Preparing for the new financial year

The Successful Builder coach offers tips for increasing your paycheck alongside your workload

It’s that time of the year again when your end-of-year financial accounts reveal the real truth. Hopefully it’s a great report, but sometimes there can be unwelcome news about the year’s performance. You may have done heaps of business, as proved by the tax bill, but when it’s all tallied up, is there enough left over for you?

If you’ve decided that this financial year needs to be different, then you may want to get onto making changes as soon as possible. So here are four things you might want to focus on to give yourself a better chance of doing well in the new financial year.

1. Aim for wallet share, not market share

Share of wallet is a marketing term referring to the amount of the customer’s total spending that a business captures in the products and services that it offers. Market share is a percentage of total sales volume in a market captured by a brand, product, or company.

There is a tendency among inexperienced builders to win a job no matter what, especially when it looks good – picture a high contract price, mouth-watering progress payments and the prestige of having your sign outside a big job in a good suburb. It tends to create the illusion that ‘if the jobs are big, and there is lots of money going through the bank account, then we must be doing OK’. Right?

Wrong! Unfortunately, it is just not true. Business income does not equate to personal income.

I know of small businesses turning over more than $5m annually, yet paying their owners less than similar businesses doing a $2m turnover. You probably know some too. Why? Because the successful business owner understands the difference between market share and wallet share and how to ensure the latter.

Most business consultants, coaches and accountants know that wallet share is closely connected to Gross Profit (GP) and Gross Profit percentage (GP%). Many (including me) will say that these two numbers are the most important in your business. Of course Net Profit (NP) is important too, but apart from GP it can only be increased by reducing your fixed expenses – and it’s not easy to make major changes to these without affecting your ability to run your business.

However, there are many ways to increase your GP. So this year, focus on checking your reporting systems to ensure you’re not compromising GP for turnover. Think of your wallet!

2. Improve your cashflow

Building businesses often suffer because of poor cashflow management. In sales, the business can be doing really well with large contracts and good profit margins. However, without the money to pay your team, subbies and suppliers, those contracts are worthless. You need to be able to fund your operations.

Cashflow problems are often caused by clients not paying on time – either because the job is delayed or, sometimes, because the client can’t (or won’t) pay for one reason or another.

So this year, review your contract payment terms, the spacing between progress payments and the size and timing of your deposits.

Make sure that you will always have enough money in the bank to cover your operational expenses in the event a client can’t make a progress payment. 

Sometimes it’s those one-off payments such as holiday pays, insurances, taxes or similar that cause the problem. If this is the case, consider setting up a separate bank account to fund these one-off payments.

Then, on a monthly basis, pay enough into this account so you can pay your one-offs as they come up. You might even pay in a little more and build an emergency fund. That way, if someone can’t make a monthly payment, you can take action immediately.

If you are uncertain about how to do this, seek some advice. It’s very unfortunate when an otherwise great building company goes under because cashflow issues were overlooked.

3. Mark up for margin

Margin is the difference between a product or service’s selling price and its cost of production. Mark up is the ratio between the cost of a good or service and its selling price. It is expressed as a percentage over the cost.

In my opinion, there is a mathematical test that a builder should score 100% in before quoting any job.

The test should be in the calculation of margin and markup. I have seen too many cases where builders believe they have quoted a 25% margin, but then discover that they have actually quoted a 20% margin. Unfortunately, this is often realised after the contract is signed!

Now, 5% might not sound like much but, when you consider that overall a building business might return just 8% net profit, then a loss of 5% equates to a loss of 62.5% of the net profit – almost two-thirds!

So it’s worth the effort to get your head around margins and markups. If you are uncertain, get someone to check your calculations before you provide a contract!

The table below shows you the percentage of markup you will need to apply to your costs to achieve a desired Gross Margin percentage.

4. Value your service

You are a qualified builder, an entrepreneurial business owner, a professional advisor and you handle your clients’ largest assets.

Few of your non-building peers handle contracts anywhere near the size of those that you do.

Moreover, if you are the main contractor on the build, you are likely the first port of call should anything go wrong during the project or in the guarantee period, and even if the issue is caused by others, you will handle it. That’s a lot of responsibility.

So give yourself a break this year and don’t underestimate the value of your service.

Remember!

Take a moment or two right now to think about the suggestions above. Even if you can only manage to follow through on one, it can make a world of difference.

Graeme Owen, based in Auckland, is a builders’ business coach. Since 2006, he has helped builders throughout New Zealand get off the tools, make decent money, and free up time for family, fishing, and enjoying sports. www.thesuccessfulbuilder.com