Are you working hard, but not making much (or any) profit? In this episode, Andy and Angela take you through the process to understand exactly what you should be charging your customers to make profit.
Andy
Well, hello there and welcome back to another episode of The Tradie Show, together in trade business.
Ange
Well, hello, hello and lovely to have you listen in again.
Andy
This week, I thought we could bring back the old trusty toolbox for a question. What do you say Ange?
Ange
Sounds great. Let’s do it.
Andy
All right. This question came from an electrician in Western Australia. And they asked. I feel like I’m working my ass off, but we are not making any profit. What is going on? Ooh, God. We’ve heard this so many times.
Ange
Yeah. We have, and this is an interesting one. It’s actually a common sentence we hear when chatting with trade business owners.
Andy
Agreed. And I love a good chat about profit and why a lot of tradies aren’t making the money that they deserve.
Ange
Yeah. Look, before we answer this specific tradie toolbox question, I’ve actually got a book recommendation that I wanna share, and it’s even on the same theme. So this week’s book recommendation is one of my favorites. It’s authored by a friend of Lifestyle Tradie, and that’s called Profit First by Mike Michalowicz.
Andy
Great pick and yes, Mike is an absolute superstar and we’ve had him talk at one of our events and he’s all the way from the USA. He’s also starred on one of our podcasts, so if you haven’t had a listen to it, make sure you search for it. We’ll leave a link in the show notes too. He is a cracking guy and I love his work.
Ange
The principle of Mike’s book called Profit First is to transform your business from what he calls a cash eating monster into a profitable cash cow.
Andy
And that is exactly the goal for every trade business owner right there to make profit in the business consistently, and that’s what Mike’s principle of literally doing, just that taking the profit first from the business makes a hell of a lot of sense. And the people that I know that are using it are loving it.
Ange
Yes, but you know what? That’s exactly the point. It’s not actually the way that we are taught about business in basic finance. We’re taught to make sales deduct expenses, and what is left over is your profit. It even looks that way on your profit and loss statement.
Andy
Yeah, it does. But Mike teaches a different formula and what he teaches is make money, deduct profit, and what is left over is available to pay for your expenses. For me, it’s, it’s kind of stuff I wish I’d known when I first started Dr. Drip all those years ago.
Ange
Yeah, look, me too. Mike’s formula of putting profit first is key for all businesses to thrive whilst still letting the business owner thrive. Novel that, Hey, so for all you listeners, I recommend you do check it out, and even apply his principles within your own trade business. We know plenty of our Lifestyle Tradie members have done exactly that and lean on each other for advice, and there’s no better way to perfect a process than that.
Andy
Absolutely. And all this talk about profit is actually a great segue into today’s topic. So let’s get back into it.
Ange
Okay. So just to recap, we had a tradie toolbox question that read, I feel like I’m working my ass off. But we are not making any profit. What’s going on?
Andy
I’d have to say this is a lot more common than a lot of us think. You know, I hear this all the time where business owners are running around like a chicken with their head cut off, working all day, working all night, and deep down in their gut, they feel like they’re absolutely killing it.
Ange
Yes. But you know what the problem is? They actually connect being busy to being profitable.
Andy
Exactly.
Ange
And then you know what happens? It gets to the end of the month or that quarter or the year, and they wonder why there’s no money in their bank to show for all their hard work. But you might be working hard, the thing is, you’re not working smart, which means you aren’t making profit.
Andy
You know how many tradies out there listening right now are sitting in their truck, working on site, sitting at home and going, I work my ass off. And at the end of the year you pay yourself a basic wage. Probably there’s a little bit of that cash on the side. I never said that word.
Ange
No.
Andy
And you sort of weigh the whole thing up and then you look at your top tradies and what they’re getting and you think, is the stress and the drama all worth it? And the responsibility it comes with running a business as well, when something goes bad, it goes really bad.
Ange
That sentence is a good one. It is often common for them to stop and reflect on what they pay their tradies, and they actually say, I’m actually getting paid less per hour than I’m paying some of my team.
Andy
Yeah, that is common. Hey, and I, and I know I’ve done it over the years as well, because it’s your business and you feel that you have to pay everyone. And we do. But that all comes down to knowing your numbers. And you know, as we said, a lot of tradies that just focus on turnover. You know, I’ve definitely done that in the past as well, but turnover these days is just not a metric that’s important to me. I soon realized, back in the days at Dr. Drip, I was watching the wrong data, you know? Profit, profit, and profit is the thing I look at now when someone comes to me and goes, I turn over half a million, a million, 5 million, 10 million, and they say it sometimes with a lot of gusto, like I’m a $10 million business. But when you dive deep into how much actual profit and what is their net percentage margin on that money, it’s freaking so low for some of these guys, and I’m like, holy sh*t. Give me a one man show business all day long, then turning over 10 million with, you know, 20 staff or 30 staff and, and having all that stress and making not much money.
Ange
Yeah, agreed. There’s a saying that goes, turnover is vanity and profit is sanity.
Andy
And cash flow is reality.
Ange
Yeah.
Andy
I can still remember my accountant saying, Andy, there’s plenty of businesses out there that make more net profit than you, make a bigger turnover in new and have gone bust because of cash flow.
Ange
Right.
Andy
And that was like, holy sh*t. I don’t think a lot of people, if you are making profit, everyone just thinks I’m making profit, everything’s good. But a lot of people think, where is that profit? I’m looking at my bank account, I can never see it. It’s hiding somewhere. Is it under this rock? Under that rock? And they can never find it. Then it’s a, there’s perfect examples of where that is, but they don’t know where to look.
Ange
Yeah, that’s a really valid point. The cash flow really is important. So at the end of this though, isn’t it great that you decided that it was important to start learning and investing in your knowledge so that you understood business principles?
Andy
Well, I have to admit it wasn’t by choice back then. It was like, holy sh*t, I’ve gotta change and I’ve gotta know my numbers, and now I love my numbers and I’m so hungry for it. And when you know your numbers, you know exactly what is going on in your business at any given time, and you can react. So many people are in business right now with a bloody blindfold on. They’ve got no idea. They stick their heads in the sand and they don’t know if they’re making money or they’re not. They’re going off a gut feeling that sometimes can be right, sometimes can be wrong, but they just don’t know. You cannot be a proper business owner if you’re feeling like that, and if you’re feeling like that right now, I’m telling you, please, please, please do me a favor. And fix it. You need to know your numbers.
Ange
Yeah, valid. So let’s talk specifically around profit. It seems obvious to say that this is actually the reason that we are in business to not just make money, because that’s like buying yourself a job. What you really want is to make profit, so basically make extra over and above the expenses of every job. The expenses of the business and having paid yourself a decent wage.
Andy
Yeah. And if you wanna do that, it means you’ve really gotta ensure that you’re maximizing both gross profit and that is what you have left after every job. And maximizing net profit, that’s the extra you have left after all of your expenses have come outta the business.
Ange
Exactly. So there are multiple different strategies that you can implement to increase both gross profit and net profit. We’ve talked about Mike’s book, Profit First, as an example, and the benefits of implementing that. But the one I wanna touch on today specifically is around the hourly rate that you charge, because how do you know if you are charging the right hourly rate for your trade business?
Andy
Exactly, Ange and you know, if you’re playing in Facebook or Instagram land at the moment, there’s a lot of people talking about this hourly rate. So let me ask you this. How did you choose your hourly rate in the first place? And do you know if you are covering all your expenses and actually making money as well?
Ange
Or are you actually going backwards and you don’t even know it?
Andy
Yes.
Ange
So in light of the question from this Sparky that we’ve been asked, maybe he’s just not charging enough.
Andy
But that’s the point, right? Most trade business owners don’t really know what to charge. The thing is, you didn’t start a business to go out there and make peanuts. You started a business to be in control, make good money, you know, build a big future, buy some toys on the side. But you know, a lot of guys are just talking about turnover. You know, you need to pay yourself a solid wage and then you need to make profit in that company so you can take director’s dividends, which can help you and your family, and you can buy property and there’s other world strategies that you can look at, but most people just don’t know the most basic stuff. They start a business and now they’re so deep they’ve been doing it for so long, and realistically, they’ve done okay. You know, most guys have done okay but nowhere near the money that they should have.
Ange
Well, they’ve probably bought themselves a job.
Andy
That’s exactly what they’ve done.
Ange
So let me ask you this, then. You’ve said there’s a lack of understanding about deciding how much to charge. So can you just maybe share some thoughts about that specifically?
Andy
Yeah, sure. I mean, most people start up their business and like most tradies, they just copy their old boss. They talk to their mates, they look at the local competitors, but they just pick some random hourly rate because that’s what everyone else has charged. But if a good 50% of trade business owners are really struggling, then why is everyone copying each other? Copy the guys that are at the top 10%, don’t copy all these other guys.
Ange
But how do they know that they’re even at the top 10%? Because every business has different expenses inside their business, right?
Andy
So, well they join a community like Lifestyle Tradie cuz our guys are definitely at the top of the tree.
Ange
Valid. So there is something to be said for looking at your competitors just so that you understand a market, especially when you’re in a geographical area. But overall, it can’t just be random. There needs to be some thought gone into what the hourly rate was that you pick.
Andy
Exactly, and you could be in Sydney, you could be in Dubbo, you could be in the Northern Territory, like there’s so many different areas, so you can’t just go off one thing. The one thing we do here at Lifestyle Tradie, we never ever tell someone what they need to charge, but once they do the hourly rate calculator, it actually tells them what they need to charge to make the net profit and everything they need along the way. The thing you gotta remember is you’ve gotta base your hourly rate on your own individual business. No one else because every business is so different. So let’s go back to basics. Think about how you build a quote, for instance, you got time, you got materials, you know, you might have some additional services, margin. This all equals up to a quoted price. So if we actually unpack what this actually means, you know, additional services like plant and equipment, you know, like skip bins, concrete saws, an excavator. It also refers to external contractors. Like you might need an electrician or a plumber or a roofer, or a level two electrician. You know, these are just some of the things. And then, you have fees on these, some of these jobs as well, like council fees. You know, the materials are based separately, and are loaded with a margin. Some people put 10%, 20, 30, 50%. That’s definitely up to you. But then that leads us to talk about time. So time includes like, how long does a job take? Like is it gonna take eight hours for three days, or how long is it gonna take? And then leaving a buffer or a variable. Like a lot of the time, if I quoted a job for two guys for three days, I’d be thinking they can do it in three days. But if something goes wrong, I’m allowed four days. And if they do it in three days, you know what? There’s a really good margin in that and we’ve made some really good money. And if things don’t go right, well, you know what, we’re not gonna make as much. But we’ve still done well. And a lot of the times people times this by the right of a charge of per tradesman, how many tradesmen on the job? But this is where most trade business owners get a little bit unstuck. They use an hourly rate for their tradesman that’s really just too low. You know, I hear all the time, oh, my guys on $40 an hour, so I bill him out at $80 an hour. I make $40 an hour. No, you don’t make $40 an hour. You’re probably losing money.
Ange
Correct.
Andy
Because of all the expenses, you know,
Ange
Super insurances.
Andy
That’s it. Because you gotta remember, we haven’t even talked about the expenses of the business, like marketing, rent, bookkeeping fees, offers, expenses, vehicle maintenance, petrol tolls, insurance like this needs to be included too. It’s all called operating costs, and it all needs to be built into your hourly rate of business to make sure you’ve got the right hourly rate to earn what you deserve for running a business because it doesn’t matter how good your business is, there’s stress, there’s ups and downs and swings and roundabouts and yes, tradies, we need to all stand up and realize we’re gonna make good money.
Ange
Yes, there is something else that needs to be included in your hourly rate, which is like your finance repayments. Maybe you have, you know, vehicle leases, that kind of thing, or equipment leases. Those costs need to actually be included in your hourly rate as well.
Andy
Exactly, and the kicker is you need to load things up to make a margin. You know, we aren’t in business to break even. So if anyone out there, you’re not making enough money. I actually feel for you, because it’s not that you don’t wanna make money, but you sort of built yourself into this hole that the clients you work for, you believe you can’t charge more. But you have to charge more to have the business of your dreams. And this is where, you know, you’ve gotta pay yourself a good wage. You’ve gotta get, you know, direct dividends at the end of the year. Otherwise, realistically, guys, it is not worth running a trade business unless you’re making good money and getting good benefits out of it. Because at times it’s an absolute head. Yeah, isn’t it? We all know this.
Ange
Yes. Well, the profit that you make, so, as we said, making sure that you are paid a wage that reflects your responsibility. You’ve gotta, you’ve gotta equal that to, if you were truthfully to replace yourself, what would you actually pay someone in the market to actually hold your responsibility and your job? So therefore, that’s the wage we would suggest that you need to consider, because the profit that you make in the business is the assistance now for growth, right? So imagine you’re in this startup phase and you’re moving into this growth phase or this scale up phase that we call it. Then if you’ve got intent and a vision for this business to grow, and it means you have to invest in machinery or vehicles or whatever, then you must have profit to ensure that you are capable of doing this and that the cash flow is there to be able to cater.
Andy
I have not come across a business yet that doesn’t make really good profit and is extremely successful. Profit is what you need to spend the money on marketing, buy the equipment, buy everything you need. So we all need be able
Ange
To pay your tradies more money because they’re demanding more money.
Andy
Yeah. And at this time and that day, isn’t it, right? Tradies are just, everyone wants the world, don’t they? You know? And I know some of the smaller guys go, but I can’t pay that. I said, I know you can’t. But the bigger boys can because they charge so much more. And they’ve got the margin to do that.
Ange
Correct.
Andy
So when you’ve got tradies in Sydney now asking 50 to 60 bucks an hour, a truck and a phone, you know the average guy that charges 80, 90 or a hundred, you just can’t afford that. You just can’t.
Ange
Yeah. And that’s why, going back to what you said earlier, Andy, about the formula, That you need to consider for a trade business regardless of the style of your work, whether it’s maintenance or project-based work. Cuz at the end of the day, us as maintenance, if you’re doing upfront pricing, we, it’s basically quoting anyway. Uh, and or project work that is like stuff that might take a few days or maybe a few months or maybe the year like a builder does, it is still built with respect to what you quoted, which was like time plus materials, plus additional services, plus that profit margin equals that quoted price, which is what you put in front of a customer. And where a lot of tradies get undone is the fact that they don’t build in this operating cost of your business. And it’s really important to consider because this is where your hourly rate is important.
Andy
Yeah, exactly. There is something else that needs to be considered as well though trade business owners writing up a quote. They look at a day or or a week and they think, okay, every day we bill out eight hours. But that’s not always the case in some jobs, like if you’re a maintenance style of business, you might bill out six hours or four hours or 10 hours,
Ange
Especially when you drive around a city a lot like our boys do.
Andy
Well some of these guys are out in the country as well. They can drive two hours to get a job. You’ve gotta take all this into play, you know, and you know, and also if you’re a project based business, you are getting your eight hours a day. So the thing that people don’t do is they don’t sort of put buffers in, like they’re not looking at the wet weather or the team’s got covid or they’ve all gone down sick or someone’s taken a sick day, like all these stuff really does bite tradies in the ass, right?
Ange
Yeah.
Andy
And the thing to remember is everything’s not sunshine and rainbows. It just isn’t in business. So we’ve gotta allow for that. But a lot of people are trying to bring their price down to make sure that they win the quote. And you know, when you are playing that game of, ooh, you’re scared if you’re gonna win it, you’re gonna lose. Then you’re just not making the margin you need. It’s the ones that know their pricing, know their price. They’re like, that is my price. And they come back and you say, listen, I’ve been through the figures. I know this quote better than anyone you dealt with. That is the price and that’s a good price and you’re gonna have an amazing product at the end of this job, you’re gonna love us. But what they’re doing over there, I’ve got Buckley’s how they can do it for that price, but you gotta stick to your guns.
Ange
Yes.
Andy
If you are out there and you are competing with Billy bum cracks, then you are gonna be a Billy bum crack too.
Ange
Yeah. And when we have this conversation about time, Andy, this is where this hourly rate calculator is so important because instead of building your quote, Kind of what I class as the bottom up. We actually have to come from the top down, meaning you need to see your business holistically for a year. And start breaking down the fact that, well, there’s 52 weeks in a year. But in actual fact, my team has four weeks of paid annual leave. They’ve got 10 days of paid public holidays. They’re allowed to take 10 days of sick leave. And straight away. It’s not 52 weeks anymore, it’s 44. So have you actually thought about that when you’ve actually built your hourly rate giving consideration that’s the base we haven’t even talked about rainy days for a builder as an example.
Andy
And business goes up and business goes down. Like you’ve gotta look at your business as a whole year to get an hourly rate, you’ve gotta oversee the whole period. There’s no use having an hourly rate that’s good in March, but it’s not good in any other month. You’ve gotta look at your whole year, every single expense that you do over a whole year, and then build your hourly rate off that. And if you haven’t done that, I please, please, please do that.
Ange
And you know what? All these costs combined dialed down to hourly costs then loaded with this profit margin will help you determine what hourly rate you need to charge to make profit for your business. Cuz it’s different from everybody else’s.
Andy
Yeah, and you know what? The shock is real.
Ange
Yeah.
Andy
The shock is real. People see this hourly rate come up and they go, there’s no way I couldn’t charge that. I must have done something wrong. Andy, Ange what has happened? And we go, Hey guys. If you’ve done the formula right, go and see your accountant and see what he says, and then they come back and go, it is real. And we go, we know.
Ange
And they say,
Andy
We know it’s real.
Ange
Oh my God, I’ve been undercharging for years.
Andy
Undercharging for years. No wonder I’ve found business so tough.
Ange
Yes. No wonder I haven’t been making a profit every year that I’ve been in business.
Andy
And there’s a light bulb in their head goes, bing and it snaps and they go, oh my God, I’ve gotta fix this now.
Ange
Exactly.
Andy
And when they do, it’s scary to start charging more, but they realize at the end, two months, three months, six months, a year later, and they’re like, where did all this money come from? I didn’t realize I could charge this.
Ange
Exactly. So I do at this point, just wanna add a bit of a disclaimer and just recommend that you absolutely speak to your accountant before you literally change anything because they do understand your expenses and the pricing within your specific business. So Andy, other than working out your true hourly rate, is there anything else you would recommend to listeners considering when to decide what is the right price to charge?
Andy
Yeah, you do have to have a look at the competitors and to get an understanding, especially when you’re in small towns and small rural areas. You know, you gotta be careful if you are seen. Oh my God, over the top price type of guy. It can really hurt your business, but the fact of the matter is if you do an hourly rate, as we’ve talked about, and it’s your hourly rate and it’s what you need, and you are absolutely freaking out about it, well, you’ve just gotta do one or two things. You either use that hourly rate, or if you don’t think you can charge that, then you’ve got too many expenses. So now you’ve gotta try and cut back your expenses so you can bring the hourly rate down to something you’re comfortable with.
Ange
Yes.
Andy
And that’s a hard gig, but I don’t wanna do that. Well, what do you want me to say?
Ange
Yes and I do wanna preface, it’s not always just about cutting expenses. There are lots of other strategies we can implement to actually fix your gross profit margin, because I think a lot of trade business owners are really inefficient when they’re actually on the tools. I say that respectfully, they just waste time and they don’t understand that each moment, you know, if they’re not watching that really closely, that they’re losing money.
Andy
Yeah, and they jump in their truck and they’re like, I’m really busy. I’m running around quoting all day, but I did this as well. You’re running around earning no money and you’re probably doing a few quotes, but you’re talking to your mates and you go to the local cafe and, and you’re just burning a hole in the pocket of the business.
Ange
That’s right.
Andy
The amount of people that come to me that are struggling, the business owner and I’ve had to make, get ’em to put their hand up and go, oh shit, I’ve gotta change my waste. And we’ve talked a lot about quotes, but what happens when you’re charging by the hour? I remember my company 10 years ago, we were around 88, $90 an hour. We realized we need to charge over a hundred dollars an hour because if you told a customer you’ll charge over a hundred dollars an hour back, then they would fall off their chair.
Ange
Totally.
Andy
Now I know there’s guys out there now charging a hundred twenty, a hundred thirty, a hundred forty an hour and saying the hourly rate, and they’re getting around that and it’s working for them at the moment. But when your hourly rate starts going way too high, you can’t be telling the customers what your hourly rate is. And that’s why you’ve gotta do an upfront style of pricing. Um, and you know, it’s like breaking your invoices to hourly rates, labor and material, but customers just go through these invoices and pick at the shreds. So you’ve gotta be smart about how you do this, and it does really come down to the customers that you’re working with. Because I know a lot of you might use stratas and builders and real estates, and they’re looking at your pricing and they might be comparing your pricing with other tradies out there. But at the end of the day, you are in business to make money and what we do a lot with a lot of our guys is this A, B, C, and D customers. We grade our customers and the best businesses that we work with, they only have A and B customers. Maybe there’s a couple of C’s in there, but not many. But when I talk to people before they come to us, they’ve got so many C and D customers. They haven’t got the quality of customers they need to make the money to get the cash flow to make their business worthwhile.
Ange
Yes. Well, the C and D customers are causing them a lot of stress.
Andy
Exactly.
Ange
And that’s the challenge.
Andy
And you’re making most of your money out of the A and B customers. And the C and D customers, as you just said. They’re the ones that are doing your head in.
Ange
And they’re also taking up all your time. Oh, so you are actually really busy. Yeah. So you are racing to jobs and not realizing that you are trying to keep them happy and fulfill their expectations, but you are doing breakeven work or you know, no profit jobs as an example.
Andy
And it’s hard to get the money out of them at the end of the job as well. And then, and then if, if things are going bad there and they’re, oh, we just can’t pay you this month because I’m a little bit strapped for cash. Mate, that’s my money, dude. Get I bank, dude. Yeah. And then all of a sudden us tradies are at the bank like, nah, you can shove that.
Ange
Yeah. So the good question to ask is, do you want to continue doing unprofitable work? Right?
Andy
I think the answer is no way.
Ange
But I reckon a lot of trade business owners do exactly that because they don’t know any different.
Andy
Well, when you get your head stuck in the sand, of course they do that. Cause I just don’t understand, you know, when we have these discussions, With these guys and their pricing needs to go up, there’s a whole strategy that we use with them to help them do that. You can’t just throw all your prices up and that’s it, and you can all get stuff because all of a sudden you might not have any work.
Ange
Correct.
Andy
So there’s a strategy around what you do.
Ange
Yes. So just because we’re talking about this specifically on this podcast, there are lots of different factors at play. Uh, and each business faces totally different scenarios that need conversation.
Andy
And I know today we’re talking a lot about hourly rate, but the most important thing to remember here is your customers are buying you. And the confidence that you have in delivering the explanation of what you do and how you’re gonna solve their problem because they’re buying you and they trust you, offer incredible customer service. They are gonna go with you hands down.
Ange
All great points, Andy, but the bottom line is you don’t wanna be busy for busy’s sake. You wanna be busy doing profitable work.
Andy
Exactly. There’s always a method to our madness.
Ange
Yes, there is. So listeners, we’ve been working with trade business owners for over 13 years to help get this stuff right. And you know what? It’s perhaps time to get off your butt and start making the profit that you deserve. If you’re unsure what hourly rate you should be charging to ensure that you are making profit every day, then can I suggest you get in contact with us today, have a one-on-one chat with Andy about your personal situation, and discover how we can help you set you on the right path once and for all.
Andy
Yeah, and don’t sit back on your hands in the map and go, yeah, yeah. I’ll do that one day. The right time to start making profit is now!
Ange
And that’s why you started your trade business in the first place.
Andy
A hundred percent baby.
Ange
Alright then with that said, I reckon it’s time to say see you. Bye everyone.
Andy
Catch you next week.
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