Fiscally sound management is key for smaller businesses.
At the end of each of my columns, there’s a note with my email address and the absolutely true comment that I love hearing from you.
Many readers write to me and I always learn from those notes. Last May, I received an email from subscriber Norman Chusid. This note was so good that I asked him if I could share it with you.
And it’s not that I needed a month off. It’s just that Norman said it so well I couldn’t find a word to change. I think you’ll agree. Here ‘tis.
“I enjoyed your ‘Advanced Learning’ article in April’s Supply House Times. When the magazine arrives, your column is one of the first pages I turn to as I enjoy your writing style and the way you get your message across. While my company, Nor-Mon Distributing Inc., is not in the hydronics parts or service business, we are a distributor of 140 brands of major appliance parts, HVAC-R parts, hardware, electrical, plumbing, hand tools, fasteners and property management supplies.
I started working in this industry when I was seven years old at my father’s hardware store (I always say there were no child-labor laws then). I took over running the operation 30 years ago (I was 27 at the time) and through good luck, prudent financial management, a huge amount of customers, reps, factories and employees who believed in me, we have grown our family’s once-small, one-person hardware store into the combined wholesale-retail operation it is today. Nor-Mon Distributing is not only fiscally stable, we have never borrowed one dime to run the business.
Because of my work history and continuous customer contact, I feel that I have some solid insight into many of the problems facing the service industry today, whether it is the hydronics, HVAC-R, appliance or similar fields. One of the biggest problems I see is the inability of small (one or two people) service companies to run their businesses in a fiscally sound manner that allows them to not only survive, but to grow and prosper.
The people running these companies are good people. They are knowledgeable about their trade, enthusiastic about doing a good job and not afraid of the hard work it takes to be successful. They just don’t have the knowledge of how to create and keep profit.
Let me give you a good example: A service tech for an HVAC repair company sees that his time is invoiced out at $120 per hour, but is upset that he is only being paid $25 per hour. He feels that the company he works for is taking advantage of his ability and he is grossly undercompensated. His solution, as he sees it, is to go out on his own.
Now this service tech (let’s call him John) is a capable technician and can hold his own when it comes to diagnosing and repairing HVAC equipment. John leases a truck, gets a basic uniform, adds some job-specific tools to his already ample tool assortment, buys a rubber stamp to print his name on some store-bought invoices, runs a small ad in the newspaper, and being honest, even acquires some insurance and files a CCB number with the state.
John comes to a distributor such as Nor-Mon and asks for credit to open an account. John has no credit references other than he purchased from Nor-Mon for his prior company, and for that reason, ‘knows us and we should know him.’
I’ll suggest that John use a credit card at the beginning to pay Nor-Mon for his parts with the promise that, after a few months, if things are going satisfactorily, Nor-Mon will give him net-10th credit terms. John confides to me that his credit card is already just about maxed-out due to his start-up costs. I’ll ask John a little about how he’s going to make it as a service tech, and unless he seems totally oblivious, I’ll take a flyer on him and allow him $500 worth of credit.
Am I a fool? Maybe, but I always remember that some people once took a gamble on me and without their help Nor-Mon wouldn’t have made it to the level it’s reached today. I do always suggest they make an appointment with a counselor from SCORE (Senior Corp of Retired Executives) who offer their wide array of experience at no cost to those small business people who request it. I also realize that most won’t take the time to do it.
So John goes out and does a few service calls his first week in business, grossing more than $2,000. Hey, this is easy he thinks. I’m making $100 per hour and just rolling in the dough. Why didn’t I do this sooner?
John goes down to the neighborhood bar that weekend and since he’s flush with cash, buys his friends a few rounds of beer. He then goes home to find that his wife is short on grocery money and gives her $100. One of his kids keeps asking for new school clothes, so John says why not, I have the cash, and gives him $200.
End of the month comes and John has a truck payment of $400, a gasoline bill of $200, an insurance payment of $150, a uniform-rental payment of $50, and a $500 parts bill with Nor-Mon, not to mention a payment due on his maxed-out credit card. Only problem is John has almost no money left from his service calls because he spent it on a bunch of other (can we say frivolous) things earlier in the month.
Fast forward a few months later and John is back to work at his prior company (they always liked John), getting his $25 an hour and trying to do what he can (since John is honest) to pay off his creditors, including Nor-Mon.
During the past few years, when a person like John came to see me about starting up his own service business, I took him into my office for a discussion. I suggested some sound fiscal management proposals to help him be successful. I told him that I’m sure he’s a good and knowledgeable tech, but my past experience has shown me that the best techs have someone else such as their spouse, a relative or a CPA manage the money side of the business. I suggested he pay his bills weekly to make sure those bills don’t overwhelm him at the end of the month. I gave him the name of a couple of bankers who can help him set up a business checking account and business credit card.
Basically, I tried to offer that new customer some basic business knowledge to help insure he is successful. And okay, maybe I’m a little self serving with all of this, but I realize that successful techs will also pay Nor-Mon their parts bill on time.
I apologize for rambling on, but maybe you can do a future column about the need for small businesses to have a strong financial plan to run their new businesses. Many people (including two from SCORE) helped teach me 30 years ago and I’d like to pay it forward if possible.
And if you ever happen to find yourself travelling to the great Pacific Northwest and have some time to spare, contact me and we’ll set up a time for you to come by and see how our small, 1950-ish business still operates in an old-fashioned and successful manner. We still hand-write many of our invoices, don’t worry about inventory turn, trust our co-workers to make the right decisions, pay our bills on time, open up after hours for emergencies, still do outside sales calls and do our darnedest to help all of our customers be as successful as possible in their own businesses.”
See what I mean? I couldn’t have said it any better and I wish our industry had more people like Norman Chusid counseling those new to the business side of our industry. And now more than ever.