5 Strategies to increase profit margin in your trades business

5 Strategies to increase profit margin in your trades business blog

In an unstable, pandemic-crippled economy, many Australian trades businesses are having trouble turning a profit on their jobs. No matter how skilled you are at your craft, increasing profit margins is a tricky game. You need to see where your company currently stands, know how to win the right jobs, and implement various ways to cut costs. Below are some effective strategies that can help your business establish healthy margins.  

Know the numbers to track profit margins 

The first thing you should do is use top accounting platforms like Xero, QuickBooks, or MYOB Online to gain a clear picture of your company’s profitability. Key financial metrics you should monitor include: 

  • Net income – indicates your company’s overall earnings minus expenses and taxes 
  • Gross profit per project – shows you the degree to which specific projects are making money
  • 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 – refers to the money you owe suppliers, subcontractors, and other vendors 
  • Financial goals – specifies target revenue, expense, and profit numbers to measure your company’s growth 

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 spend. It’s, therefore, crucial to use the following financial reports: 

  • Income statements – These show you how profitable your company is over a month, quarter, or year. Income statements keep track of revenue, expenses, and gross and net profit. They also help you determine which services are your biggest moneymakers and which ones are likely to put you at 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 like vehicles and heavy equipment. 
  • Cash flow statements – These illustrate the movement of cash in and out of your company over a certain time period. By tracking your company’s cash flow, you can predict future cash shortages and surpluses throughout the year, so you can plan your investments accordingly. For example, if you expect a shortfall in revenue between July and September, you should slow down hiring and large equipment purchases to maintain your margins. 

Avoid the race to the bottom

In a competitive marketplace, it’s tempting to undercut the competition’s prices in hopes of getting more clients. However, this will only lead to bloody price wars in which competing trades businesses make smaller and smaller bids 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 razor-thin margins. 

To avoid these dangerous outcomes, focus on winning higher-margin projects that are best suited to your company’s specialties. You should avoid projects that have low qualification entry requirements since you’ll have to compete with more companies where price 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, you need accurate and realistic quotes to win profitable jobs. Project quotes must cover estimated job duration, equipment and material costs, labour costs, and even location-specific pricing. They should also factor in reasonable service markups to make sure you have a good profit margin. Creating standardised price books from previous jobs and current market trends will make it easier to calculate these estimates. You can also use job management software like WorkBuddy to instantly produce professional and competitive quotes for prospective clients, so you’re the first business they think about.

Reduce unnecessary expenses

When running a trades business, cutting costs wherever possible can have a massive impact on your profit margins. Here are some simple tips that can put thousands of dollars back in your pocket every month: 

  • Create comprehensive project schedules so that field workers aren’t working more than required and you’re not forced to pay extra for overtime.
  • Standardise 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 resupplies. 
  • Pay equipment and material suppliers early to avoid expensive late fees.

Leverage new technology 

Streamlining back-office processes can significantly increase your company’s profitability. For instance, combining job management systems and accounting software to automate invoicing processes ids your business of time-consuming and error-prone paperwork. Job management software lets field workers easily enter project-related expenses into the 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. 

What’s more, top job management software can automate dispatching by processing work orders and finding the most qualified technicians for the job. WorkBuddy systems even provide optimal routes, direct communication channels with contractors, and work checklists to ensure jobs are completed to a high standard. 

The efficiency gains from implementing these technologies systems also have far-reaching soft benefits. Your relationships with customers, in particular, will improve with professionally handled projects and expedient payment processes. Word of your company’s stellar performance may also spread and grant you a line of more profitable jobs in the near future. 

If you want to experience the benefits of job management software firsthand, call us today. As Australia’s leading job management system, WorkBuddy enhances your trade company’s scheduling, invoicing, and communication.

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