As a hardworking tradesperson operating your own trade business, you may
have just started out with your trade business, or you may well have been in business for many, many years now. Either way, as a doggedly determined trade business owner, you will likely be spending no small amount of time thinking about how you can increase profit margins in your business.
After all, profit is why most entrepreneurial individuals start their own business. It’s about becoming the author of your own destiny, being your own boss, and doing things your way. And if it goes to plan, enjoying an early retirement – or at the very least enjoying the freedom to choose when you work and not always being obligated to keep full-time hours week, week out, year after year.
However, for many trade business owners, competition and operating costs are increasing, not to mention regulatory requirements such as compliance and tax related issues.
Many tradesmen have found success by targeting “quick wins” such as discounting what they charge for their services. However, quick wins are rarely sustainable long-term. That said, there are certain steps you can take to power up your cash flow and increase profit margins for your trade business. Lets dig into 10 tips that can help you improve cash flow and increase profit margins in your trade business.
10 tradie tips to boost trade cash flow and profit
No matter how skilled you are at your craft, increasing profit margins is a tricky game. You need to understand the current reality in your business (including where your company currently stands financially), know how to win the right jobs, and know how to implement various cost-cutting strategies.
So, what tactics can you put in place to improve cash flow and profits in your trade business? Here is our pick of the bunch of the top cash flow management for tradies tips to power up your cash flow, increase your profit margins, and make your business more profitable.
1. Know the numbers for tracking your profit margins
The first thing you may consider (if you’re not using them already) is to use leading digital accounting platforms such as Xero, QuickBooks, or MYOB to efficiently gain a clear picture of your company’s profitability. Key financial metrics to track include:
- Net income: Indicates your company’s overall earnings minus expenses and taxes.
- Gross profit per project: Tells you the degree to which specific projects of yours are turning a profit for your business.
- Gross profit per client: Determines which clients are paying more for your services.
- Accounts receivable: Sums up the unpaid invoices for services rendered.
- Accounts payable: The money you owe your suppliers, subcontractors, and other vendors.
- Financial goals: These may include your target revenue, expenses, and profit numbers, all of which can be used to measure your company’s growth.
2. Use the right financial reports
To make profitable business decisions, you must know where the money is coming from, where it’s going, and how much of it you can safely spend. It’s therefore crucial to get well acquainted with reading and interpreting the following business financial reports for your trade business.
- Income statements: These show you how profitable your company is over specific periods, such as a month, a quarter, or a year. Income statements keep track of revenue, expenses, and gross profit and net profit. They also help you to determine which services are your biggest moneymakers and which ones are likely to put you at a loss.
- Balance sheets: These provide a snapshot of your company’s current financial position, including your assets, liabilities, and equity. Keeping a good record of your balance sheets enables you to identify bad debts and make valuable tax deduction claims on assets such as vehicles and heavy equipment.
- Cash flow statements: Cash flow statements illustrate the movement of cash in and out of your business over a certain time period. By tracking your company’s cash flow, you can easily predict future cash shortages and surpluses throughout the financial year, which can be a great help when it comes to planning your business investments wisely. For example, if you expect a shortfall in revenue between July and September, you may benefit from slowing down on hiring new staff or purchasing large equipment in order to maintain your margins.
3. Prioritise your cash flow
Managing your cash flow is more than simply looking at what goes in and out of your accounts and paying your bills on time. Prompt payments are the life blood of a trade businesses. The ability to quote, invoice and receive prompt payment allows business owners to pay their tax obligations, debts and remain in business.
4. Target incremental growth
Becoming one of the most profitable trading businesses can require that you target steady, incremental growth. In other words, aim to grow at a rate that is sustainable long-term.
Having a growing list of loyal clients can be a big help here. However, growing that list can be part of your long run strategy. Setting incremental goals for your business, such as “X” number of clients by the end of the first quarter, ensures that your business remains on a growth trajectory. The more quality clients you have, the more profit you can make.
5. Avoid a race to the bottom
You want to make business more profitable, and that requires sound cash flow management for tradies. However, this isn’t necessarily about a race to the bottom and always being the cheapest in the market.
In a competitive marketplace, it’s tempting to undercut the competition’s prices in the hope of getting more clients. However, this can lead to price wars in which competing tradies make smaller and smaller bids just to win contracts. If you do manage to win the race to the bottom, you’ll often end up with a low-paying contract that’s liable to hurt your bottom line. Overall project performance will also suffer as you try to work with a small budget in a desperate attempt to protect your now razor-thin margins.
To avoid these risky outcomes and increase trade profit, focus on winning higher-margin projects that match your company’s specialties. Avoid projects that have low entry requirements because you’ll likely have to compete with more companies and price will becomes a major factor. Focus on more profitable projects where your company’s unique skills, client base, and track record set you apart from the competition.
More importantly, focus on delivering accurate and realistic quotes to win profitable jobs. Project quotes should cover estimated job duration, equipment and material costs, labour costs, and even location-specific pricing. They should also factor in reasonable service mark-ups to make sure you have a good profit margin. Creating standardised price books from previous jobs and current market trends can make it easier to calculate these estimates.
6. Reduce unnecessary expenses
Some of the most profitable trading businesses are the ones that know how to limit their unnecessary expenses. When running a trades business, cutting costs wherever possible can have a huge impact on your profit margins. Here are some simple tips that can put more money in your pocket at the end each month:
- Create comprehensive project schedules so that field workers aren’t working more than is required and you’re not forced to pay extra for overtime.
- Standardise your work procedures to keep field workers on task and mitigate incidents that may lead to project delays.
- Use smart navigation apps to minimise fuel and travel costs.
- Maintain tools and equipment regularly to prevent costly repairs and replacements.
- Keep track of material usage so you know when to order supplies.
- Pay equipment and material suppliers early to avoid expensive late fees.
7. Hire a finance professional
Financial consultants can help you to better understand how your business is performing and how you can reduce your losses. Financial consultants can help you to cost jobs accurately, including budgeting and forecasting, which will enable you to make informed decisions and maintain your profits.
8. Know your margins
As a trade business owner, you can benefit from truly knowing the margins in your business. This includes having an understanding of items such as:
- materials as a percentage of sales;
- labour as a percentage of sales; and
- gross profit as a percentage of sales.
A great way to improve the profitability of your business is to improve these margins. Another aspect is to compare your trade business to the industry average.
9. Embrace new business technology
Taking advantage of new business tools can be a handy way to make your business more profitable. Streamlining back-office processes can significantly increase your company’s profitability. For instance, combining job management systems and accounting software to automate invoicing processes can reduce time-consuming and error-prone paperwork.
Job management software products enable field workers to easily enter project-related expenses into your accounting database and generate invoices on site. You can then set automated reminders and offer electronic payment methods when certain project milestones are met, so your company is paid on time.
10. Streamline your quotes process
Whether you are a plumber, an electrician, a carpenter, or a builder, you have likely done more quotes than you care to remember. Streamlining your quote process can improve your quote turnaround time, potentially enabling you to beat the competition and win a job where multiple tradies are involved. The faster a client approves your quote, the faster your balance sheet grows, and the sooner you will be able to make your business more profitable.
How BizCover helps tradies reduce their risk with trade insurance
At BizCover, we remove the pain from purchasing trade insurance by making it fast (10 minutes), free of paperwork (there is none), and easy as for tradies to compare quotes from leading insurers online (saving you money).
Discover just how easy trade insurance is with BizCover. Learn more about the types of trade insurance that can help reduce the risks for your tradie business. If you would like help with your trade insurance, give us a bell on 1300 920 874 and speak with our friendly team.
This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
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