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Tracking Deposits

Too many custom installation businesses have gotten into the bad habit of collecting deposits that are too large, too early in their projects, then spending that money on other jobs or company expenses.

I hear stories like it all the time. It’s the old clich about “robbing Peter to pay Paul.” Too many custom installation businesses have gotten into the bad habit of collecting deposits that are too large, too early in their projects, then spending that money on other jobs or company expenses.

I was reminded of all this recently when I interview Jonathan Knapp (see story on p. 38). Mr. Knapp used to be an installer himself and now runs a company called Simply Reliable Software that tries to simplify the lives of dealers by streamlining their management processes. Although he doesn’t dictate when and how a custom business collects payment from its clients, his software sets up a structure for dealers that helps the whole process make much more sense.

A few months ago Residential Systems, in association with the CEDIA Management Conference, conducted an online dealer survey to help assess the management acumen of the industry. One of our questions asked dealers to describe the process by which they collected advanced payments (deposits). The question asked, “Regarding advanced payments, which is most true for you?” Of those who responded, 31 percent said, “Advanced payments are held, almost like in escrow, to cover costs of just that job. Twenty-seven percent said that they request advanced payments, but often proceed while they still await them. Twenty-one percent admitted that advanced payments go into a “general fund” and get spent where ever. Eleven percent claimed that they stop the job until getting the advanced payment, and 10 percent said that they don’t generally take advanced payments at all.

Many people who I have talked with since presenting those results have expressed their doubts about the truthfulness of some of these responses. The main bone of contention was the relatively high number who claimed to hold advanced payments in escrow. The notion was that most dealers probably have the best intentions to do so, but when bills need to be paid, that money gets spent…not saved. Sometimes it poses no problem, but inevitably this debt can knock a business out when a downturn occurs. In fact, when we hear about the big guys in our industry going under, sadly it’s usually just a matter of debt finally catching up with them.

And it gets worse as the size of deposits grows. Simply Reliable Software’s Jonathan Knapp recalled talking with A/V retail dealers at the PARA Conference who were excited about getting into custom, because in part, they finally could start collecting big deposits on the jobs that they would be installing. “I’ve been there,” Knapp recalled. “I already went from 50 percent deposits to 30 percent deposits because I realized that I was taking the money at the wrong time. You sign a deal and you’re not going to be delivering anything of substance for six months or a year. Unless you can trust yourself to really manage that money, taking 50 percent deposits is really creating a problem.”

The better approach, most business advisors will agree, is to collect money only when you have a bill to pay to your vendor. In other words, during trim and final time. Admittedly there is quite a lot of effort expended during sales and engineering, and there should be value placed on theses processes. A dealer has earned something at that point, but it’s much less than 50 percent of the total cost of the job.

One of the problems that we face in our industry is that there’s not a direct relationship between the receipt of money and the delivery of goods and services. It’s not an easy one to solve, but maybe by getting it out in the open, custom installation businesses can start to slowly change the way they are doing business. By creating better business processes and practices, we can begin to brace ourselves against competitive threats and economic challenges that always lie ahead.