- On 28/10/2019
No matter what field you’re in, cash flow determines the success of your trade business. A positive net flow means there’s a steady source of income pouring in so you can pay bills and contractors. It also means you have enough cash to reinvest in your business and outperform the competition. Unfortunately, many trade businesses struggle to achieve a healthy cash flow.
According to the Australian Securities and Investments Commission (ASIC), 49% of business failures were attributed to poor cash flow.
To ensure your company doesn’t become just another statistic, it’s important that you understand the pitfalls of mismanaging cash. Below are five of the most common cash flow problems and advice on how to address them.
Slow-paying clients are one of the biggest cash flow killers, but they’re not entirely to blame. If your tradies are not proactive about following up invoices from clients, you can be susceptible to overdue payments. This hinders your company’s ability to pay for bank fees, supplies, and labour for your next contract.
The simplest way to get paid on time is to invoice your clients as soon as possible. Don’t wait for several days to invoice or send your bill via snail mail. Instead, use job management software with mobile invoicing features, like WorkBuddy, to collect payment on the job site. Offering electronic payment methods, such as credit cards and direct bank transfers, streamlines these processes even further.
Also, make sure to set clear terms with your clients on every invoice. Let them know that payments are due upon receipt and clarify the amount you need to be paid for your services. Better yet, discuss services and prices before starting the job to avoid invoice disputes that lead to delayed payments.
Most organisations want to grow as fast as possible, but such rapid growth can hurt cash flow. Investing too much into growth actually results in larger cash outflows than inflows.
For example, an HVAC company may be tempted to hire additional contractors in anticipation of the busy season in December. However, if several jobs haven’t been completed by the end of the month, they cannot cover their new staff’s wages. An overly ambitious HVAC company may even take on larger projects, causing massive capital costs from equipment and supplies. These issues are particularly worse for businesses without substantial cash reserves to support their growth.
You can solve this problem with a clear-cut plan. Save cash and straighten out your invoices before aggressively growing your business. Another option is to inquire about business overdrafts and short term loans with a bank to handle the initial costs. Consult with financial experts to find out which option is feasible.
WorkBuddy’s cash flow forecast tool is a great resource to help you make informed decisions. It analyses monthly cash flow trends and shows you the best time to reinvest in and grow your business.
Low gross margins
Be careful of under quoting your services to beat the competition and win jobs. While it keeps people on your payroll, under quoting leads to low, often negative, gross margins. It’s also difficult to sustain a growing business when you’re hardly turning a profit from each project.
The solution here is to figure out the total cost of delivering your services. First, audit the cost of labour, job duration, materials, equipment, and location. Then, enter this information in your job management software to calculate cost estimates. Try to mark up the prices of services with weak margins if possible. When customers ask for a quote, you should also adjust your pricing based on the job type, schedule, and location.
Overheads are the costs associated with running your business but aren’t directly related to your services. For tradies, this includes accounting fees, phone bills, office supplies, equipment, and travel expenses. These overheads can add up quickly, making it difficult for your business to be profitable. That’s why it’s important to regularly track your expenses and cut back where you can.
Job management software paired with accounting systems like Xero, QuickBooks, and MYOB lets you monitor your company’s overheads in real-time. You can even drill down into the data to find out where the biggest cost overruns are coming from.
If travel expenses are the issue, dispatch tradies to jobs that are close to them to reduce travel time and fuel consumption. You can even cut overheads by cutting paper usage, using internet-based communication, and renting equipment.
If your books aren’t in order, you’re liable to make bad decisions that impact your business’s cash flow.
With a full-featured cloud accounting system, you can stay on top of bookkeeping. Not only does it help you reconcile outstanding invoices, it also makes financial reporting a breeze. This allows you to clearly gauge your cash flow so you can make the best decision for your trade business.
Whatever cash flow issue you may be facing, one thing is clear: you need advanced job management software to drive tradie performance and back office efficiency. From invoicing and quoting to cash flow forecasting and job scheduling, WorkBuddy has what your trade needs. Call us today or request a free demo to see how our software can fix your problems.