The supply-house business always is hazardous due to the chance of losses when your contractor customers file for bankruptcy. However, if you know the signs, you can minimize the risk.
Understand that the best of times for your customers may, in fact, lead to the worst of times for them financially. When they see the need to grow, they start taking on more employees, trucks, facilities and larger projects.
They are sticking their necks (and yours) on the line to achieve that needed growth. Sometimes it works and that’s good for them and you. However, many times it doesn’t work out. A poorly-bid large job, the default of a large customer or an economic downturn can drag them down, taking your money with them.
I know a lot about the pitfalls of the HVACR contracting business because I was a service contractor many years ago. No, I didn’t go belly up owing anyone, but I saw how that could quickly become reality.
A typical service tech who earns $20 an hour sees his boss charging $80 an hour for service calls and decides he can do better by starting his own business. He figures he quickly can get his boss’ customers by simply charging less (let’s say $50 an hour) while providing the same service.
This works until he realizes there are costs for downtime, bookkeeping, self-employment tax, insurance, licenses, trucks, gasoline, phones, advertising, stock, bad debts, etc. Let’s not forget about the 14-hour days.
Yes, most service techs can successfully run a one-person business out of their homes for a while if they have someone who understands and can do the bookkeeping, billing and collections. However, growth from that point on is extremely risky. Adding just one employee, one truck and additional stock, plus paying wages and insurance, not to mention keeping this new person busy earning income puts a huge financial burden and risk on the owner.
This lessens as the company grows, but whenever there is a spike in growth the risk potential also increases.
And the more success a contractor has, the more likely he will take on larger and riskier jobs. For example, bidding on commercial jobs can be a dangerous business because established companies that also are bidding have people who are very skilled at doing just that. The higher the chance that the novice contractor has of winning the bid, the more likely he has overlooked something major that will cost him dearly.
The problem with most service or installation people who go into business for themselves is that unless they have taken a business course, they don’t know how to finance company growth. And if they don’t start out well-funded, they may not make it through the lean times.
On the other hand, some of these small entrepreneurs will grow, thrive and become wildly successful and bring you along in their success! So, you and your company have some hard decisions to make when extending credit to new customers. If you don’t do it, your company will have fewer customers who consider you a friend that he or she is indebted to. The flipside is less risk.
Am I telling you anything you didn’t know? Probably not. I’m just reminding you of some facts that are easy to forget in the best of times when a customer is wildly successful.
If you have field salespeople who have good business savvy, they can go a long way in helping your customers achieve sensible growth while protecting your company from devastating losses.