As a tradie, you’ve doubtless gone through a lot of training to reach your current level of proficiency, you’ve worked really hard to buy the best plant and equipment, and now you’re ready to launch your business in the world. Regrettably, however, the vast majority of trades won’t have been trained to run a business. Many tradies learn the financial side of their business “on the job”, and while some manage brilliantly, others find it hard work and some even lose their businesses due to financial errors. One of the primary things a new tradie has to learn is the importance of Cash flow Problems for Tradies, the lifeblood of any business.
Whilst poor cash flow could damage your business over time, poor liability cover could effectively wipe out your business in a single day from one mishap. Make sure you have the right insurance for tradies to protect your business.
Healthy cash flow, as the name implies, keeps cash flowing through a business, ensuring that there is always enough money available to pay wages, cover capital expenditure, pay the bills, taxes, and so on. However, cash flow isn’t just about meeting immediate costs, it’s vital if your business is going to grow: you need money available so that you can grab new opportunities at once, e.g., if you hear of a job that needs an expensive new tool that you don’t have, if you have sufficient cash flow you can still put in a quote, safe in the knowledge that if you get the job you can afford to buy the tool. Recent research has shown that 46% of businesses fail because they don’t have a healthy cash flow. Let’s take a look at the root causes of these problems.
One of the main reasons businesses suffer poor cash flow is a lack of invoicing. This might seem incredible: people owe the business money and the business can’t be bothered to ask for it? However, anyone who has tried to run a business, especially as a sole trader, knows how easy it is to let invoicing slip out of your mind as you move swiftly onto the next new job. Invest in some decent business software to keep track of your invoices and to issue them when they are due, making sure that customers are made very aware of the expected date of payment.
Of course, some customers won’t pay or will pay slowly, even when they have been invoiced. This can be a real cash flow blockage that, in the worst-case scenario, could lead to you losing work due to not having the money to buy the raw materials needed for the next job. As above, make sure you have good software to track all the invoices you send out and the payments you receive; in addition, send out invoices as soon as possible while the job is still fresh in the customer’s mind. If you can, hand over the invoice in person at the end of the job and ask the customer how they would like to pay; given that sort of prompt, most people will pay up on the spot. Make it as easy as possible for customers to pay you by accepting all possible payment methods, including electronic payment. If you’re working for your family or friends, make sure you are very clear on the terms and when you expect to be paid, to ensure no ill feeling arises.
Counterintuitively, business growth can damage cash flow. You’d think that with more business coming in you would get more payments and better cash flow, but this isn’t always the case. If your business grows too fast, you can easily start to lose track of jobs, customers, and payments so that just at the time you need good cash flow to pay all the extra people you’ve engaged for the increased business you find the cupboard is bare. You can avoid this problem by engaging a good accountant to manage your financial matters and by creating a realistic business plan and sticking to it, even when it feels as though you could be expanding more quickly.
Another cause of poor cash flow is charging too little for your work. When you start out in business for yourself you will probably accept any job that’s going in order to establish your company, and you’ll make up for low margins by working a bit harder or longer. That is sustainable in the short term, but when you start employing other workers and taking on bigger jobs, you need to charge a fair price for your services. Apart from anything else, if you get a reputation as being cheap everyone will be expecting discounts, and your cash flow will dwindle to a trickle.
Every business has its overheads: as a tradie, you’ll have to pay for staff wages, raw materials, tools, insurance, taxes, and any other outgoings. All of these expenses need good cash flow, so keep a close eye on your books, using a bookkeeping firm if you can’t keep on top of it yourself so that you always know where the cash is, what expenses are coming, and how you’re going to cover them. It’s surprising how many people get into financial difficulty when, overall, they are doing quite well, but they simply haven’t managed their cash flow efficiently and so can’t meet their obligations.
Being too generous with credit is another problem that can damage a tradie’s cash flow. As you get more successful and start taking on bigger and bigger jobs you’ll find you are asked for more and more favorable terms. Try to accommodate your customers as much as possible, but not if it’s going to be to the detriment of your cash flow. Make it very clear what payments you expect and when and, if you are taking on a really substantial job, think about inserting penalty clauses for late payment into contracts. After all, you would be expected to give a discount if you didn’t finish the job on time, why shouldn’t a customer be penalized if they don’t pay you on time?
