Profitability & cash flow can be tough for energy service businesses.
From sourcing skilled labour, rising inflation, and changing government regulations, these things can leave a dent in your bottom line & bank balance.
There’s nothing worse than busting your gut for a year only to see that there’s not much left to show.
However, strategies can be implemented to improve your bottom line and gain control over cost and cash flow.
Here are 6 effective strategies that can help improve the profitability and cash flow of an energy services business:
The energy services game comes with its fair share of expenses, and they're a mixed bag:
That's why a healthy bank balance isn't just a nice-to-have—it's mission-critical to keep the wheels turning.
When it comes to invoicing, it's all about speed, speed, speed.
Getting paid by your clients on time is non-negotiable.
But a lot of energy service outfits drop the ball on this, still clutching onto antiquated invoicing methods, like manual field tickets.
Cranking out manual field tickets is a slog and a recipe for mistakes. You've got to create the tickets, double-check 'em, give the nod, ensure accuracy, and then input the data into your accounting system.
That's a whole load of time wasted just to get your invoices out the door, not to mention the potential for accuracy to take a hit because of all the manual checks and data entry.
By the time your invoices land on your clients' desks, weeks could've gone by, messing with your payment schedule. If you can't keep up with your own bills, you might find yourself stuck with high-interest working capital loans, chewing into your profits.
The fix? It's a no-brainer: switch to an electronic field ticketing system.
It'll streamline your invoicing, slash the chance of manual slip-ups and oversights, and let you shoot off invoices to clients quicker.
Fast invoicing equals fast payments, and that can turbocharge your cash flow.
Quick gut check - Shaving just a single day off your invoicing can boost your collections by 3%.
Picture this: if your monthly invoices total up to $100,000, a mere 7-day improvement in invoicing could fatten up your bank account by an extra $21,000.
Energy service businesses can find themselves stuck in the slow lane when it comes to raking in payments.
To keep your cash flow steady, you need to collect payments without missing a beat.
Here's how to make that happen:
Just remember, even a small tweak to your collection process can make a big splash on your revenue. For example, cutting just one day off your collection cycle can increase your revenue by 3%.
To paint a picture…
If you're pulling in $100,000 a month in collections and you manage to shave off three days from your collection cycle, you can stack an extra $9,000 in your bank account.
Roll that out over a year, and you're looking at a tidy sum.
If you want to keep your business finances running smoothly, you need a sharp picture of where your money's going versus your revenue.
That's why you need to nail down a budget every year.
Here's a play-by-play on how to get that done:
Start with a look back: When you're cooking up a budget for the next year, use the data from the last year as your starting point. So, if you're planning for 2024, you'll want to dig into the numbers from 2023.
Weigh up your expenses: Stack your average expenses against your sales figures and what the rest of the industry is doing. For example, if the industry norm for labour costs is 10%, see how your expenses stack up. Spot any areas where you're blowing the budget and need to dial it back. If equipment repairs are bleeding you dry, maybe strike a deal with a maintenance company to score better terms, like regular check-ups or extended warranties on parts.
Square up budget vs actuals: Do a monthly check-up between your planned budget and what you're actually spending. Keep tabs on any sudden jumps in costs and figure out why. If you notice a spike in temporary labour costs one month, you can suss out ways to keep those costs under control.
Sniff out savings: Dig deep into your numbers to find areas where you can cut costs. Look for inefficiencies, duplicate spending, and places to trim down expenses.
By setting up and keeping a close eye on your budget, you can stop cash leaks, make smarter decisions, and rack up savings to boost your bottom line.
Depending on old-school manual systems can bottleneck operational effectiveness and grind down your staff.
Many energy service companies still get bogged down in manual data entry for their sales invoices.
Each hand-keyed entry can eat up 20 to 30 minutes of an employee's time, opening the door to mistakes and oversights.
In fact, a lot of late invoice payments can be chalked up to wonky invoices.
The answer to this is to give your invoicing cycle an upgrade with automation.
This move can cut down on employee costs and improve operational efficiency and precision. You can turbocharge your collection processes and pump extra funds into your bank account by going automatic on invoicing and wiping out invoice mistakes.
Here at Twenty Eighty, we've engineered a unique process that slickly merges FIRE, Open Invoice, and Xero to fully automate your sales invoicing operation.
Here's how it works:
By choosing this streamlined method, you just need to punch in the data once, tossing out the need for multiple entries by various teams.
This saves a ton of precious employee time, wipes out redundancies, and lessens the risk of manual blunders and omissions.
Modern accounting systems bring automation to the forefront, handling tasks like data entry and bank reconciliation effortlessly while providing real-time reports.
By setting up automated accounting, your business can seamlessly integrate various processes and workflows like payroll, accounts receivable, accounts payable, and more.
This automation allows your finance team to get real-time insights into the performance of your business when you need it.
We’re big fans of Xero and regularly migrate energy service clients from Sage desktop to the cloud.
Manually entering bills is time-consuming and opens the door to errors. Incorrect bill entries can lead to delayed payments and unnecessary disputes.
Furthermore, delayed payments may result in service or supply disruptions and costly project delays.
You can solve this by automating your bill payment process through integrations with your existing accounting software.
With bill payment automation, you can schedule and track payments and facilitate payment approval. It allows you to minimize human involvement, ensures timely payments and improves accuracy.
Automating bill payments can save your accounts payable team 20% to 40% of their time, enabling them to redirect their efforts towards more strategic tasks and saving you employee costs.
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You might have heard these grim statistics before: more than 80% of all small businesses fail within 10 years, and more than 80% of those businesses fail due to cash flow issues. While some dispute the exact numbers, the underlying issue can't be. Cash flow is important. Period.
One would think that one of the most important business areas would be well understood. That isn't the case though. Cash flow is still one of the most ill-understood topics within the small business community. And forecasting cash flow? Even though it is just as important, it is even more misunderstood.
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In this post we will shine light on these misunderstandings, talking about what cash flow is, what cash flow forecasting is, the different types of cash flow forecasting there are, and how forecasting your cash flow can greatly benefit your small business whether you're a founder of a startup or a web3 company, or a professional that has ventured out on their own (say a veterinarian, dentist, chiropractor, optometrist or lawyer).
So, let's start with the basics: what is cash flow?
Cash flow is simply the movement of money in and out of your business. Money coming in is called inflow, while money going out is called outflow. Your business' cash flows can be positive (more cash inflows than outflows), negative (more cash outflows than inflows), or neutral (equal cash inflows and cash outflows).
The movement of money within, and through, any business is extremely important. At a basic level, every entrepreneur sets out to make money. So stripping everything down, each business' ability to generate positive cash flow, consistently over time, determines just how good that business is performing.
The more cash flow a business can make, the better it is doing.
Now, the above discussion on the importance of cash flow might seem overly simplified, and it is, but most small business owners don't have a great handle on this basic construct.
And there are two reasons for this:
Double entry accounting underpins all accounting as we know it. It requires that every financial transaction to be recorded in at least two different accounts. For example, when you make a sale, you would record this transaction both in your sales account on your income statement and your cash account on your balance sheet.
While this system provides greater accuracy and transparency around business finances, it also makes measuring cash flow more difficult. And that's because changes in cash can occur in two places: your income statement or your balance sheet.
There are two basic methods of accounting: cash accounting and accrual accounting.
Cash accounting only records transactions when the actual cash changes hands. So if you make a sale and the customer pays later, you wouldn't record that transaction until you collect payment from the customer.
Accrual accounting records income and expenses as they are earned or incurred, regardless of when any actual cash is received or paid out. Using our same example, if you make a sale and the customer pays later, accrual accounting would record the sale right away and create an accounts receivable. It would then eliminate that receivable and increase your cash balance when you collected payment.
Accrual accounting is a double edged sword. It creates financial statements that are more accurate and reliable for various users, but also creates timing differences, estimates and other complexities that aren't necessarily well understood by business owners.
The cash flow statement is the report that helps overcome the shortcomings that accrual accounting and double entry accounting processes make. This report ties the balance sheet and income statement together within your typical financial reporting. It measures all cash inflows, all cash outflows and eliminates any non-cash estimates that are also contained within your financials. And ultimately it reconciles all of this information to the cash balance contained within all of your bank accounts.
You can see two different forms of cash flow statements: those using the direct method and those using the indirect method.
Cash flow statements using the direct method are considered by some to be more accurate. This method reports all cash inflows and cash outflows from your business operations separately from any other inflows or outflows. This could include things like customer payments, vendor payments, interest income, dividends and other operational items.
The indirect method is a bit more simplified. It adjusts your net income for any timing differences between when you record accrual based items and when the actual cash is paid or received. This reconciles your net income to your actual cash. While this method isn't as detailed as the direct method, it's also not as susceptible to error.
Regardless of the method used, cash flow statements are a very important piece of your financial picture. As mentioned previously, they show how cash moves through your business. That said, cash flow statements are historical in nature. They show you what your business did, but not where your business is going. To see that kind of information, you will want to use a cash flow forecast.
A cash flow forecast is a projection of all of your future cash flows. It is a best guess, based on all available information, of what you expect to happen in the future. This includes things like expected:
A good cash flow forecast will show you:
This will give you a clear picture of where your business is heading, and how much cash you will have on hand at any point in time.
We touched on some of the high level benefits of cash flow forecasting in our Definitive Guide To Managerial Accounting For Small Businesses. Simply put, knowing the future net cash flow of your business, and your estimated cash balance at any point in time gives you a lot of power as a business owner. You will be able to:
By forecasting cash flow, you can see when your business might have a shortfall of cash. This allows you to take steps to avoid or mitigate the effects of a cash shortage, such as delaying expenditures, extending payments on accounts payable or shoring up working capital with short term debt.
Cash flow forecasting will give you a better understanding of how money moves within your business allowing you to more effectively manage your activities with operating cash. This can be particularly helpful if your business:
Knowing when and how you will get paid, and how and when you will make payments will make you a lot less reliant on debt and lines of credit.
A cash flow forecast will give you a better understanding of your business's financial health. This information can then be used to make better informed decisions about how to best use your resources.
Do you have enough cash to buy the equipment you need to grow and hit your sales targets? Can you afford to hire that stellar employee you interviewed? If you open a new location how will that impact your bank account in the short and long term?
Whether you have negative cash flow or a host of cash surpluses, thinking through exactly how you will progress your business, and knowing the effects of these decisions is an extremely helpful exercise. It will surely boost your confidence.
A cash flow forecast will help you track your progress towards your strategic business and financial goals. The information gleaned from the cash flow forecasting process itself can be used to adjust your budgets and your business plans, making these documents dynamic and more relevant as your operations change.
There are a number of different types of cash flow forecasts. Just like cash flow statements there are different methods you can use to create a cash flow forecast. And depending on your goals, the time frame you use in your cash flow projection should change.
Similar to its cash flow statement counterpart, a direct forecasting shows the exact cash inflows and outflows that result from your business' operations. This is the more straightforward approach to cash flow forecasting as it directly ties to all incoming cash receipts and outgoing cash payments.
Indirect forecasting does not start with your business' operational cash inflow and cash outflows. Rather, it begins with your company's net income figure. From there, non-cash items and changes in working capital are added back into or deducted from the bottom line to get to a net cash flow figure.
Indirect cash flow forecasting is more common associated with three way cash flow forecasting. This cash flow projection method forecasts your income statement, balance sheet and cash flow statement and ties them altogether. Hence the term three way forecasting.
Three way cash flow forecasting is sometimes viewed as the most robust way to cash flow forecast. It eliminates a lot of possibility for errors, especially when using a spreadsheet, and also presents bank ready financial statement projections that can be used for lending purposes. This method is typically a lot more customized however, can take a lot more time to create and maintain, and sometimes isn't as easily understood by entrepreneurs.
Long term cash flow projections are typically forecast from one year to five years out, with most going to three years in range. This type of cash flow forecast is most often associated with strategic planning and indirect/three way cash flow forecasts. These types of estimates are often used to:
A short term cash flow forecast is much more operational in nature. It can range from days to months in terms of time frame, and often does not go beyond a year. This type of forecast is much more granular in nature, and has much more accurate information in terms of timing. It is often updated quite frequently, as regular as weekly forecasts or daily, and is ultimately used to answer the question "do I have enough cash to do X?" in the near term.
The biggest difference between a short term and long term cash flow forecast is its use. Long term forecasts are more strategic, while short term forecasts are more operational.
The best analogy is a road trip using a map. A long term cash flow forecast determines exactly where you are going and loosely determines how you will get there. A short term cash flow forecast is used while you are driving to that destination, constantly shifting due to traffic, construction and road closures.
It is often a best practice to use both a long term strategic and a short term operational cash flow forecast.
An accurate cash flow forecast can be a game changer. Whether you're a professional, such as a veterinarian, dentist, chiropractor, optometrist or lawyer, or a founder of a startup or a web3 company, you will experience cash flow issues. Studies show that the vast majority of business owners have at least once in their lives.
Knowing exactly when that cash flow issue will come, and what you are able to do to mitigate the problem is a definite advantage. One that will let you sleep a whole lot better at night. And that's exactly why cash flow forecasting is a must-have tool.
Business budgets are powerful tools for small business owners if used properly. Learn how you can use them to spend less and save more in this article.
Knowing exactly where your business cash flow is headed will let you sleep a whole lot better at night. And that's exactly why cash flow forecasts are a must have tool for every small business.
As a business owner you are busy. This definitive guide will show how managerial accounting will get you back to your entrepreneurial dream: creating something you love, helping people in the process, and earning money and free time while doing so.