them? You have to start a trusting relationship somewhere, and that's for you to figure out. Contractors are proud and don't want anyone looking at their books, so you also have to walk a tight line between indifference and meddling.
Yet good salespeople can do and learn a lot. Perhaps you can sponsor a business class at your facility. Yes, it will cost your company some money, but it won't be nearly as bad a hit as as a bunch of customer-bankruptcy losses.
There are a lot of contractor mistakes you have to guard against:
- Poor bookkeeping practices,
- Insufficient parts or labor markups,
- Insufficient or poorly thought out advertising,
- Too much credit extension,
- Too much personal spending of company funds, and
- Venturing unprepared into new fields such as indoor air quality, plan and spec projects, jobs that are too big, etc.
Then there are the positive steps you can take, such as encouraging them to enter more stable fields such as selling service agreements and nudging those in economy-sensitive fields as new construction into the service side of the industry.
Now, I realize that what I've written here just brushes the top of the problems and their solutions. However, drawing closer to your customers and recognizing how integral a part they play in your business is an important first step.
While we live in a world that is becoming less personal and less friendly every day, you can't survive long in the HVACR industry as part of the three step process - manufacturer to supply house to contractor - by keeping your company "strictly business." After all, the supply chain is no different from any other chain: It is only as strong as its weakest link. Just make sure that link isn't your customer.