7 Common Cash Flow Problems Faced By Tradies
Tradies and services-business owners often excel in their craft through experience and consistent development of your technical skills. Likely hoping to achieve your business ownership goals at some stage.
After obtaining your desired level of skills and craftmanship, purchasing tools and equipment and approaching prospective customers, your business was born.
Unfortunately, you likely received no training around finances or the importance on cash flow management for your new found business.
Often surviving through the first few months or even years, you probably realise there is a lot more going on behind the curtain than simply getting the job done. You need to service existing clients, manage staff, balance multiple jobs, put out the fires and most importantly keep the cash flowing.
Is Cash Flow Really That Important?
Maintaining cash in your business keeps things moving. Without cash you cannot run a profitable business over the long term, or as efficiently as you need to in order to achieve the level of success you hope for.
You must pay your bills on time, make payroll on a consistent weekly or fortnightly basis and ensure you keep your tools working as efficiently as possible.
In addition to managing your direct job costs, overheads are also required as a cost of doing business. Things such as admin staff wages, software subscriptions, accounting or bookeeping fees to stay compliant etc. You may also want to explore opportunties to grow your business or stay competitive in your local market.
Inadequate cash flow is attributed to 52% of failures according to the 2024 ASIC report so it remains to be a significant problem with all types of businesses.
Below I have outlined the 7 common cash flow problems faced by tradie and services businesses.
Chances are, if you are a small business, there is a good chance they apply to you too.
Delayed Invoicing And Not Following Up With Customers
It's common that many tradie businesses struggle with cash flow because they don't invoice customers quickly or sometimes, not at all. If you're not on top of invoicing and folloiwng up on payments, your business's cash flow will suffer. This makes your business less flexible to weather slow periods and slows your overall growth.
Using the right software to invoice immediately after jobs are completed, taking a deposit to cover upfront materials or sometimes taking full payment in advance if they are extensive projects will only improve your businesses cash flow. As a simple rule of thumb, always invoice quickly and clearly state the due date on the invoice.
Unpaid Invoices Or Slow Paying Customers
Cash flow issues often plague tradie businesses due to delayed invoicing. To ensure your business remains agile and grows steadily, it's crucial to be efficient in sending out invoices and following up on payments - you cannot afford to let customers use you as an interest free loan.
Accounts receivable or put simply, your customers unpaid invoices are one of the biggest problems faced by small businesses. A structured process that is followed on a regular basis is needed to follow up with your overdue invoices from customers. The right software can make this easier for you to keep track of, particularly when automating reminders.
A few ways to reduce the number of overdue invoices include:
Invoice as soon as possible. Keep in mind, people will only pay when they have an invoice, therefore delaying sending the invoice only delays when you will receive payment.
Where possible before you leave the job site, invoice and collect payment.
Offer payment by credit card, cash, bank transfer or collect payment details as a condition of accepting the quote/invoice, that way you can zap the account automatically upon completion of the job with the customers approval.
Be upfront about the cost and payment terms with all your customers, including friends and family to avoid causing damaging to your reputation or relationships.
Growing Quickly
Growing a business is hardwork, very rewarding and often exciting at times. That’s probably one of three reasons why you started it. But managing growth, if not handled well, will cost you a lot of money in the long run and hurt the business in many different ways.
Running things is easier when it’s just you and a few trusted workers. It gets much harder when you are constantly hiring, training, and managing more staff members.
This level of growth takes lots of cash and without having consistent forecasting and management of cash flow front of mind, you may run into a situation where costs stack up to a level you may no longer be able to afford. It's at this point in time you must take accountability for the numbers side of your business.
To ensure you can afford that growth, there are simple processes like cash flow forecasting and financial performance reviews that will help you navigate these periods of growth. Because as the team gets bigger so do your problems, including the ability for you to meet payroll.
The accounting and finance division is typically the last set avenue of skills brought into any small business, particularly after sales, marketing and operations. Which is absolutely the right way to do it, without marketing and sales you don't have a business, and without staff doing the work, there are no operations.
Finances get managed after these spots are filled, when the business ramps up and begins to get complicated. An advisor or virtual CFO can help you navigate the financial complexities as your business grows, helping you maintain cash flow and profitability.
Poor Gross Margins
When you first start your business, you can cut corners since overheads and other costs are likely low enough you can still make a profit. You might work extra hours for free and still make what you hoped for. But as the business grows, overhead costs and wages will grow too.
It's at this level, you must be careful and considerate that taking low-paying jobs regularly will leave you walking away without a profit. If you continue to operate this way, eventually there will be no cash left in the business and unfortunately, everybody loses from employees, to customers and especially you as the business owner.
Staff and suppliers must be paid on time. It can feel tempting to take any job just to keep people busy, but too many low-profit jobs will hurt your future and slowly drain the business until it can be sustained no longer.
Ensuring you price your services at the total cost of operations plus a profit will ensure you are operating over the long term, can support your staff and your family.
Excessive Overhead Expenses
You know you need staff, systems, and tools to keep the business running, but building that setup can get expensive very quickly. Managing expenses is usually not something you were trained to do as a tradie. The business infrastructure needs to be paid and maintained every week. Admin staff, bank loans, equipment, and software all need money, even when there are no new jobs coming in.
Keeping overhead costs low is a smart business move but rarely done in practice. Often these costs are tracked every now and then or not at all, meaning you go months without reviewing your spend. For example, there may be subscriptions you forgot to cancel months go and without checking transactions you've forgotten about them.
Try to keep overheads as low as the business can safely support and always have cash reserves and a plan for the unexpected, because work can slow down fast.
Know in advance what costs you can reduce or cut quickly, so you are prepared before the next downturn hits.
Ignoring The Importance Of Bookkeeping
Most tradies starting out don’t know much about bookkeeping.
But bookkeeping is the ultimate and main scorecard for identifying the performance and health of your business. Your bookkeeper is the one keeping the score on your behalf. It's often owners typically choose to outsource. Just like using an accountant for tax, it’s normal to have a professional handle your books.
While outsourcing your bookkeeping is totally acceptable, keep in mind that the financial health and performance of your business is still your own priority. Unless your bookkeeper has specifically discussed sitting down with you every month to explain what's happening and how to improve your performance, you may still want to partner with a financial expert.
We support business owners, by connecting with you and guiding you through better financial management, particularly if it's not your strong suit. Even so, it’s important to understand the basics, so along the way, working with either a bookkeeper or virtual cfo will help you to achieve this level of understanding you can take with you.
So bookkeeping really helps you to spot mistakes early, avoid problems, and know what’s really happening in your business. Your books show how the business is trending, how it’s performing, and whether things are improving or slipping over time.
Poor Accounts Management (Receivables And Payables)
Poor credit control (paying bills and collecting cash) puts a lot of pressure on your cash flow. This applies to both money coming in and money going out.
Clients will often ask for more time to pay in your industry, which is common and oftentimes you'll typically allow it. But the real problem occurs when you are too lenient at following up. You might agree to offering favourable terms but fail to manage collections by the new due date. You'll often find customers need reminding in order for payment. This becomes the core problem.
At first, small invoices are usually paid on time. But as jobs get bigger, invoices get larger and payments get slower. Before you know it, clients can owe you a lot of money.
On the other side, as your business grows, you may win bigger jobs and get better payment terms from your suppliers, which can help boost cash flow. Until then, you need to track what you owe and when it is due, so nothing catches you off guard.
No matter the size of the business, clear credit rules matter. When you stick to your payment terms, problems don’t get out of control.
If you would like more information on how we can help with cash flow management to help you grow your business. Contact us today by visiting our website.
