Earnings Quality in the Green IndustryTomChilders
We’ve all heard or read about “quality of earnings” but have you ever stopped to think about what that means to a green industry contractor or why it’s important? According to Investopedia, “…firms with high-quality earnings typically generate above-average price to earnings multiples (higher stock prices). They also tend to outperform the market for a longer time. More reliable than other earnings, high-quality earnings give investors a good reason to pay more.” For today’s green industry contractor, the same holds true for your performance and the value of your business. Your business is worth more as your earnings quality improves. While there are many factors to consider in quality of earnings, this post will focus on two factors, revenue stability and the time between revenue recognition and cash in hand.
As for revenue stability, compare a public utility to a construction company that builds to order. Who will have a more stable and recurrent revenue stream? Not only does this help illustrate the issue, but this was the exact example used in an American Institute Of CPA’s piece on earnings quality. It may feel like an unfair comparison because of extreme business differences and one is very cyclical, but bottom line, to some people revenue stream reliability can be a big factor in earnings quality considerations.
The key here is to look for ways to strengthen your revenue recurrence and reliability. Obviously, this is why many do maintenance, lawn care, builder work, offer maintenance contracts, offer add-on services and more. Also, this is related to the point that existing customers are more profitable than new customers. Once you satisfy one need for a customer and have established trust, it is easier to get them to allow you to satisfy a second. Getting good at add on service selling can help stabilize and grow revenue. What can you offer your existing customers and/or prospects in non-peak times to maintain and prop up revenue? This is why many contractors snow plow in the winter. If you routinely communicate with enough customers and/or prospects, you should be able to find ways to both stabilize and increase revenue but you must put time and effort in it. The need to be a marketing machine is especially relevant to those who focus on areas that are not year round and contractual.
As we all know, profitability and cash in hand are not the same thing. The time from when you recognize revenue, or bill the customer, and when you actually get paid is the difference. In this industry, that delay can cause real pain. It can increase costs, demand your time and attention, and even put you out of business. As you wait to collect, you continue to operate and pay bills, which may mean financing charges or even worse, not paying bills resulting in even bigger service charges and future capital problems. As time moves on, disputes, short pays and lost customers can ensue further jeopardizing earnings.
If you have a collections problem, you should talk to a lawyer or collections specialist. Understanding your exposure and your options are critical. Once you learn ways to mitigate risks, you can put systems and processes in place to help manage. This can go along way in simplifying your life and keeping your earnings of a good and growing quality.