The nine biggest financial mistakes that trade businesses make
You work hard in your business, spending hours a week on the tools, yet somehow you just don't seem to be getting ahead financially. Does this sound like you? Unfortunately, the reality as a business owner is that over the lifetime of a business, 40% of businesses consistently lose money, 30% just break even and only about 30% make marginal profits.
The main reason that most small businesses close their door is lack of financial sustainability. Ensure that you are not making the mistakes below and, if you are, put some steps in place to fix them as soon as possible.
Mistake #1 — Not charging enough
It is unwise to charge too much; however, it is equally unwise to charge too little. There are two aspects to this mistake: knowing what you should be charging to ensure that you are making a profit on every job; and charging what you are really worth. Plenty of businesses that we start working with are undercharging their services simply because they are not aware of the actual running costs of their business and what is required to cover these costs and also make a profit.
Mistake #2 — Not measuring gross profit
Gross profit is the amount that you keep after each job — that is, after you have paid for all the expenses associated with doing that job. This includes materials, cost of direct labour, waste removal, freight, etc. This is your REAL income. Your gross profit is what you now have to pay your running expenses and overheads, and make a net profit. If you don’t know your gross profit margin, how do you expect to improve it?
Mistake #3 — No cash reserves
It is not a matter of if — it’s a matter of when you will need some cash reserves to get through either a slump in sales or perhaps a climatic situation such as wet weather, when work cannot be completed and you still have to maintain the business overheads. Gradually building up some cash reserves over time from today onwards will ensure you have a buffer for such situations. Start off by getting at least 1–2 weeks’ worth of operating expenses built up in cash reserves. Gradually build this to 2–3 months’ worth.
Mistake #4 — Not knowing your break-even point
It costs you a certain amount of money to run your business each and every day. Over a month of paying rent, vehicle leases, phone, electricity, fixed salaries, insurance, etc, it soon adds up. You are required to complete a certain amount of work every month just to cover these costs. Do you know accurately what that amount is?
Mistake #5 — Not paying yourself a salary
To run your business as a proper enterprise, it is important that you pay yourself, as an owner, a salary just like every other employee. Ensuring that you make this a habit allows you to run your business with a proper business model versus simply just paying yourself drawings when you have the cash available. If you cannot pay yourself a consistent salary, you have something missing in your business model and this needs to be fixed.
Mistake #6 — No reporting or review
As a minimum you should be reviewing a profit and loss, balance sheet and cash flow forecast for your business every month. These three reports give you an overview and bigger picture of the results your business has produced and the future of your company. If you don’t have the reports, you have nothing to review. This would be like a coach of a football team not evaluating the statistics of how his team performed after a match so that they can adjust the game plan.
Mistake #7 — Lousy bookkeeping
The source of many financial challenges in a business come from the fact that the bookkeeping is either inaccurate or not up to date, or both. Ensuring that your bookkeeping is kept current and accurate allows you to make decisions for your business based on the financial results that it is producing. Plenty of businesses that have had to close their doors could have been fixed if their bookkeeping was accurate early on, and the challenges identified as soon as possible.
Mistake #8 — No allowance for overhead costs when charging out
When you charge out your labour, do you include the overhead cost of actually managing that one hour of labour? Plenty of trade businesses undercharge, thinking that all they need to do is cover the cost of the hourly rate of the person they are paying plus a margin on top. This does not take into account the actual cost of managing this person in the business, which can be surprisingly high.
Mistake #9 — No cash flow forecast
How do you know if you are winning in your business? For many trade business owners, if they have money in the bank then they are happy. Yet this does not tell them what the forecast income is going to be. Plan out as many weeks or months in advance as you can based on your predicted work intake as to what your bank account balance will be on a weekly basis. This allows you to deal with challenges proactively, rather than at the last minute.
If you have identified that you are making any of the mistakes above, select one at a time and go to work to fix it. If you would like some guidance, please touch base with the team at PROTRADE United to help create a game plan to get you financially well organised and profitable for the future.
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