In this episode of Power Forward, we get a crash course in the financial health of solar installers. What do “healthy” installers do that troubled installers don’t? And if you’re not in trouble right now, how can you best protect yourself against market volatility? Rachel Shapira, Director of Residential Finance at BayWa re gives us some in-depth insight.
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Be sure to watch the full 20 minute episode for yourself. Here is part of the transcript.
Let’s look at some of the things solar installers can control. What are the main indicators of the financial health of installers? And what defines health in this way?
Shapira: The leading indicators are:
- Is the installer going through a period of controlled growth rather than unfettered growth where their sales far exceed their ability to complete installations?
- Is quality at the center of the works both in terms of know-how on the roof but also in terms of in-house systems?
- Are they using data to inform the decisions they make?
- Do they have good project durations and
- Do they adjust their red lines as prices move?
A healthy installer also has systems and processes developed as they grow. They don’t just grow up and then realize uh oh we’ve outgrown our systems. They continually invest in their systems and processes so that the systems can evolve as they grow, because what happens to many installers is that they are so focused on quality craftsmanship, which is worth always worth doing, and they’re focused on sales, that they’re not investing in the systems that allow them to track KPIs to make sure they’re hiring the skills they’ll need in three years to manage their cash.
So what do healthy solar installers do differently than struggling ones? You talked about it a bit here, but are there any other examples you can give?
The first thing is that they say no to certain opportunities. They are selective about how they grow so they can be intentional and strategic in how they grow because not all growth is profitable. It is not worth investing in growth that will not be profitable.
You need to perform proper analysis and make strategic decisions based on forecasts of actual data projections that help you inform:
- Do I want to enter a new vertical?
- Do I want to start growing in non-solar services?
- Do I want to close a sales team when my number of closed sales far exceeds my install capacity?
The other thing they do is they really focus on operational excellence. They invest in systems to ensure they have data to guide their decision-making. They make sure they have enough money in the bank to more than cover next week’s payroll. They’re looking at their cash flow to make sure they have enough money to cover all the costs due on all the projects they’ve closed because when you don’t have data and you’re just looking to can I do next week’s payroll, you end up mispricing your services. We know this is a very price sensitive market; we know that many installers operate in very competitive environments that are a bit oversaturated. This can lead to mispricing of services, which can lead to a lot of quality issues, which can then lead to installers getting themselves into real trouble.
Many of the best installers actually invest in systems to the point of hiring someone to manage them and help analyze the data because, again, they are focused on the long term. They focus on scalability and they focus on growth.
The next thing healthy installers do that unhealthy installers tend to invest less in is organizational resilience. We all know that we are going through a tough time for a solar installer right now… but we need to think about how we are going to get through this. Are your employees focusing their time on your growth goals or are they caught up in unproductive work? Do you have systems that allow you to plan your cash flow needs so that you can have the cash you need to meet your growth goals and objectives.
And do you have cash reserves on hand to ensure you can survive a downturn? Many healthy companies generally like to know that you know three months of OPEX at all times so that if there’s a downturn or a downturn like the one we’re experiencing right now where there just isn’t enough supply to meet most installers’ installation deadlines, resulting in slower revenue. Installers who have cash reserves can use them to keep their staff here, keep them paid, continue to grow, and get through this tough time.
The best installers really excel at setting customer expectations and talking about homeowner expectations. Their sales teams are well trained and focus on consultative sales and owner education so they know what to expect.
The last thing, and this is really essential, is that they adjust the red lines as prices rise. Over the past few months, as equipment prices have risen, labor costs have risen, and many installers have been very hesitant to adjust their redlines as they don’t want to be pushed out of the market by their competitors.
This meant that they lost the margin they needed to be able to absorb costs such as change orders when they couldn’t get exactly the product they needed when we were facing production constraints. ‘supply. You need to ensure that you are in a position where you can adjust your red lines in a timely manner to ensure that you continue to have some leeway to cover change orders if needed or just to ensure that all of your sales and facilities are cost effective.
Installers have the ability to sell their value and quality in order to justify a slight price difference if they are competing against someone who has not fitted their redlines. They can also be sold as follows: “we are going to be financially sound; we are here for the long haul. I know we are a few cents more and so we will be there to honor our guarantee to you.
Then we enter:
- accrual accounting vs cash accounting,
- renegotiation of sales agreements with third parties
- ^ and why it is important to renegotiate them
- And what financially sound installers should do at present – how to check BayWa re Split Payment Optionwhich Shapira says is “specifically designed to ensure that you can get the equipment you need when you need it. We partner with select solar financiers to be able to guarantee the equipment we ship to you against loans you have taken from the financiers. This way we can send you more material than our line of credit normally allows, and you get the material when you need it without having to prepay other bills if your line of credit doesn’t leave enough room for you to get all the equipment you need within a given month.”
Pick up the episode where the transcription left off:
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