Cash Flow Episode 2: It’s Important To Know Your Numbers
Click on the video to watch it (Runtime 6 minutes).
If you’d rather read the transcript it’s here below.
Cash Flow Episode 2. Knowing Your Numbers.
This is Episode 2 in the 4 Episode Cash Flow series. Episode 1 was about how better margins and better deal flow helps with your cash flow:
- High prices, lower costs
- Charging more, paying less
And the point I made was I think you can do it. Don’t be scared. Go ahead and do it.
I made you a worksheet to use, to download, to commit yourself to taking some action because of course that’s the secret to business coaching. The way to get different results is to do something different. Until you do something new, nothing changes.
Today I’m talking about knowing your numbers and what lots of trades business owners do as they prepare a quote is they submit it and if they win the job, you get over it. That’s kind of where it ends. You’re too busy. You’ve got stuff to do. You don’t go and check whether what you allowed for in terms of labor was watched or it got used, whether the amount of materials that got used was what you had allowed. The only check that really happens is whether there’s money in the bank at the end of the month or the end of the year.
Now, it’s important to check! The earlier you find the problem that you’re not quoting enough or your people are taking too long or whatever else, the sooner you can fix it and the less you’re going to lose projects like houses or pools or fences or whatever. It’s a matter of matching the materials, invoices, and subcontractor invoices and your guy’s timesheets to the quote at the end of the job. “I allowed these many hours for this part of the job. It’s what actually happened.” You can call it reconciling.
Do you do it? – It’s my question to you because of course, you should.
Check Whether Jobs Are Profitable
Here’s a story… I once spent some time bullying a good client of mine to do this once. He resisted and resisted because he couldn’t be bothered. He was too busy and I think he was slightly scared of what he was going to find.
Now, I pushed him because we needed to know if he wasn’t making much money. And he did it and he called me to say, “I’ve been under quoting on roof trusses on this last job. I quoted 10 days, they’ve taken $14,000 as a team. It cost me $13,000.”
He was out-of-pocket $13,000 and he wouldn’t have known if he hadn’t done this checking. It happens. He’s a builder with 30 years of experience, he’s not an idiot. These things happen.
It’s important to check your numbers. You’re going to make mistakes, things are going to go wrong. And like I’ve said, the sooner you find the problem, seeing you can take action and fix it, then the smaller your losses are going to be.
If you do smaller jobs, checking everyone might be painful, or it might not. You might have the capacity to do it. But if there are too many, spot check them. Do some of them at least. And if you’re not making the money you thought you’re making like I said, you’re either quoting wrong, or your people are doing it wrong. Go and find out and fix it up.
Recommended Reading: Cash Flow Episode 1: How To Have Better Margins In Your Trades Business
If you want me to help you, of course, give me a call and we’ll talk about what you can do differently. If you worry about having to charge more, if it’s quoting, that’s the problem here, don’t be because it’s amazing how strong and confident you feel if you realize that a cheaper price makes you no money. It’s real easy to say, ‘No’ if you know that cheaper makes you no money. And if you use a job management tool or a project management tool, these things help you. It doesn’t have to be a manual process. If you invest the time and the effort in those systems, this part of the process is much easier.
Check Your Assumptions Going In
So, we’ve covered checking your profits coming out of the jobs, that’s a very important process. But now let’s have a think about understanding your costs going in as well. I take lots of my clients through an exercise where we work out how much each employee or subcontractor actually costs and it’s more than you think. You pay $30 an hour, you pay your full-timers, 52 weeks a year. But they get holidays. They get public holidays. They get sick days.
Nobody gets charged out for the full 40 hours a week either. There’s:
- Time filling vans
- Time driving
- Time driving off to buy materials
- Time cleaning
There are all sorts of stuff. Your average tradie can be charged about 70% of the time. The rest of the time you’re paying them but you’re not charging for them. The number in your business will be different from what type of business you are. I’ve heard 90% and I’ve heard less than 70%. You need to do your own homework and understand the numbers in your business.
This is equally true for subcontractors, unless, they’re paid on a quote, which is very different if you’re paying them by the hour.
- Understand what it is for your business
- Check your timesheets
- How many hours does each person get charged to a job versus how many hours do you have to pay them for?
- You can do that every day. You can do that every week. You do that over a month.
Understand this and then you factor it into your pricing structure. I made a video called the true cost of employment. You can go through that there.
And one more point. On top of your labor costs and your materials cost, your jobs need to bring in enough money to cover your overheads as well. So calculate what you spend on overheads over a year divided by the number of days of each trade (220 is the normal in a year) and add that to your labor and materials costs for a day and make sure it’s covered in the profit.
(Overheads spend in a year / No. of days of each trade) + Labor and materials costs for a day
This is really important stuff. I’ll get too complicated if I dig much deeper into it. This is only a Toolbox Tip after all. So if you want to explore it in more detail and you want some help with your calculations, book a 10-minute chat. There’s a link below and I’ll try and help you the best as I can.
I’m Jon from Small Fish Business Coaching. Cash flow is important. We’ve covered margins last week, now we’ve covered knowing whether your margins are what you thought they were. Know them going into a job, and check that you were right coming out of the job as well.
See you later.