Why most trade business gobble cash

How you can turn any trade business into a cash flow machine.

If you would like to know a hidden way to quickly increase the cash flow in your business that even your accountant won’t tell you, this post will show you how.

One of the biggest problems I see among trade business owners ( An Australian friend of mine calls them “Tradies”) is that all they want to do is increase their sales because they think, (heck, they’ve been told), that this is the easiest way to grow their business and make more money.  When, in reality, there is cash hidden everywhere in their business.  Right in plain sight, yet they can’t see it because they aren’t trained for it.  Yet.

They think that all they just need to get more sales and more jobs, and things would be better.  Then they could work less hours, spend more time with their family, not miss out on their kid’s dance recitals or games.  They feel that they have no money, no control and no freedom.

In fact, nothing could be further from the truth.  Sales is just one part of the big picture.

If you’re like many other trade business owners and feel that it’s sales that drive everything, understand that it’s not your fault.  Even high level organizations, like Entrepreneur’s Organization say you have to have a million dollars to become a member.  They don’t say anything about profit or cash flow.  They’re making the same mistake too!

There’s a smarter way to higher profits and more cash in the bank.  It’s just three simple steps.

Turn your trash into cash 

More often, I’ve found the solution is to start by finding and understanding all the costs and numbers in the business.  

Specifically, around waste and how much material and labor is being tossed in the dump. 

Often you have to put on the brakes, play defense and review everything. 

Take Tom, a general contractor. 

When Tom came to me, he had a similar problem.

He said, “I’m working more hours than I ever have before.  But it doesn’t seem to matter much.  No matter how many hours and people I throw on a project, I’m not making any more money than I did before.  How can I get my sales up?”

After analyzing his situation, it became clear that Tom was spending more on materials and wages than his competition on similar jobs.  When we looked at why, it eventually became clear that his team wasn’t being careful about measuring and using their materials.  You know the old but true saying; “Measure twice but cut once”.   Well, they were often measuring and cutting.  Mistake.  Measuring and cut again.  That caused two problems.  One was the wasted materials that went straight to the dump.  The other was higher wages from guys sitting there waiting to get the new materials which delayed completing the job.

Tom was asking me to help him raise his prices, but that would initially made him less competitive.  We were eventually able to do that, but what made the biggest and quickest impact on his business was understanding on what his costs were and which ones we could completely eliminate and which we could greatly reduce by concentrating on reducing wastage.  By putting on the brakes in his business.

In just 12 months, Tom was blown away to discover that there was an extra $50,000 in his bank account.  In fact, he was even working fewer hours and able to spend more time with his family because he began “playing defense” and was able to earn more money and didn’t have to hustle for those extra jobs that were generally not profitable, just to pay the bills.

Your bank lies!

One of the biggest mistakes that tradespeople make is believing that the money in their bank account is actually theirs!  More often than not that money is required for materials to run the business and the money required come tax time.

This can lead to a feast and famine situation where sometimes you have lots of money other times you’re short and have to spend the next 5 years paying back the tax man.

Now, I’m not saying that no money is yours. Just that I’m constantly surprised to see just how many trade business owners treat their bank account as a personal savings account only to be surprised by the bills that will be rolling in and that they will have to spend the next months or years scrambling to pay off.  They need to realize that the cash in their bank account not only isn’t all theirs, but there are going to be times when they might have more money in their account that ever before, but they’re actually going broke.

The solution to this is the war chest.

How do I know?  Because that was me! 

I should have learned my lesson from watching my Dad. 

As a general contractor, he had all the same problems.  Working long hours, employees, material costs, taxes and cash flow.  Knowing what my father went through is one reason that I didn’t go into the trades although I was very interested in it.  But I ended up with an accounting business instead.

As an accountant, I was great at following all the traditional rules.  I knew I make a nice profit last year so that cash in the bank should have been mine.  Except for the fact, very similar to the trades, we have seasonal periods where money might not be coming in until sometime in the future.  So using traditional accounting won’t tell us that we’re about to experience a massive cash flow shortage.

It was a cold, wet and rainy day in Southern California when I sat down at my desk and pulled out my bills.  I’d been in business for three years and had done fine.  But that day, looking at the numbers, reality hit me like a sledgehammer between my eyes.  Thousands of dollars in bills and not enough money to pay them because it would be months before tax season revenues started to come in.

I was sick to my stomach.  I had stumbled right into the same problems my dad had. 

I’m an accountant and here I was, dead broke!

And I still had to go home and tell me wife that we were going to have to cut all expenses for our improving life style and I was going to have to spend ridiculous hours hustling just to make enough money to keep the lights on.  Or I’d have to admit failure and go get a job.  A regular J.O.B.  Not to mention all the clients I’d be letting down.

Luckily, some deals closed, and we barely managed to squeak through.  But I vowed never to let that happen to me again.

Once you bring in that bit of additional profit, it allows you to focus on the next major step in getting off that trade hamster wheel and that is building your war chest.

I immediately set some strategies in place to recognize that all the money coming in wasn’t mine.  It was needed for expenses in the future.  And that’s why I started building my “war chest”.  Sure, it meant reducing our living expenses for a while, but soon I was able to leverage it to grow my business and improve our life.  Not only that, but I could sleep at night.  Every night, knowing I had the money in my war chest to cover all these expenses.  And plan for growth.  It feels amazingly good to live in a world with no more surprises.

All growth is not created equal

Developing a war chest gives you the chance to explore growth opportunities.  To go on offense.

The problem I see is that most people don’t have a good understanding on how to evaluate those growth opportunities so they’re making the wrong financial decisions.  They look at every opportunity as a good one rather than truly evaluating them.

The solution is to take a step back and understand where you want to go and how you are going to get the best bang for your buck before you hit the accelerator.

Take Eric.  He was a plumber who left his full-time job because he decided that he could make a lot more money in his own business.

He was able to make a little more money.  But unfortunately, he was working ridiculous hours to get there.  The only thing he had going for him was a flexible work schedule, but you’d never know it because he was working more hours than he’d ever worked before.  

But he planned and developed his own war chest.  I helped him realize that if he allocated some of that war chest towards bringing on a staff member, he could be more efficient.  His staff member could run a lot of the jobs so that Eric could spend more time finding clients and running the top-level part of the business and so, would be able to make more profit. 

With that extra time, he also realized that many of the job he could have bid on were low margin and would bring in very little extra cash into the firm compared to the investment of time and material.

Within a year, his profitability jumped an extra $30,000 more than he was making before.

Within 18 months after that, by carefully analyzing his other opportunities to grow, he was able to grow his team even further.  His business got to the point where it was making over $220,000 in profit.  His cash flow mushroomed!  By simply realizing that

The moral to the story is that to play offense in your business, you have to evaluate your opportunities and make the right growth choices.  While many people might spend their money in all the wrong places, if you make the decision to spend your war chest money the right way you could find out that in 12 months, two years from now, you have a completely different business. 

What happens if you don’t listen to conventional advice and DO WHAT WORKS instead?

Trade businesses have a lot of opportunities but there are a lot of potential threats to their business as well.

Nothing is more important to a trade business’s success than having a sound defense, the growing of and leveraging of cash flow (the war chest), and then having a solid offensive game plan.

By using the traditional rules, a business is looking at their finances in the rear view mirror, paying attention to what happened last month or last year.  They need someone to keep a constant, watchful eye on their metrics to ensure that their business goes from being a cash eating monster to a cash generating machine.

To making sure that the money you’re spending is yours and that you’re putting money aside to get yourself off of that endless hamster wheel that comes with owning a trade business that doesn’t have a solid cash flow strategy along with a solid long term strategy.

Get off the hamster wheel and build your own cash flow machine.

If you’d like to know more take the cash flow quiz:  Your Cash Flow Killer

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