This post is part two of LM’s “5 ways to improve your cash flow” series. Read on to part three, “Recognize the power of recurring revenue,” here.
Phil Catron started Frederick, Md.-based NaturaLawn of America, which today has $50 million in annual revenue and franchise locations in 24 states, just like many others in the landscape and lawn care industry: He bootstrapped it. However, that’s not an approach he recommends.
“Get a line of credit from day one,” Catron says. “You may have the financial resources to bootstrap, but my advice to anyone is, ‘Don’t.’ Use the bank’s money first before you use yours.” Here’s the rationale: If you cash out your 401(k) or take out a second mortgage on your home to fund the business, if something happens and you need to go to the bank for a loan, there’s nothing left to use for collateral. Most banks won’t give you a loan if you wait to apply for one until you really need it.
How big should the line of credit be? “If you think you need a dollar, get two,” Catron says. “Because things happen.” NaturaLawn, as an example, requires new franchisees to get a $150,000 credit line for marketing and payroll to get them through the first spring.
Catron says it’s scary for startup operators who wonder how they’re going to pay it back, but he emphasizes they need to look at money spent the first spring as money they won’t have to spend the following year because they’ll have a customer base generating revenue.
Subsequent years afford another form of credit, Catron says: “It’s called your customers.” For recurring services, Catron says it’s vital to get some customers to prepay for the year, but he warns against getting a high percentage of clients who prepay at too large of a discount.
How much is too much? “How much profit do you want to give away?” he asks, tongue in cheek. If you must give a discount (and Catron questions whether you really need to) the key is to determine how much income you need to cover your low- or no-income months and collect just that amount upfront. Sit down and do a simple cash-flow analysis, he says. Use a spreadsheet and map out when you’re going to start production, how much you’ll earn each week and when you’re realistically going to get paid for it. This exercise may tell you you’ll need $25,000, for example, to make it through spring. Any prepays collected above that figure, he says, are customers you gave an annual discount to for no good reason.
