I’ve learnt, and continued to learn, a great deal in the years of owning and operating my own trade business. Lessons learnt (and plenty of them!) through trial-and-error, words of advice from other business owners, my accountant or many others. And, a large portion of these lessons, have been in relation to the topic of finance/money.
That said, there are many little, (and big) fundamentals about business finance that need to be shared so that you too, can grasp their importance when operating a successful trade business.
You may as well gain from my 25+ years experience in the trade business industry, and sharing this information is what we’re all about here at Lifestyle Tradie.
What you are about to discover are some of the lessons I’ve learnt, have taken heed, and as a result implemented within my business. I believe what you are about to read is the backbone of what needs to be considered when running your business, and making any sort of business decision.
I have developed these lessons into 29 ‘Rules Of Business’ that every trade business owner should live by, and for the purpose of this article, have hand picked 11 of my favourites.
Rules of Business #1 – Know Your Numbers
You seriously must be sick of hearing me saying this, but it is necessary to take a close look at your Profit & Loss Statement and Balance Sheet on a monthly basis so you understand, from a financial perspective, what’s going on in your business. Then, you can design a dashboard (a snapshot of your businesses finances and financial goals) for you and your employees to watch, measure and work towards daily.
Rules of Business #3 – Set financial targets (turnover/profit)
A business plan that consists of specific and measurable (with a little bit of stretch) financial goals is imperative. Track your goals using a rolling dashboard.
Rules of Business #4 – Understand Your Break Even Point
The Break Even is the exact point at which your business stops running at loss and will begin to make a profit. Knowing this point is critical in understanding what amount of money you need to make on a monthly and daily basis to ensure you are covering basic operational costs. Anything that exceeds this is profit!
We covered this in great detail in the ‘Profit Maximiser’ session at our last live event. The members commented it was one of there favourite presentations. They even worked out their hourly expense rate. Now THAT was an eye-opener for many!
Rules of Business #6 – Create a cost control culture
Constantly review your Profit & Loss Statement, making necessary changes to your business to ensure that it is running as a ‘lean machine’. It is surprising how a $10 saving here, and a $100 saving there, across different facets of your business, will inevitably equate to thousands of dollars in savings over time. Work with your team on developing cost saving ideas.
Rules of Business #8 – Don’t have all your eggs in one basket – One single customer versus many
It is critical to ensure you ‘share yourself around’. If, for instance, if that one builder you do all your work for decides to ‘penny pinch’ and find another ‘you’, a replacement for your trade, simply because he thinks he can get a better deal, you’re in trouble! Where’s the next mortgage payment coming from?
So, don’t spread yourself too thin and concentrate on building your customer base.
You know my story here. This could have killed us! Thank goodness we recognised the danger and made the necessary changes before it was too late!
Rules of Business #11 – Develop Systems
Isn’t it funny how we always seem to end up back on the topic of systems? Create a ‘repeatable way of doing things’ in a pre-planned, logical order in return for a desired outcome of favourable results.
Having a set way of performing tasks goes a long way towards streamlining your business. It will reduce unnecessary errors by employees and give you increased control over the outcomes of specific tasks.
Understand what needs to be done when, by whom, how, etc. For example: whose responsibility is it to complete the dashboard on a weekly basis? And what are the steps involved in developing one?
Rules of Business #13 – Purchase Assets through A Lease
Why tie up money buying a vehicle or piece of equipment outright? Okay, I understand you can save a considerable amount of money if you buy the asset outright. But in reality, who has $40,000 lying around to make a simple purchase? If you do, and are happy to use it, then great! But, if you don’t you need to make your purchases through a lease.
Possibly your accountant has told you to ‘spend some money’ just before the end of financial year. However, as a general rule of thumb, tying up money in a direct purchase is not a very productive or efficient way to leverage the money you have. It is far better to keep the bulk of your money saved for ‘a rainy day’ and spend that little bit extra to pay out a lease, than it is to have good money tied up in one asset.
Rules of Business #15 – Build a Financial Cushion and Don’t Touch It
It’s a smart idea to have a ‘buffer’ of money, or a ‘financial cushion’, to weather the inevitable bumps that your business will experience. Savings that would cover about two to six months of expenses would be ideal.
This financial cushion should not be touched unless you are in absolute dire straights and resorting to this ‘kitty’ is necessary.
If the situation arises where you do have to dip into this money, be sure to replace it immediately. At this stage you should also take a very close look at your business and make sure you understand what may have caused your business to get to the point where you had to use this money in the first place. Maybe you are not doing as well as once thought! But, at least you can learn from this.
Rules of Business #17 – Never deal with cash payments – customers
By this I mean never accept cash payments from customers with no tax invoice in return. I have heard of businesses operating in this way and taking off the GST for the customer. This is an absolute no-no!
In the past it was seen as a way to make a bit of extra money. But, it will certainly catch up with you in the end. Money taken as payment with no invoice provided, means you are trading outside of legislated business requirements. Hence, one avoids tax obligations, staff entitlements (such as superannuation) and WorkCover.
Accepting cash brings with it many demons;
Firstly, you will never truly know the financial position of the business, which basically equates to no business control.
Secondly, the cash you acquire can never be used to purchase assets as it raises the question of how you got the money to pay for the asset in the first place.
Thirdly, if your team knows you are accepting cash, you’re educating them that it’s okay. How do you know when they might be accepting cash for a job?
In short, dealing with cash payments is simply poor business practice and you are far better off growing your business to become an asset, legitimately demonstrating the money it really can make.
Rules of Business #21 – Never pay invoices early. Pay on the due date.
Keep money in your bank account until the very last minute to make sure your money is working for you. If you start paying invoices early, you are simply training your supplier to expect to see the funds straight away. The invoice is due on a certain date, so pay on that date.
Rules of Business #24 – Prepare Your Business For Sale, Whether You Plan Sell It or Not
I am quite sure that most of us didn’t start our business thinking that one day we would sell it. Regardless of what your long-term plan is for your business, you never know what life throws at you. Therefore, it is best to always plan for future possibilities and make sure your business it set up to sell (whether that’s your current plan or not).
And what exactly do you need for this? Well, for starters, as mentioned above – never deal with cash payments. An investor or a buyer will only look at the Profit & Loss Statement and Balance Sheet. They will not incorporate cash takings within their consideration to buy.
Rules of Business #28 – Leverage
In short, don’t ‘work for your money’, ‘make your money work for you!’. Take your time with financial decisions. Think smart before making purchases, weigh up the pros/cons, consider all your options and maintain a reduced cash gap (cash gap = the time between when you buy inventory for a job and you receive payment from your customer for that same inventory).
So, there you have it, #11 of my top #29 ‘Rules Of Business’!
Like me, I hope you’ve gained from even just one of these ideas. Apply what you’ve learnt to your business and tailor it to specifically work for you.
I would love to hear what your favourite ‘ Rule Of Business’ is from this article, or let us know about one of your own that we didn’t mention! To share only makes every tradie a better business person.
What’s next?
- Join our Kick-Ass Tradies Facebook Group, for access to trade business specific conversations, tips and resources, plus a like-minded community of tradies.
- Book a 15-minute Game Plan Call with Andy, owner of Dr. DRiP plumbing and co-founder of Lifestyle Tradie, to clarify your priorities and get clear action steps.
To your, success…
