No matter your trade, or how long you’ve been in business…
There is one fundamental question that every successful trade business owner should have sitting at the front of their mind…
And that question is…
How can I make more cash?
Because revenue is vanity, profit is sanity, and cash is reality.
And this is very important to understand, because there is a BIG difference between profit, and cash.
Profit and cash are NOT the same thing…
I don’t care how big or small your company is, if you’re just staring at your profit and loss statement every month, dancing up and down because sales are going up, just assuming that your cash position is also improving with every sale…
Then you’ve got a big problem.
Because the profit and loss statement tells us, how much profit we’re making on paper…
It is your paper-based profit… NOT cash in the bank.
And this can be confusing sometimes… But here’s how it works.
You send an invoice.
Sales go up on your profit and loss…
But that sale only ever becomes cash, once the money exchanges hands.
You’ve actually got to collect it.
If you’re not collecting cash, it doesn’t matter how many sales you’re making…
Your cash position isn’t improving…
So don’t get caught up in the trap of thinking that the only way to improve your cash flow is to sell more…
Because locking in more sales revenue doesn’t automatically dump more cash into your bank account…
That’s just not how it works.
And on top of that, collecting cash is really just step one…
How does cash flow through your business?
How well is it actually managed?
How is it being spent?
Because this is critical to understand.
There have been plenty of great contractors out there that were highly profitable on paper – but still went under because of a cash problem.
And often times, they don't even know WHY, or if they do, by the time they figure out what's going on it's already too late...
And I’m sure some of you listening might be able to relate to this situation, where you’re really busy, you’re making a whole bunch of sales, you feel like you’re running around all the time… but you never seem to have enough cash in the bank…
Sales are up… but cash is getting tighter and tighter…
So, this brings us back to the profit and loss…
As business owners, we typically love to look at our profit and loss statement, because it’s easy to understand…
And many people choose to avoid the balance sheet, because it’s complicated…
But the balance sheet is equally as important as the profit and loss statement when it comes to understanding and improving… our cash position.
To make more cash… you need to understand how to increase your profit and decrease your working capital…. that’s the money it takes to run your business.
To increase your profit, we discuss price, volume, margins, and every item of overheads – items all found on the profit and loss…
To decrease working capital, we discuss accounts receivables, inventory or works in progress, any loan facilities, and accounts payables… items all found on the balance sheet.
So, what does this tell us?
Well for every trade business, there are only 7 key levers that you need to focus on to improve your profit, cash, and overall business value.
Right now, I’m going to talk about just one of those, accounts receivables (which is just a fancy word for money owed to us from our customers) and I’m going to give you 5 strategies that you can actually use to improve this lever in your own business…
1. Communicate price and payment terms upfront:
You’ve got to talk numbers upfront, period! Hourly rate, quoted price, inclusions/exclusions, whatever it is, you need to have that conversation up front… and you need to communicate clearly what your payment terms are… this is all about educating our customers how we do business and what we expect from them…
2. Get approval and a written signature before starting ANY works:
You shouldn’t be doing ANY work… until you have approval and a written signature first… and this goes for variations too! If you’re doing any work without getting written acceptance first, you are literally shooting yourself in the foot…
We hear too many horror stories of contractors completing major works, multiple variations, and everything without having a signed contract in place… only to have the client refuse to pay once everything is finished. So be smart about this one and cover your arse...
3. Get a deposit:
One of the best ways that you can manage your receivables and protect your cash position is to get a deposit up front prior to starting work… Now, this isn’t always possible depending on what you do… but if it’s a larger project, take progress payments. Whatever it is… aim to reduce the amount you need to collect from the customer at the end of the job.
4. Take payment on completion:
Your goal should be to collect payment on completion, and if that’s not possible… shorten your payment terms, and get them down to a 7-day account!
You might not always get paid within 7 days but shortening them and chasing up after the 7 days will more than likely lead to faster payment! And if all your work is with builders with low margins and 60-day payment terms… then you need to find other customer groups! Diversify your client base, and protect your cash…
5. Follow up relentlessly:
You need to have an effective system in place that you can deploy to actually follow up and chase your money… you’ve already done the work… you deserve to be paid!
The best way to do this is through leveraging accounting software like Xero for example, knowing who owes you money and how much is as simple as clicking a button and generating a report – it’s a three second task to get this information from your business!
And if you start with finding out who owes you money, then you can determine why, and then you can follow up effectively!
Now a bonus tip…
INVOICE your customers as soon as possible!!
So many contractors aren’t invoicing quick enough… the faster you invoice, the faster you get paid, okay!?
We need to train our customers to pay on our terms.
So stay on top of this and aim to reduce your accounts receivables…
For every day that you collect sooner…
Every day that you reduce your accounts receivables…
Your cash position will skyrocket.
So, be intentional with what you’re doing, and make sure you stay on top of your accounts receivables… and proactively manage your cash…
And if you don’t know how to do that, get in touch with our team because I’d be happy to help you…
If you're an electrician, plumber, painter, carpenter, or any other trade business owner who is looking for an accountant who actually cares about your business - click here to learn more!
