Chapter 6 - You’re Working for Free ( Total Business Turnaround Book )

Hey everyone, it's Mike Andes. Today I'm gonna be reading chapter six.

Of the Total Business Turnaround. It's gonna be all about working for free. Yeah, you heard it right. It's not good. Basically, you do the work, you have the invoice sent to the customer and they never pay you. I really, really, really appreciate it if you could do me a big favor and just give a rating on this podcast.

Sometimes the only way for people to.

Actually find the podcast is they just scrolling through business related channels and for a podcast to have lots of reviews, they'll actually take a listen. So if you could do a big favor and just leave a RA podcast, it'll help other small business owners find the podcast, hopefully listen to this message and hopefully also make sure that they're not working for free and they're not leaving paid invoices or invoices unpaid when they send them to customers. Because ultimately if we all do that and we make sure that people customers are actually held accountable to paying their invoices, it will absolutely help all of us. So share this message, share this episode and let's dig right into it. Chapter six.

You're working for free. Why you don't have a million dollar business reason six you're working for free. Mr. Sudsy is a pressure washing business located in Indiana. They also offer window cleaning and install Christmas lights. A man named Blaine owns the company. The business had a problem. It never had enough cash on hand. Because of this, Blaine couldn't afford to buy Christmas lights earlier in the year. He had to do so before the prices rose as the holidays neared. Doing so could have given him a 30% discount. Unfortunately, without money in the bank, they couldn't make it work. This had a big impact on the profitability of his Christmas lights installations. Blaine had a lot going on. Instead of focusing on Mr. Sudsy, he had a hand in many business ventures. Recently he tried to build a mobile gaming app. He'd spent a bunch of money on the development. When I met him for the turnaround, he was suing the person who developed the app for $15,000. He'd also tried to franchise Mr. Sudsy. That hadn't worked very well. He had one person sign up. That person was only doing $10,000 in annual revenue. Blaine got a 10% royalty on that. In all, he was making $1,000 per year for franchising. That won't come close to even covering the legal fees to stay compliant. Mr. Sudsey had also recently undergone a transformation. Blaine had merged his business with a Window cleaning operation. The operation belonged to his friend Chris. This allowed him to expand his service offerings and cross sell existing customers. Unfortunately, they didn't operate like a joint venture or co owners. It was more like the kind of relationship you'd have with a subcontractor. At the end of every month, Blaine cut a check to his friend for all the window cleaning jobs he had done. They didn't split equity, banking or profits. They weren't even the same legal entity. Combined, these factors painted a clear picture. Blaine lacked focus. Blaine told me that he suffered from adhd. He said his mind was always racing. This made it hard for him to follow through on a long term plan. He'd get an idea and feel compelled to run with it. As a result, he had a minefield of half finished projects. I wanted him to focus more on Mr. Sudsy. Specifically sales. His energy was great. I thought that if he could focus it on one thing, he'd be way more successful. Despite their issues, the business managed to make almost $500,000 a year in revenue. There was one final problem. They had more than $80,000 in overdue invoices, also known as accounts receivables. This caused a huge cash problem. We had to do something. The invoices had not been paid for six, seven or eight months. Some were large invoices totaling over $10,000. Blaine was sitting there telling me he couldn't afford Christmas lights. It was no Wonder why almost 20% of his annual revenue was sitting in uncollected payments. Keep in mind, for most home service businesses, 15 to 20% of revenue is their whole profit. In other words, most or all of Blaine's profits were sitting in accounts receivable. Sometimes businesses spend too much time thinking about new leads or pricing. How good are you at collecting the money you've already earned? Remember, you aren't the bank, you aren't the White House. Your job isn't to hand out interest free loans. It definitely isn't to forgive loans. That is never collect on your invoices. It amazes me how many business owners let customers avoid paying for months. They do so without any penalties or fees. It's like a bank issuing a loan and never collecting interest. They wouldn't do that. Why would you? You are running a for profit business. If you are going to let customers pay you later, you should collect a fee for that service. A lot of small businesses are great at the services they provide. They're usually horrible bankers. Banks charge for their financing services. They charge fees, penalties and interest. Small business owners don't think of themselves as being in the financing business, but when you let a customer go months without paying, you're effectively giving them a loan. The bank of Mr. Sudsy was alive and open for business, handing out interest free loans left and right. In an earlier chapter, I mentioned that raising your prices is often the fastest way to fix your cash problem. That's still true, but you can have the best profit margins in town and it won't matter if you never collect payments. If you don't receive the payment you are owed, you are working for free. Many small business owners experience this problem. Here's how I handle it. First, I require autopay and payment details on file for overdue fees. Copilot CRM can automate this. We have a feature you can require credit cards before the customer accepts your estimate. With this feature, you pretty much know that you can collect on any job. Granted, not everyone likes credit cards. You may prefer to avoid the 3 to 4% processing fee that comes with credit card transactions. That is a legitimate concern. Processing fees add up over time. But I would challenge you to look at the bigger picture. How much money are you failing to collect with your current collections strategy? What's the cost of mailing late notices, checking the mail and depositing paper checks? Does your cash flow swing each month as you wait for payments to come in? Most owners find that accepting credit cards reduces their overdue invoice count. It is well worth the processing fees. If you aren't going to keep cards on file, it's a good idea to charge at least 1% per month in overdue fees. That way you're incentivizing the customer to pay on time. Keep in mind, that's a minimum. A bank would charge much more for a consumer loan and a retail store. They won't let you leave the building without paying. Imagine asking your waiter at your local pizza shop if you could pay next month for the dinner you just ate. Imagine telling your mechanic that you will pay for the engine they installed next year. Yet home service business owners find it normal for overdue invoices to age. Some of those overdue invoices will never get paid at the end of each year. We consider this bad debt. Money you can't collect because you never heard back from the customer. Maybe they moved away. Maybe you can't contact them. Maybe they are avoiding you. Another good way to avoid this problem? Start requiring customers to make deposits on larger projects. Copilot has a feature that automates this process. It triggers when an estimate hits a certain dollar threshold. When the customer accepts the estimate, they must pay the deposit. This is important because there are cost of goods sold cogs that you are required to pay before the job can start. This comes in the form of paying for labor and buying materials. Often it's good to collect the money for all that before the job starts. I usually recommend seeking 50% of the final invoice up front. This lets you cover labor and materials before the job starts. This is a practical consideration. The customer may try to avoid paying for six to eight weeks. But you need to pay employees wages and material costs within one to two weeks. Home Depot, the gas station and your employees won't accept an iou. Your credit card company will also charge you huge interest. If you don't pay off your balance each month, you're out for the cost of the job regardless of when the customer pays. That can lead to a major cash flow problem. For example, Mr. Sudsy can't afford Christmas lights. He passed up big discounts. They would have come if he had the cash from overdue invoices. If the customer never pays, you could be out thousands of dollars on larger projects. It infuriates me this happens every day in home services. It causes small businesses to fail. Remember, for many industries, it's normal to seek full payment before giving service. Your phone bill is a good example. Most forms of software any subscriptions you are currently using. In our industry, it is standard for customers to wait until after the service. Then they pay. A down payment or deposit is customary and required to minimize the risk of unpaid work. I would challenge you to think about how you can get paid before the job. This is acceptable even for recurring work like mowing jobs. Can you collect at the start of the month before your service cycle begins? It will take good sales skills to pull this off. It's something business owners should approach with caution. Throughout this book, we've talked about adding friction to the sales process. Requiring 100% payment upfront will add friction for most customers. Can you get away with it? It depends on factors unique to your business. If your company is in high demand and has little competition, you will easily roll out this strategy. If your market is full of competitors and they allow more flexible payment terms, it will be harder for you. But this is one way to make sure you never work for free. The third way I handle overdue invoices is to automate collections. You can use automated text messages, emails and even phone calls to track down late payments. COPPA allows you to automate your payment retrieval process. For example, on day one, the CRM might send out a text alert with a link to the invoice. Day two, it might send an email. On day five, it may trigger a reminder to your office telling you to give the customer a phone call. On day 10, you may show up at the property and try to retrieve the payment in person. At that point, you should stop serving that customer. Do not serve them unless they pay up front. Your goal is to avoid this process. You can do this by having a card on file to charge right away. I've seen cases where recurring contracts went on for over a year. The business owner didn't notice that they weren't getting paid. In some of these cases, the property wasn't even occupied anymore or the original owner had passed away. In other words, there was no one even to collect from. The business owner wound up working for free because they didn't have a process in place. When you automate collections, it increases your odds of retrieving payment. A customer who doesn't want to pay can get away with a lot. This will happen if you only check in at the end of the year after they are overdue by six months. Automation prevents this from going undetected. So how do overdue invoices take you further away from building a $1 million business? Here's something I've learned. It's super simple. If I ask for money less, I will make less money. If we don't ask the customers to pay, the likelihood that they will decreases. If we don't enforce payment recovery, we won't be able to pay our bills. If we can't pay our bills, we can't grow our business. We probably can't even keep the business open. We certainly won't increase our revenue. Keep this in mind if you are worried about bothering customers with overdue invoices. Businesses short on cash can collapse before realizing their customers lifetime value. Here's an example. Let's say your acquisition cost and cost to deliver or cogs expenses add up to $1,000. You make $10,000 throughout the lifespan of the customer. The ratio makes sense, right? You are 90% profitable. But let's say you have a bad collection process. The customer is going to pay you that $10,000 in 50 years. That's a much different story. In this case, your day to day expenses will use up your money before you recover the lifetime value. This means you need more customers to pay the bills. What results is a treadmill effect. You work harder and harder, but you never get anywhere. Your impulse is to grow and Expand your customer base to get more revenue. Do that and your business will grow on paper. In reality, your accounts receivable balance will also grow. Over time, your overhead would exceed your income. When that happens, businesses fail the fix. Collect on the invoices you've already sent out. Monthly revenue is more important than lifetime value. In the example above, the contract looks profitable. But if it takes them 50 years to pay you back, that would mean you were making $17 per month. It would take five years just to break even on the $1,000 it took to acquire the customer and perform the work. This will lead to a cash crunch. Massive public companies can acquire customers at a loss. They have the stock market's money or venture capital required to make it work. Small business owners rely on collecting payments fast. They use that money to pay their employees and vendors on time. Okay, so let's say you've turned your business into a charity. You're working for free. How can we measure the problem? Here's what I say. I get payment immediately. Anything past that is a problem. If you have invoices outstanding for one to three days, it's a payment problem. You may not be collecting as effectively as you could, but if payments arrive within 72 hours, they probably don't cause much hardship. When your invoices are a week old, then you have a cash flow problem. At this point, making payroll or paying for new materials could become a problem. Once 30 days pass, it's time to stop service. You now have a legal problem. It can get nasty from here. The average business owner doesn't want to put a lien on someone's property. They don't want to go through a collections agency and get in a legal dispute with a local customer. Yet they they have their own bills to pay. Try this stunt with the power company. You'll be reading this book with a flashlight. Bottom line, failing to pay for home service is no different than any other form of theft. If you want to build a million dollar business, you have to stop working for free.