Rob runs a busy electrical contracting business on the Gold Coast. He has a team of 6. Three qualified electricians and three apprentices. He pairs up each qualified electrician with an apprentice and puts each team into one of their three vans. He’s worked hard to build up the three teams and feel pleased to have accomplished this over the last 18 months as this allows him to get off the tools, look for and quote up new work.
Sounds good, right?
Rob has not invested a lot into the finance and accounting function of his business. He sees it as an overhead, and overheads should be minimised. Accordingly, his accountant just does the basics. End of financial year tax work and the BAS’s. The client accountant relationship is purely transactional.
He feels he would like more from his accountant, but wants to keep cost low. Overall he feels he is getting what he is paying for.
Rob is focussed on building his business. His presumption is if he wins more work, he’ll make more money. That would be nice as cashflow is always a bit ordinary. He’s always got enough to pay wages, rent, van repayments and the ATO, but not enough to take out a juicy dividend. He’d love to be able to take out $20k every quarter and invest that money, but the cashflow’s just not there.
At dinner with his wife Nat over the weekend he vents his cashflow frustrations. They both reach the same conclusion – they need to spend money on digital marketing.
More work and more money.
Next Monday a $2750 p/m digital marketing package is signed. A $33,000 annual commitment signed up to without too much hesitation.
Exciting times. Accept one thing – the cause of the cashflow problems is not revenue, but rather proper investment in business financial planning.
The accountant tells Rob his business makes a 2% operating profit. Which means on $2.5 million of revenue, $50,000 profit is generated. Income minus expenses. However, when it comes to cashflow the accountant shows Rob that after paying its liabilities; van repayments, director drawings and ATO payment plan there is an annual $20,000 cashflow deficit. Ouch!
Running a successful business means successfully optimising all main functions of your business: operations, sales & marketing, accounting & finance. Underinvesting in one area lead to that area causing the most grief. For example, poor operations will mean higher call-backs, lower levels of customer satisfaction and lower numbers of referrals.
Underinvesting in accounting & finance may mean poor profitability and cashflow but good workmanship and new work queuing at the door. Neither of these two examples is ideal.
A thorough analysis of Rob’s business uncovers massive financial issues. For a start, the hourly charge out rate for the electricians and apprentices has not been calculated correctly – it omits annual leave and sick leave from the calculation. The mark-up percentage on materials is much lower than the 40% target. Call-backs on jobs is accepted as a normal part of the job and there are multiple call backs every week, killing time and money. Job costing is ad-hoc, staff often forget to add their timesheets onto the jobs. Rob also explains that job scheduling lacks proper planning, often a team finishes one job early and the next job is 45 minutes across town.
Spending $33K on marketing may increase business revenue, but doubtful it will solve the business profitability and cashflow issues. Pushing more work through a financially disorganised machine will generate further lousy financial results.
The most profitable trades businesses are also the most experienced trades businesses, and they don’t skimp when it comes to the numbers. Their charge-out rates are calculated correctly, mark-up percentage is applied consistently, their scheduling is organised to minimise travel, they have proper job costing methods which accurately track job profitability. Additionally, they have proactive measures in place to reduce the number of call-backs on jobs. Their trusted adviser is helping them to make the right financial steps.
In conclusion, while marketing efforts may help drive topline growth by attracting new customers and increasing revenue, it is equally important to nail down your business numbers with proper accounting practices to ensure growth of bottom-line profitability.
Written by
Lyndon Russell FIPA FFA
Director – Next Level Accountants
Author of Amazon #1 best-selling book ‘Know Your Numbers’ the no nonsense guide to operating a profitable and enjoyable trades business.
