If you have a team of one or thousands, cashflow is an essential key to having a successful business. It’s also an area a lot of tradies struggle with. Next Level Tradie business coach Daniel Fitzpatrick highlights five key strategies you need to get cashflow right
Studies from ANZ Bank showed that, while 82% of small and medium-sized enterprises fail due to cashflow issues, a stunning 69% of these businesses were profitable.
In other words, 69% of those companies failed – not because they were making losses, but because they ran out of money to pay suppliers, wages, and other expenses needed to keep going. With better cashflow, many of those businesses likely would have survived.
Doctors know that without oxygen, water and food, you cannot survive. Without oxygen, you will last around three minutes, without water for three days and without food, three weeks. It doesn’t matter how fit or healthy you are now – without these essentials, you will not survive.
Cash is the oxygen that keeps your business going. Not convinced? How many days will your business last without cash in the bank?
Here are five proven cashflow strategies all tradies need to keep your bank account full and stress levels low.
1. Watch the canary in your coal mine
Coal miners would always take a caged canary into the mine to see if it was safe. This was their early warning sign. If there was a lack of oxygen, and/or dangerous gases, the canary was the first one to be affected. If the canary died or looked unwell, they would drop tools and act immediately while there was still time.
With cashflow in your business, there are also early warning signs. The canary for you could be that you:
Seem to be behind with bills every single week.
Have too many overdue accounts.
Receive a warning letter from the IRD.
These are all signs that need immediate attention. It might be making an arrangement with the IRD, chasing overdue invoices, or getting more work. But don't leave it – act now before cash flow gets out of control!
Look for the warning signs early! We always equip our clients with our tradie dashboard, which gives a snapshot of each important part of the business and identifies the early warning signs where cashflow will be affected and needs attention.
2. Ensure your rhythm supports your cashflow
In music, the rhythm is defined as “the underlying structure that all the other elements of music are held together by”. In your business, you also have a rhythm for cashflow. But is it one that supports or hinders your business?
Are you always scrambling to pay wages every month and chasing the next dollar to stay ahead for another month? Or are you waking up at 3am in the morning, realising that you forgot that GST is due tomorrow?
Or is it a symphony, where your business is predictable, with a steady flow of cash to pay all the bills and then some? Where large jobs have payment terms structured with cash flow in mind, invoices are always sent out on time, a team member regularly follows up payments, and there is a healthy cash buffer in both your cheque and tax accounts.
With the right systems in place, key team members taking responsibility, and regular check-in points, you can have a predictable rhythm with much less stress and a healthy cash buffer.
3. The numbers are your guide
The numbers will show you how much cash you have available and what is required in the future.
You should be watching your cash position (the amount left if you were to collect all the money owed and pay everyone you owe money to), cashflow forecast (what your bank account is going to look like over the next few weeks/months), overdues, and profit and loss (are you making money or digging a hole?).
Be careful to make sure your numbers are accurate. I see a lot of tradies, who have profit figures that look great one month and then terrible the next. This can be a timing issue – when deposits are taken for invoicing stages on larger projects – which can skew your figures big time. We usually suggest a work-in-progress calculation added to the profit and loss to allow for this.
One of the first things I always do when working with clients is check if their numbers are correct and show them which ones are most important. More than 50% of the time, their numbers are wrong.
Wrong information leads to bad decisions. You don’t want to be buying that new ute with cash and then discovering there is not enough to pay the taxes due next month.
4. Make sure you have the right map
Now that you have the numbers, identify your location and where you want to go. A map will show the way.
If you’re travelling from Auckland to Dunedin by car, and you only have a map of Canada, that's not going to help. Many tradies are using the wrong map or no map at all for their cash flow.
One of my clients had plenty of work on but was worried about increasing the team, even though the work was profitable. The problem is, they were using the old map from last time, which was ‘grab anyone who is available and hope it works out’.
But this time was different because they had the right map now, which was geared towards optimising cashflow. It included:
A system for attracting and identifying the right team members.
A cashflow forecast, so there are no surprises when payroll comes around.
A knowledge of the best and most profitable jobs.
A cash buffer for the first few weeks, while the new team members got up to speed.
The right map will guide you on the direct path, without all the wrong detours in between.
5. Don’t let your emotions tank your bank account
Do you go into a tailspin every morning when you check the bank account and get crazy frustrated at having to follow up with the late payers yet again? That voice starts playing in your head: “It's just not fair… we work so hard… why us….?”
Or maybe you know you need to get into the office and do that invoicing you have been putting off all month, but decide to stay on the tools this afternoon instead. Maybe you get home and argue with your partner (who pays the bills) about why there is no money in the account and then feel guilty for the rest of the night that you still haven't done the invoicing.
Procrastination kills momentum, splits your focus, and creates emotional rather than strategic thinking.
The bank account doesn't care how you feel or how hard you work – ultimately, it’s just a reflection of the choices (good and bad) you have made in the past, the systems you have put in place for collection, the clients you decided to work with, the overdraft facility you arranged, or the types of jobs you took on.
Trades business coach Daniel Fitzpatrick has been helping tradies increase profits and win back their weekends since 2010.
Need some help to get your team performing at the highest level? Book a free strategy chat with Next Level Tradie director Daniel Fitzpatrick here: nextleveltradie.co.nz/nextstep