Tradies’ seven cashflow killers

It’s 5am, and Linda is awake again with that familiar knot in her stomach. She’s worried about having enough to pay the wages and suppliers this week. Sound like you? In this article, the Next Level Tradie Daniel Fitzpatrick runs through seven cashflow killers that tradies make – and how to avoid them

We all know that things have been tight for a while, and Linda feels like the economy is getting worse. She reckons if those two progress payments come in, it’ll be ok for this week, but then what after that?

Fully awake, Linda decides to get up, because she’s not going back to sleep any time soon.

Sound familiar? If cash flow keeps you up at night, you’re not alone.

There are times when every tradie business has cash flow issues. But if it repeats week after week, month after month, then that’s a pattern. I’ve coached hundreds of tradies, and these are the top seven cashflow killers that cause the most problems and how to fix them (not necessarily in this order).

Mistake 1: Soft payment terms

There’s no system in place to follow up and ensure you get paid on time.

I’ve seen way too many tradies who weren’t paid on time but finished the job anyway. Sometimes, never getting paid. When things get tight with your clients, will you be at the top of the list of who gets paid? Or at the bottom?

The fix: Set expectations up front and make sure you stick to them. Have a system that highlights overdue invoices or progress payments. On bigger jobs, take deposits and be prepared to suspend work if necessary (giving notice and using the provisions in the CCA) until you get paid.

Mistake 2: No billing system

Billing is not a top priority, so it gets done last. But if the client doesn’t have the invoice, they can’t pay you.

Especially on multi-stage or commercial jobs, bills are sent months later, variations are not captured, or, worse, parts of the job are not billed at all.

The fix: Implement a system to bill as soon as the job (or a portion of the job) is completed. Ensure your team records all details, including extras (materials and labour), on the job or soon after completion. Get client agreement on variations before starting, so there are no difficult conversations later.

This was a game changer for a plumbing business run by a husband-and-wife team I worked with: margins and cash flow improved dramatically. Now every part of the job completed by their plumbers was being charged out, and they were getting paid on time. The added bonus was no more late-night arguments about money, time for more fun things instead.

Mistake 3: Not enough margin in your jobs

It doesn’t matter how big your jobs or sales are. If you’re not making enough money to cover your costs, overheads, and make a profit, then cash flow won’t improve. You can be turning over millions and still be going backwards. Without a margin, the turnover will just dig a bigger hole. Remember – not every job is a good job, even in a crisis.

The fix: Have a target margin on every job and stick to it. Track jobs and back-cost them to check whether margins are met. Adjust future pricing as necessary.

A client of mine with a $2m annual turnover used this strategy to increase his gross margin from 8% to 21% – which earned him $260,000, which he used to pay off debt.

Mistake 4: Making your bank balance the only metric

What really matters is what’s left after everyone is paid. If you don’t know what you have left after collecting receivables and paying all suppliers, wages, credit cards, bank, and taxes, then you are flying blind. I call this “cash position”; it’s the real number that tells you where your business stands.

The fix: Calculate your cash position at the end of each month and work to improve it every month. This avoids guessing if liquidity is getting better or worse!

Mistake 5: Surprise tax bills

Nothing derails cash flow faster than a tax bill you didn’t see coming. If you have large tax bills and you haven’t got the money, that’s a sure sign that something’s wrong.

The fix: Check with your accountant to know exactly which tax bills are due and when. If you are getting behind, don’t leave it; contact the IRD and make an arrangement. I’ve seen large debts where interest and penalties are as high as the original debt.

Mistake 6: No cash buffer

Construction is cyclical. In good times, if you don’t put cash aside, when the bad times come along, there is no room to move, so the bills keep coming in, and there is no money left for bills.

The fix: Create a cash buffer that can cover two to six months of overheads by putting money aside (in a separate account!) on a monthly basis.

If you have a large deficit, then you might need to restructure using a loan or extend your overdraft.

Mistake 7: No plan

Many tradies wing cash flow, and it gets them into trouble. They live week to week with no long-term plan. The ones who break the cycle aren’t necessarily more talented; they just start looking further ahead.

We are at the start of a fuel crisis. The Government says things will get worse before they get better. So, hope for the best but plan for the worst. Keep plans flexible so they can adapt as the situation changes and remember; it’s always easier to move forward when you know what you’re aiming for.

The fix: Start with a 12-month budget and 90-day cash flow forecast so you know exactly where you’re headed. Then track monthly to check your progress. My clients know what to aim for every single month. Easy to fix one month, hard to fix 12.

In short

None of this has to be complicated. The tradies I work with don’t want to be accountants – they’re builders, plumbers, sparkies and painters who just need a simple system to follow.

Once they had that, cash flow became more manageable and prediuctable. The first step is to map out your cashflow over the next 2-3 months, so you know how much cash will be available and when.

Want to take the stress out of cash flow? Get my free 12-week cash flow tool, simple to use, with an instructional video, and only takes 30 minutes to do. Get yours here

Daniel Fitzpatrick

Next Level Tradie

https://nextleveltradie.co.nz/