According to the Australian Small Business and Family Enterprise Ombudsman, the trades make the largest contributions among small businesses to GDP, amounting to $71.3 billion.
Running a successful trade business requires more than just technical expertise and a dedication to quality work. Financial management is crucial for ensuring that your business remains profitable and sustainable. Here are essential financial skills every trade business owner should master.
Three Financial Skills Trade Business Owners Should Master
1. Budgeting and forecasting
As a trade business owner, planning your finances is essential to ensure that you have enough resources to cover your operating expenses, pay your employees, and invest in growth opportunities.
Revenue projections
Tracking your financial position at regular intervals can help you to monitor whether you're on track to meet your financial goals. More importantly it gives you a clearer understanding of revenue projections. These projections are normally based on figures from current contracts, upcoming projects, and market trends.
Examples of revenue projections include:
- Quarterly/monthly/annual revenue projections
- Project-based projection
- New product/service projection
- Marketing campaign revenue projection
- New contract revenue projection
To track your financial goals and revenue projections, you can invest in accounting software or also even consider enlisting the help of a business advisor like Lifestyle Tradie, Modus Operandi, or Tradies Success Academy.
Meet financial goals
As a business owner you’re no doubt aware of the need to develop budgets for each project, considering materials, labour, equipment, and overhead costs (salaries and wages, insurance, rent and utilities, vehicle expenses, licences and permits, etc). Examples of other financial goals include:
- Boost revenue by 10% over the next year
- Reduce debt
- Allocate a certain amount of funds to purchase or upgrade equipment
- Increase marketing budget by 20%
- Invest in employee training
- Cut operational costs by 15% by streamlining processes and eliminating inefficiencies
- Enhance cash flow by reducing accounts receivable period from 60 days to 45 days
- Achieve a goal where 90% of projects meet or exceed profitability targets
Use Software to Track Income and Expenses
If you’re not using it already, accounting software can become an invaluable tool to track your expenses. Additionally, some accounting software tools like Quickbooks or Xero integrate with Groundplan!
Accounting software simplifies financial management by streamlining tasks such as bookkeeping, invoicing, and payroll. The software tracks income, expenses, and generates reports for financial clarity, enhancing efficiency and accuracy in business finance.
Integrating tools like Quickbooks or Xero with software like Groundplan is incredibly helpful in ensuring accurate counts of materials, in turn allowing for precise ordering.
Ordering too much can lead to wastage, while ordering too little requires an additional trip to the site with the needed materials.
![Quickbooks worksheet on Groundplan](https://cdn.prod.website-files.com/6109eae3653aac5848f69b6b/6684df3faac2eaf8fd77e16b_quickbooks-worksheet.png)
2. Cash flow management
“According to QuickBooks, 61% of small business owners struggle with cash flow issues.”
Does this sound familiar? Cash flow management is vital for trade business owners to sustain operations effectively. It involves monitoring the flow of money into and out of the business to ensure there's enough cash to cover expenses.
Material purchases
Trade businesses often need to purchase materials upfront for projects. Managing cash flow ensures they have funds available to buy materials without causing delays. Groundplan helps enormously here. By ensuring an accurate count of materials, you can order accurately. If you order too much, there’s wastage. If you don't order enough, you'll end up needing more materials, which means another trip to the site.
Staff payments
Timely payment of wages and subcontractor fees is essential for maintaining a skilled workforce. Effective cash flow management ensures there's enough liquidity to meet payroll obligations.
Unforeseen expenses
Construction projects often encounter unexpected expenses like additional materials or equipment rentals. Good cash flow management ensures there are funds available to handle such contingencies without impacting project timelines. Unforeseen expenses can arise for a number of reasons, including:
- Weather delays
- Design changes
- Material price increases
- Labour shortages
- Equipment breakdown
- Supply chain disruptions
- Safety incidents
- Inflation
Equipment maintenance
Trades rely heavily on equipment and tools. Proper cash flow management allows for timely maintenance and repair of equipment, preventing costly breakdowns that can disrupt projects.
Equipment maintenance is important because it ensures the optimal performance and longevity of machinery, minimises unexpected breakdowns and costly downtime, and maintains compliance with industry regulations.
One great way to track and manage equipment maintenance is with Simpro’s Maintenance Planner, which manages equipment maintenance by making scheduling easy for any size job. It helps to track maintenance details and test results while keeping accurate, up-to-date records of maintenance activities, test dates, contract activities, costs, and income in one central database.
![Construction equipment in outdoor construction yard](https://cdn.prod.website-files.com/6109eae3653aac5848f69b6b/6684df681567cf665f7b1dd7_construction-equipment.jpg)
3. Understanding financial statements
Financial statements help trade business owners effectively manage their operations and make informed decisions. Here are some of the most important financial statements trade business owners should know:
Income statement (profit and loss statement)
The Income Statement shows the revenues, costs, and expenses over a specific period. For example, for a plumbing business, the Income Statement would include revenue from plumbing services, costs of materials, and labour expenses, leading to the net profit or loss for the month.
For example, things that might be included on an income statement for a plumber can include pipe and sewer line inspections, plumbing materials like pipes, fittings, and valves, etc.
Balance sheet
The Balance Sheet provides a snapshot of a trade business's financial position at a specific point in time, detailing assets, liabilities, and equity.
A Balance Sheet might list assets such as tools and equipment, accounts receivable from completed jobs, liabilities including outstanding loans for purchasing equipment, and the owner's equity in the business.
Cash flow statement
The Cash Flow Statement outlines the inflows and outflows of cash within the trade business, categorised into operating, investing, and financing activities.
For a trade business, it would track cash received from clients for operating activities, cash spent on equipment, and payments made on a business loan.
Budget vs. actual report
This report compares the trade business’s budgeted financial performance against the actual results, highlighting variances to manage financial performance effectively.
For example, an HVAC company might use the Budget vs. Actual Report to show that actual costs for HVAC units were higher than budgeted, indicating a need to adjust future budgets or find cost-saving measures.
Accounts receivable aging report
The Accounts Receivable Aging Report categorises outstanding invoices by their due dates, helping trade businesses manage collections and cash flow. This report might reveal past due invoices, prompting follow-up with clients to expedite payments.
Accounts payable aging report
The Accounts Payable Aging Report lists the business’s outstanding bills categorised by due date, assisting in managing payments to suppliers and maintaining good credit terms.
For a landscaping business, this report might show upcoming payments due for mulch and plants, ensuring timely payments to avoid late fees and maintain supplier relationships.
Learn more about financial reporting requirements here.
Honing the above financial skills and implementing a solid budgeting and financial reporting process can provide a clear financial roadmap for a trade business’s success.