How To Understand Your Numbers
When we interviewed Dan Pollard, CEO of Fergus he had a lot to say on the topic of numbers, namely that not knowing what his margins were is what undid his business in his early 20s. He said “knowing your gross margin and understanding cash flow makes or breaks your trades business”
The numbers; the profit, the margins, the profit and loss, your profitability are all parts of the business that we know are important, are vital to understand, yet a lot of people shy away from them. Avoid them. Might not understand them correctly.
It’s a topic I talk about extensively. Maybe even a bit excessively but I want trades business owners to understand that you can understand these terms and you can understand how to utilise them to run a profitable business.
So I had a chat with Dan Pollard CEO of Fergus and got his opinion on this subject and we had very similar views on the matter, not surprisingly.
Let’s start with margins.
One of the topics I am repeatedly drilling into my clients is that your margins NEED to cover labour, your subcontractors as well as materials for the job. You need to charge the right prices so you can make this margin and in turn make a proper gross margin.
As your gross margin needs to cover ALL your overheads. All the costs of running the business – devices that break, the rainy days where you can’t work, the delays on a big job because the head contractor couldn’t get his finger out in time – all that. So when these occurrences do inevitably happen you have the cash in the bank to get by.
I get a lot of builders doing things like putting 10% margin on and I ask ‘what are you doing man’ and their response is ‘you don’t understand, Jon’. They always say, ‘my market won’t stand it’ and my response is to tell them to shut up as the market will stand it, can stand it and does stand it. All of my builder clients charge above a 20% margin and they don’t lose work, no customer turns around to them and says, no. It doesn’t happen.
“There’s one thing I’m actually quite serious about, Jon. The one thing I’ve learned from all this is that most tradies actually need coaching to understand gross margin.” – Dan Pollard, CEO of Fergus.
Charging healthy margins is how you run a business profitability and properly. And if you don’t do this you can run your business into the ground which is why Dan Pollard said his first trades business venture in his 20s didn’t go well. He told me he didn’t understand what a gross margin was until he was about 28 and when he did discover the term and what it meant “it was like a light bulb moment”.
So what is gross margin?
Gross margin is the difference between what it costs you to do a job (so your labour, materials and subcontractors) and the sale price.
So you pay for materials, you pay for your people to do the job, you pay for the subcontractors then add the gross margin to that and this equals the price of the job. Gross margin is expressed as a percentage.
An example would be:
A job is $10,000. Materials cost you $4000 and wages $3000. So your gross profit would be $3000.
Why? $3000 + $4000 = $7000
And $10,000 – $7000 = $3000 (gross profit) or 30% (gross margin).
Now the reason this is important is that the gross margin has to cover the costs of running the business; all your overheads as well as make you a profit which is why it is INTEGRAL to have a healthy margin.
Cash flow is what makes a business successful; it’s what drives a business forward and keeps it moving. And by cash flow, I mean invoicing daily – every day after every job. Not intermittently, not when the pile gets too big but every, damn, day.
Why – because if your cash flow dries up, the short answer is you’re stuffed, you have to pull money from somewhere (who knows where) to cover the costs of your business.
Cash flow ties nicely into the Theory of Constraints, a management principle that Dan Pollard mentioned when we discussed cash flow. The Theory of Constraints is a methodology for identifying the most important limiting factor (i.e. cash flow) that stands in the way of achieving the goal and systematically improving the constraint so it is no longer a limiting factor.
So in regards to trades businesses (many businesses), the limiting factor is Cash Flow, and what bottlenecks cash flow? Invoicing.
So I’ll repeat what I said above; invoicing on time is crucial to a trades business, as ‘nothing can move faster than the slowest thing in a business’ something Dan Pollard said which explained it so simply, so you need to identify what factor in your business is preventing you from invoicing and unplugging the bottleneck of cash flow.
Dan Pollard, CEO of Fergus can attest to the fact that when you own and run your own trade business you need to understand the numbers; your margins, your cash flow. He’s had 3 different trade business ventures throughout his years and two of those three fell into the ground; why? Well, one was because he hadn’t done his accounts properly and hadn’t paid his taxes which caught up to him and left him with the weight of a $60k bill.
However, he was young, just 22 and he was burnt out (emotionally and physically) from the pressure of running a business. So he started again at 28 and this time there was no tax trouble but the other elements of business were ever-present; the pressure of cash flow, the constant stream of invoicing, scheduling, quoting, and managing jobs, keeping everybody happy was all too much for Dan. Too much stress. So he stopped.
And started again a third time; which went well and he built up a successful plumbing business. What he took away from this was that business is scientific and there are rules to this science, rules that need to be followed.
These rules are what we mentioned above; understanding and utilising your numbers and making systems around managing them.
It’s as simple as that.
Want help doing it? Chat to me.
There are four ways you can engage with me:
1. Subscribe to these emails and get them once a week in your inbox so you never miss a video from me.
2. Join the Trades Business Toolshed Facebook Group where you can watch these videos, ask me questions or talk to your peers.
3. Attend my next Tradie Profit Webinar.
4. Book yourself a 10-minute chat with me. We’ll talk about whether coaching is right for you now and if it is, we’ll go further into the process before you have to make your mind up.
See you later.