Lessons Learned – Making Decisions Based on False Profits

Image showing the words "Lessons Learned"

Lessons Learned is an educational series of webinars on financial management for your solar business presented by Leslie Shiner of The ShinerGroup and Annie Kendrick of Kendrick Business Services, LLC. The stories are fictional, and are used for illustration purposes only. They do not depict any actual person, company or event. 

Luke, the owner of No Clouds Solar hired additional sales staff last year, which increased gross sales from $2 million to $5 million, with projects in the pipeline well into the future. With the increase in projects, Luke needed more vans to accommodate the additional workload. He found a great deal for five new vans if he purchased them on the spot. He wrote a check for $95,000 from his line of credit and picked up the vans the same day.

Luke also needed more room for the additional crew so he took a distribution of $200,000 out of the business for a down payment on a new shop, which he purchased personally and rented back to the business. He paid his crew through No Clouds Solar to make improvements to the new shop and help with the move. His bookkeeper posted this to the usual labor expense accounts on the profit & loss because Luke wanted No Clouds Solar to absorb the expense.

The down payments collected from projects had already been used to finance the company growth and now more projects were getting ready to start. Luke purchased the equipment for the installations on credit with his vendors and the bills were coming due.

Several of Luke’s larger jobs were slow to pay and were over 90 days past due after the final installation, leaving $100,000 still outstanding. These were good customers, so Luke wasn’t worried as he knew they would pay eventually.

Cash became tight so Luke decided to make an appointment with his banker, Don, to increase his line of credit, which was maxed out at $100,000. He had only paid interest on the line of credit over the previous year, since he needed the funds for other expenses. Don was a good guy and Luke was confident he just needed to ask for the increase. He believed Don would make it happen since No Clouds Solar was “doing so well.”

Don requested a copy of No Clouds Solar’s profit and loss statement, balance sheet, A/R aging, A/P aging and WIP (work in progress schedule). A few days later Luke received a call from Don asking him to come to his office so they could talk. Luke figured Don saw his reports and wanted to congratulate him in person for No Clouds Solar’s “great success” and increased sales volume.

Don sat down with Luke and told him he wasn’t able to get an approval to increase the line of credit. Don said there were concerns about negative equity, a current ratio of only .50, low profit margins, lack of payments on the line of credit over the last year and large balances on the A/R aging report in the 90 days or more column. He also told Luke that since his line of credit renewal was coming up in two months, they would need to see improvements in the situation to renew it.

Luke sat there trying to take in the information. He didn’t understand everything Don was saying and thought there must be some kind of mistake, since he had been doing so well with increased sales over the last year.

What did negative equity mean? What did a .50 current ratio mean and what should it be? Why was the bank concerned about receivables in the 90 day or more column? Why did any of this matter to the bank when gross sales had increased with so many projects in the pipeline? What could he do now to improve the situation?

This story is an extreme example of Lessons Learned, however the lack of understanding of key performance indicators can keep you from getting a loan or increasing a line of credit. To learn more about which KPIs to track and know what your bank is looking for, view the pre-recorded webinar online.

You can find out more about the financial management program for Solar trade allies and other business development opportunities for your company online.