Article written by Malcolm Sackman
Turnover is vanity, profit is sanity and cash is king. I am sure you have heard this many times before. Our trades and construction clients have recently been telling us their pain points:
- Material prices have gone up and it is difficult or impossible to pass on to customers;
- The new reverse charge vat system is hurting cashflow;
- Customers are paying later, whilst suppliers are putting more accounts on stop;
- You are busy, work is booked out solidly for months but there is no money in the business.
Many small businesses suffer with weak cashflow, lack of growth or profit, working too many hours, frustrations with employees and new ideas/initiatives failing.
Does any of the above sound familiar?
So where do you start to try and improve things?
Compared to other industries, trades can have a really long lead time from starting work to eventually being paid. Often, you pay for the labour and materials upfront, then the job can be several weeks before being signed off and then at least another 30 days before you get paid. So, the cycle can be literally months. This can be really painful for cashflow, particularly if this is not being tracked in a systemised, consistent manner.
A modern business cannot be reliant on paper, spreadsheets or a series of unintegrated software solutions. You must be on the cloud using a real time accounting system. Our preference is Xero and currently at £24/month it offers excellent value for money.
But do not leave the data processing to your financial year end and hope your Accountant will then magically “sort it out.” This is the biggest mistake you will ever make. You have to be on top of things all the time or things can quickly escalate out of control.
Best business practice is that every month you review a profit and loss report. This will help you be clear on the trading position ie the turnover, gross profit margin, overheads, profit and tax. An understanding of a balance sheet is important. This shows what the company owns and is due and what it owes to third parties.
A cash flow position is absolutely crucial because 88% of businesses fail because they run out of cash. In a large number of cases, nobody sees it coming. It just happens.
But actually, that is perception and not the reality. Most of the time, cash peaks and troughs can be visibly seen and planned via a cash flow forecast. The problem is that very few businesses do an ONGOING budget and cash flow forecast. Things change quickly in business and so must your reporting system. Preparing these reports is something business owners struggle with because they take time and require technical skill and knowledge.
There are apps that integrate with Xero like Float and Fluidly that can help you but because this function is so crucial, it’s best left to the numbers experts like us.
Many trades do not have a job costing system in place. If they do, they are using spreadsheets which are very prone to error and inaccuracy and of course take up so much time. If you do not know with a very high degree of accuracy, the profitability of all your jobs as you go along, you are on the back foot and for sure, losing profit and cash. Often, by the time you do find out, the job has nearly finished and it is too late.
Many businesses are flat out but of course, being a “busy fool” is not a good thing. Too many trades do jobs which are low margin or loss making. Often, I hear this justified as “it contributes to the overheads” or “it keeps the men busy” but that does not make commercial sense to me.
The worst thing is that business owners are not even aware of problem contracts and make decisions based on “gut feel.” No business book I have ever read, has put forward guessing as a good strategy!
I recommend you use a trade specialist software system to integrate all your recording systems. This will save you a lot of time and help you track much more accurately.
Have a look at Simpro, which also integrates with Xero. They are well established and have thousands of subscribers. These days, software is so much cheaper and all businesses must strive for maximum efficiencies.
About the author, Malcolm Sackman leader of Ten : "we pride ourselves for being an alternative firm of Chartered Accountants". We are equipped to support you with our accountancy and tax expertise. We do all the things that you would expect- Accounts, Tax Returns, Tax Planning, Payroll, Bookkeeping and Monthly Reports on the key numbers. We love the cloud and are approved Xero partners.