IN THE KNOW —
Managing finances through tough times The stars are aligning, and not in the way we want them to from a Trade business perspective. There are well documented economic and industry factors that are placing severe scrutiny on what it means to be a tradie in business. Stories of severe product shortages, staff absenteeism and cost inflation are endless. For some businesses this will be the first time they have had to navigate particularly challenging financial times. A number of respected economists are now talking about the ‘near certainty’ of recessionary type conditions for the near term. If nothing else, remember this: “Cash is King”. As we see several high-profile construction and trade Companies in Australia report liquidation, almost all point to the lack of cash when required as the key reason for collapse. So, whether this is your first time facing these conditions or you have been through it before, there are some practical things that you can be doing now to ensure you are best placed to ride through the next period:
1. Get close to your numbers Firstly, if you are not close to your figures you need to be. And quickly. Depending on your scale, this could mean knowing the detail of every staff member or it could mean a higher view of staff and projects. No matter what your scale, there are things you need to know on a daily, weekly and monthly basis to ensure you are on track. As a starting point, here is the bare minimum of what you need to make decisions based on: • Daily: staff movements and project progress • Weekly: productivity, project status and spend with major suppliers • Monthly: actual vs budget performance and cashflow. The important thing is then what you do with this information. It needs to inform decision making and gives you a chance to see challenges coming before it is too late.
2. Ask yourself “What does good look like?” This starts with understanding the ‘capacity’ of the business. Almost all trade businesses are selling labour and materials. You need to know what the capacity of the business is if things are going well. All too often we see businesses who don’t know the answer to this question, which makes it almost impossible to make informed decisions about performance.
3. Manage margins Never forget the orchardist who saw others selling apples for $0.90c and decided to sell his for $0.80c. He found it so easy to sell them that he decided to sell his whole crop for this price. He then worked out that it cost him $1.00 to grow each apple. In times of inflationary pressure and project risk uncertainty,
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any small errors or omissions in pricing can quickly blow out to large issues. Old ‘rules of thumb’ risk being out of date, and cost inflation in both direct costs (labour and materials) and delays is where a number can come unstuck. Some tips to avoid these traps: • Communicate with your clients early so they understand the landscape, and the risk of increases as the project progresses • Ensure any prices you are relying on are valid and locked down • Ensure your quote timeframes are realistic and match to your inputs • Review any ‘rules of thumb’ or previous pricing techniques as they risk being out of date • Back cost jobs regularly to ensure your assumptions hold true.
4. Protect for inflation The cost of building materials today is likely around 15–20% higher than what it was 12 months ago. If you priced a job in June 2021 and are still working on this for the same price now, then it is likely you are making little or no profit. As project delays to both get projects consented and progressed continue, the risks of inflationary pressure come on all jobs. As always, ensure your quotes/margin allow for this factor and communicate with your clients early if you see variations or costly delays coming. Likewise ensure your supply of product is locked in at ‘today’s prices’ as much as you can through your supplier relationships.
5. Squeeze the cash cycle As mentioned up front, Cash really is King. Accordingly, the longer period it is in your bank account and not tied up with stock, suppliers, or customers the better. Of course, be careful with this as sometimes a shortened cash cycle can paper over bigger profitability issues. However, we would encourage you to look at your entire cycle and ensure it works for the current conditions. In particular: • Take deposits. Not only is this good practice, but it ‘weeds out’ potential issues before you start bigger jobs • Make payment easy. If you are completing high volume of residential jobs then ensure that you can accept payment immediately, or as soon as possible. Also look at 7-day terms, particularly for residential clients
