Imagine for a second that your trades business is a bucket with holes in it.
The only time you make money is when the bucket overflows, so the holes have to be small enough that the bucket can still fill and overflow.
The two biggest holes in most trades business will always be labour and materials. You’re never going to lose much money on your vans, tools or stock.
And, overheads are pretty low for the most part. You don’t have to pay expensive rent on a fancy office and most of your staff work on no-work, no-pay contracts.
The only real drain is collecting late payments and dealing with customers who never pay but then that’s the case with pretty much all small businesses and there’s always room to improve payment collection.
That’s why it’s so important to get labour and materials right.
If your staff ain’t workin, you ain’t earnin’
A good rule of thumb is to have your Tradies working 40 hours per week. Plus lunch breaks, that’s around 42.5 hours spent at work.
Of those hours worked, you’d ideally want all the time to be charged out, but of course it’s not possible once you factor in meetings, training, and travel time.
Instead, aim to bill out 92% of your team’s hours.
Take a look at the table below. It shows how much income your staff could be generating based on total hours worked and what % of those hours are billable.
You might be surprised to see that a Tradie working a 40 hour week at 92% billable hours is more profitable to you than another Tradie working a 32 hour week at 97% billable hours.
It goes to show that one of the worst decisions you can make in your trades business is employing people who don’t work the full 40 hours. It’s simply not worth it to have part-timers on the payroll.
Get a grip on materials
Most suppliers charge about the same amount of money for materials - no one is getting a better discount than you if you’re both in the same industry with the same buying power.
What you have to worry about is how you manage materials.
Just in Time Stock Control
Just in Time Stock Control has been around for a long time. It’s the backbone of lean manufacturing.
Companies like Apple and Toyota use this system, so chances are - it works.
In a nutshell, Just in Time Stock Control is buying goods only when you need them. Sounds simple, right? But what does it mean in practice?
To get started, follow these four commandments:
- Quote what you buy: Quote for the exact amount of materials required to do a specific job.
- Order what you quote: Only order the materials that were included in your quote.
- Control what you buy: Do not overbuy stock for the job. If you do, take it back for a credit before it ends up misplaced in a van or somewhere else (or accidently given to a customer for nothing).
- Charge what you buy: If you buy materials for a job, charge them to the job. Don’t let anything slip by the wayside.
What are you waiting for?
It isn’t too hard to keep your trades business bucket overflowing once you have your labour and materials well under control.
Get those two variables right and you’ll start seeing major improvements to your bottom line.
Over to you
Cash flow forecasting is tough, but it’s compounded by not being able to see which jobs you’re performing well on and which ones you aren’t. Click below to download our Profit and Loss Calculator. Just fill in the fields and see how you’re performing on any job before, during or after the job, and then check out the analysis.
To find out how Fergus smart job management software for trade and service businesses can help you effectively manage your labour and material costs, sign up for a free trial now.