There are always warning signs in business before trouble appears but, unless you actively look for them, they can take you by surprise. Next Level Tradie Daniel Fitzpatrick goes through a few common warnings you should be on the lookout for!
In military training, they teach people how to look for warning signs that could affect the mission. They call this ‘situational awareness’. Potential threats might include the enemy’s position, the current environment, the shape individuals are in mentally or physically, or their position if things went wrong – and what the next move would be.
It’s the same in trades businesses – there are always warning signs when you are heading for trouble.
Having personally coached hundreds of trades businesses over the past 12 years, I have been able to identify nine crucial warning signs. Deal with these early and the chances of success improve dramatically. But left too long, they can cause major problems at best and failure at worst.
Early warning signs
These usually start small but will become bigger over time if not dealt with. So, tackle them early, and your business will stay out of trouble further down the line.
1. Bank account is often at low tide
This is the one that everyone pays attention to. If I have money in the bank then I must be ok, right?
Not necessarily. If the bank account looks good but you’ve just taken some large deposits on jobs or there are suppliers’ bills that have not been paid for yet, then things will look better than they are.
However, if the bank account always seems to be low and you are constantly scrambling for money, then that’s a bad sign too.
2. Owners not getting paid
Not being able to pay yourself a regular wage as the owner is not good. Time spent in the business either on the tools or organising should be costed into the jobs, so the money is there. Too many trades business owners in early years are making less than if they were working for someone else, but there should be enough for a wage and a healthy profit as well!
The same applies to your partner when they are working in the business. If cashflow can’t support their wage, it’s a sign that you are just not making enough for a sustainable business.
3. Confused by the numbers
It’s essential that the numbers you see are accurate and being checked at least monthly. It’s easy to fix one month but hard to fix 12.
I still see a lot of tradies’ financials that show incorrect margins because wages or other direct costs are coded as expenses rather than direct costs.
If you are finding that your profit and loss shows large profits one month then big losses the next, even though not much else has changed in the business, it’s likely you are not including ‘work in progress’, which takes into account deposits on jobs or costs incurred that can’t be billed yet.
Not watching the numbers or using inaccurate figures is like flying a Boeing 747 with no instruments, while your copilot is yelling instructions as they are looking out the window. Dangerous!
4. Going in different directions
Business owners or the team pulling in different directions is bad news! This could involve owners being out of alignment on the big issues or a clash between management and staff.
I am not talking about the odd disagreement when looking for the best solution to a problem. That’s healthy and challenges wrong assumptions. But when there are core issues that can’t be resolved, deep-seated family disagreements, or frustrated team members working against the company’s objectives, it turns into a toxic environment that needs to be cleaned up!
5. Discounting when things get quiet
If work is a little thin on the ground, it’s tempting to discount jobs to keep the team going. But how low is too low? A mistake I see a lot is people discounting to get that big job and then later discovering they have spent the past six months breaking even or losing money on it.
Big jobs usually have a few surprises and it doesn’t take long for extra hours to add up. A builder I worked with told me at our first session that he had completed an $800,000 job and made nothing of it. That doesn’t happen anymore.
Discounting margins to get the work combined with growth is a slippery slope. You won’t really know how profitable the job was until the end, so a buffer is essential. Larger companies can lose a lot of money here and may not realise until it’s too late.
6. Collecting too many barnacles
If jobs are consistently taking longer than they should, this will be eating away at your margins. Similarly, you could have clients who keep complaining about the price, trying to get something extra for nothing.
Like barnacles on the bottom of a boat, left long enough, they accumulate, slowing momentum. Over the years, they will also strip away the paint and water will erode the metal. Too many barnacles will do this to your business, too.
Late warning signs
Late warning signs are much harder to fix. At this point, the business is in intensive care and requires immediate intervention to survive.
Cashflow will be bad and it is likely that losses have been accumulating for years. Time is running out!
7. Constantly being chased by suppliers
One crucial warning sign is when suppliers are chasing you for money that is significantly overdue. They may even have put you on stop credit. Your front desk could be hesitant to answer the phone in case it’s another creditor asking for money they haven’t got, and then you get stuck in a vicious cycle of payment arrangements being made, before being broken, which erodes credibility further.
Another problem area is when you get stuck in the loop of paying for old jobs with new money from current jobs. Robbing Peter to pay Paul, whoever is yelling the loudest might get something, while jobs are constantly delayed, as materials aren’t available to finish the work.
8. Employees not getting paid on time
Not enough money for wages some weeks can lead to pay runs being delayed. The result is lots of mistakes and callbacks on jobs, as employees are no longer invested. Not paying your staff on time can lead to serious consequences!
At this point, the team has lost confidence in the business and individuals are likely applying for more secure jobs. Some have already left and there is a lot of talk around town that the business is in trouble. If you’re in this stage, you need expert help and fast!
9. Legal
Owing a lot of overdue money to suppliers and the IRD is a serious issue. Another problem you could face is that one or more creditors have lost patience and have taken legal action against the company to get paid, which results in accumulating costs and lawyers' involvement, which adds even more expense.
The reality is that at some stage, every trade business will experience some of the early warning signs in their business. This could be working though a small cashflow issue with a supplier extending payment terms, or making an arrangement with the IRD to pay the GST this month.
But if there is a cluster of these signs, or they are happening often, then act early! They are much easier to fix now than later.
Even at these late stages, the business can sometimes be turned around, depending on how big the deficit is and if there is enough profitable work to trade out of it.
However, this often involves convincing lawyers, creditors, staff and the IRD to back your plan, which can be a tough sell.
I have coached companies, who have traded out of these final stages, but sometimes it’s just too late and the hole is too big. Better to deal with the warning signs early – it’s way less stressful and you’ve got much better odds of success.
If you recognise these warning signs in your business and want to get ahead of them, then book a free business check-up and let’s look at the numbers together nextleveltradie.co.nz/nextstep
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