A wise person once said, “Manage your money wisely, and you will eventually have more money to manage.” That same person also shared that “Money is attracted to structure and order and runs from chaos and disorder”.
From the large number of businesses that we have worked with over the last 15 years, we can honestly say there is truth in both statements. Regardless of income, those businesses that continually manage their money well, seem to attract more opportunities to grow their income and profit.
If you wish to profitably grow your business then get yourself organised, you must know your numbers intimately and continually educate yourself on financial management. You don’t need to be the person doing the work, yet you do need to be the person who understands what the numbers mean. Your profit & loss, balance sheet and cash-flow all tell a story. Every challenge in a business will eventually show up in the financials and profitability.
Expecting others in your business to manage finances can be asking for trouble. Be responsible for being the person who knows your business financials the best. You may take guidance and suggestions from trusted advisors in this space, yet in the end it is you who makes the decisions.
Below are some key points to becoming financially well organised.
1. Engage a quality bookkeeper
A question for you, how long would it take for you to get the information you require to give you an accurate and current picture of your business’ financial position? Five minutes? Five days? Or five weeks?
Your business financials are like a football scoreboard. The score tells a story, and the story is in the score! If you are coaching football team, when do you want to know the score? All-the-time!
Stop trying to be the bookkeeper if you are not good at it, don’t enjoy it and…your time could be better spent. A quality bookkeeper will save you money, time and headaches, and deliver accurate and current financials to you, allowing you to make better decisions, more often.
2. Know your Gross Profit – it is the Real Income
Top line revenue is what is called the ‘vanity’ number. Gross profit is what we call the ‘reality’ number; your REAL INCOME. Gross profit is the amount you keep after paying the costs of delivering your product or service; that being what you have sold. Most trade construction companies sell materials and labour, plus a few extras. Work with your bookkeeper/accountant/coach to accurately measure this. Then go to work on improving this number.
3. Manage your overheads and grow to >10% net profit
What net profit margin (pre-tax profit – or EBIT as the accountants call it) should you be aiming for? Do you even know what your current net profit margin/amount is? If not, see that should be step one!
After paying yourself a market salary for the role you play in your business, aim to generate at least a 10% net profit margin. By the way, your salary is not your profit! Your business needs to be profitable, consistently, to have a future.
Our research shows that the majority of trade businesses are just ‘1-2 bad months’ away from having to ‘close their doors’. With net profits <10%, there is little margin for error with pricing, job management issues or employing more people. If you wish to scale your business, then consistent net profit above 10% is a pre-requisite. You need to earn the right to grow to the next level.
4. Know your ‘break even’ number
Another question, how many sales/jobs does your business need to have complete, invoice and be paid for, every single day/week, to keep the business functioning? This is before the number needed to provide the net profit that you desire. This is called your ‘break even ‘number, or as we call it, your BAM; your Bare Ass Minimum! This is relative to the minimum score a football requires to win a game.
So how do you calculate your ‘break even’ number? Glad you asked!
1. Know your Gross Profit %.
2. Know your total overhead cost per month.
3. Divide your GP% into your overhead cost.
Example: ABC Painting Company.
1. Gross Profit = 57%
2. Overhead cost per month = $23,000
3. Break even = ($23,000/57%) = $40,350
Now, if the average job value for ABC Painting Company is $7,500, then the number of completed, invoiced and paid for jobs required every month is:
$40,350/$7,500 = 5.4 jobs
Get to work!
5. Know your cash situation – always
Based on the work you have scheduled, and time to collect payment, how much money (cash) will you have in your business bank account in 30-day’s time? If you have a challenge with this – time to go to work!
If sale/income equals vanity, and gross profit equals reality, then cash is sanity! You probably have already experienced making a good profit (on paper) during a month, yet what is in your bank account does not reflect this. So where is the ‘cash’ if it is not in your account? Well usually it’s in one of three places:
• Customers who haven’t paid you yet
• Suppliers you have paid too quickly
• Work in progress, i.e. work not invoiced
If you need assistance with any of the above, then connect with team at PROTRADE United or your accountant. Clarity preceded mastery!
Written by Jon Mailer
Founder and CEO of PROTRADE United