Two of the preventable or mitigable costs incurred by service contractors are financing of their receivables and bad debts.

It makes perfect sense for a service contractor to send an invoice to the client as soon as the services are rendered; however, in many cases, the invoice is produced weeks after the work is done. In all fairness to clerical staff, if they have to wait for invoices from distributors before they can send out their own invoices, then such a delay is to be expected.

It is not uncommon for a service contractor to have an average collection time of 60-plus days. As a result, the contractor has to finance labor for almost the full 60 days and materials for about 30 days. This can stretch the contractor’s line of credit and often preclude him from taking advantage of the very lucrative 2% cash discount on materials.

An additional detriment is the reduced chance of collecting the money because of the substantial amount of time elapsed since the installation. Many things could have gone wrong since that time, namely the client may be in financial difficulty, cash flow may be poor, the client does not remember the details of the installation and needs to meet to refresh his memory, the price may be perceived too high, or the current budget has been spent and now has to go to the new budget next month.

I am sure that you have experienced many of these cases and more, and you will agree that sending an invoice as soon as possible will increase our chances to collect and collect on time.

Service business can be very profitable and can appreciate in value. A good client base generating re-occurring revenues is what potential buyers look for. This type of financial appreciation is one of the most neglected intangible assets in the contracting business, that is, until the contractor has a need or a reason to sell the business.

Providing an excellent service, charging a fair amount of money, and sending a consistent and detailed invoice as soon as the work is done, are key factors for the success of a service contractor.

Work orders should not get lost or turned in weeks after the services are rendered. Invoices should be issued daily with consistency and in considerable detail in order to retain clients and build mutually beneficial long-lasting relationships.

The service manager needs to monitor the following key indicators on a regular basis:

Sales per client per month, per quarter, per annum.

Total sales per month, per quarter, per annum.

Materials to total sales ratio in % per invoice, per month, per quarter, per annum.

Labor to total sales ratio in % per invoice, per month, per quarter, per annum.

Gross profit to total sales ratio in % per invoice, per client, per month, per quarter, per annum.

Sales per service technician per month, per quarter, per annum.

Gross profit per service technician per month, per quarter, per annum.

Materials to total sales ratio in % per service technician, per month, per quarter, per annum.

Labor to total sales ratio in % per service technician, per month, per quarter, per annum.

                                                                                                                                   

Clients must be segregated into several profiles to afford them an equitable fee structure. The following is a guideline that can help in the definition of the various profiles.

A –  Good volume, 60% labor 40% materials, paying punctually on time. This is a precious client; we must take extra care of this account and strive to find      more like it.

B – Reasonable volume, 65% labor 35% materials, paying on time. This is a good client that deserves our attention as it may become an A client.

C – Lower volume, 70% labor 30% materials, paying on time. Still a good client that we need to charge a little more than the A and B.

D – Low volume, 80% labor 20% materials, paying on time most of the time. Still a good client that we can work with; however, we need to charge more than the A, B and C clients and monitor for collection.

E – Low volume 90% labor 10% materials paying in a less regular basis. Need to monitor this account closely as it is very difficult to make money with a 10% material sales. Both labor hourly rate and material charge have to be much higher and we need to stay on top of receivables.

F – Medium to low volume, 95% labor 5% materials paying on his terms and at his will. This type of client can often be very demanding, seldom satisfied, always looking for credits and better prices, and a strong advocate of a win-lose philosophy. This type of client should be made available to the industry. Invest your time in acquiring more A type profiles and taking better care of your more deserving clients.

As soon as a service request is received, a work order should be issued and dispatched to the proper technician. Once the work is done, the work order should be returned with a signature and plenty of information to bill the client with. A list of materials used, labor hours spent, general expenses, and a pictorial description of the work performed, go a long way to get the invoice approved and paid.

Consistency can be achieved if the invoicing software program allows client profiling and various default parameters for each type of client. To produce an invoice upon receipt of the completed work order, the software must have a database of materials with current prices and net costs, and the ability to store different markups and hourly rates for the various client types.

It is also very desirable to have the invoicing program interface with your accounting program so that invoices and related costs can be transferred electronically to A/R, thus avoiding duplication of input.

One of the common issues encountered in service companies is a conflict between the service manager advocating the use of a dedicated time & material billing program, and the Chief Financial Officer wanting to use the accounting system’s invoicing program. In all fairness, the CFO is concerned about issuing invoices and missing charges of materials or labor. However, with a proper control system, this can be achieved without having to wait for the invoices from the distributors.

Each approach has its strengths and weaknesses. I would advise using Accubid’s Time & Material Billing program to prepare your invoices and work orders for the following reasons:

Includes extensive database of products with current prices and net costs also used for estimating and change orders.

Database contains labor units that allow good comparison between estimated time and actual time taken to perform the work.

Database contains assemblies that make the entry of materials expedient and more accurate.

Any number of clients can be easily profiled and assigned unique mark ups, labor rates and special instructions.

Invoices can be generated as soon as the work is done.

You can produce estimates and turn them into “Not to exceed T&M invoices”.

Any key indicator ratios for materials, labor, margins, volume, and so on can be extracted expediently with little effort and for any period of time.

Technicians’ productivity, margins, sales volume, and ratios of material to labor are also available quickly and with very little effort.

Special markups on materials can be hidden and yet charged with consistency.

You can produce a client copy of the invoice with perceived costs and an internal copy showing all real costs and markups.

You can e-mail the invoice from the program in a format that the client cannot alter.

One thing we cannot do is force the accounting systems to accept our invoice information electronically. Those developers who care about their clients have built an open interface to work with other systems. Others, however, in the attempt to force the client to use their invoicing system, flatly refuse to build the bridge to other systems. In the latter instance, the user cannot have the best of both worlds unless he changes accounting software.

If cash flow is the lifeblood of the service contractor, then a system for issuing detailed invoices in a timely fashion is the prescription for keeping the cash flowing and the contractor healthy.

Giovanni Marcelli is President and CEO of Accubid Systems, the leadingprovider of estimating, billing, and change order software for electrical contractors. You can e-mail him at gmarcelli@accubid.com.