Why Growing Your Business Can Kill Your Business
In the quiet times/holidays it is important to chase outstanding invoices, finalise and send out invoices for completed works (if you do not have automated systems), follow up clients to confirm projects are going ahead and calculate if you have enough cash in your bank to pay suppliers, along with paying yourself a wage! For business owners, managing this ‘cash flow stress’ is critical for survival.
A lot of business owners will be beating the cash flow stress this coming year by planning to grow their business.
In this article we will highlight why ‘selling more’ will not alone break the week to week cash flow headache, but how in fact it can kill a business.
The majority of construction and trade service businesses are operating under pressure from inadequate cash flow. Figures released from ASIC reveal 24% of businesses which became insolvent in 2013/2014 were from the construction sector, which was the highest of any industry. According to ASIC 41% of company failure was due to inadequate cash flow.
The problem for a lot of Trade business owners right now is that they do not know if the money currently sitting in the business bank account is actually theirs, or if it belongs to suppliers and the ATO. Through operating day to day, week to week, month to month; large chunks of money is deposited into the bank account and large chunks of money is debited from the bank account. For the business owner it is either feast or famine, with no real control over their cash.
What Causes Cash Flow Headaches
The common question we often get; through assisting tradies gain control of their business; is “how come the busier I get the less money I have in the bank?”
From our experience the main causes of cash flow problems within the construction industry are:
- Failing to Manage Growth – Sales are up and the owner has failed to adequately take into account that he must now:
- Hire more employees (recruitment, training, tool box talks, performance management);
- Expand capacity (vehicles, tools, office, warehouse, equipment);
- Increase administration (pricing, systems, quotes, invoicing, collections, payables, payroll, ATO);
- Increase customer service (quality control, compliance, defects, follow up, meetings);
- Increase material purchases (inventory controls, wastage, theft); and
- Incur other drains on the business cash supply.
However, collections from the increased sales often lag behind as the company grows and the result is a cash crisis and time management crisis for the business owner!
- Pricing Too Low – A common failure is not accounting for the ACTUAL COST of operating the business within the price (hourly rate/fixed price). This includes planning for:
- Lost Employee Time – annual leave, travel, tool box talks, training, unproductive hours, inclement weather (calculate actual billable/productive hours);
- Employee expenses – workers compensation, superannuation, long service leave, leave loading;
- Office/administration expenses – insurances, interest, accountant, bank fees, licences, memberships, phones, internet, operating systems, rent;
- Equipment/vehicle – leases, fuel, tolls, tools (hand/power tools), consumables, repairs; and most importantly
- Profit – what profit do you want the business to generate?
Often the business owner doesn’t realise they are losing money before they even get onsite. Once your ACTUAL COST is calculated it then becomes an easy process to communicate why you need to increase your prices!
- Lack of Cash Flow Planning – Unfortunately, many small businesses do not engage in cash planning (when money will enter your bank account and when money will leave your bank account) which results in:
- Poor Decision Making – spend money when should be saving money;
- Incorrect Terms of Trade – fail to identity negative cash impact incurred through delayed invoicing and payments;
- ATO Surprises – failure to plan for large statutory liabilities; and
- Sales Shortfalls – failure to identify shortfalls in future sales required to cover planned expenses.
Today’s economic conditions make cash flow planning even more critical to the survival, growth and profitability of a construction industry business.
Your Take Away
- Grow Slowly – You must adequately plan and forecast all cash and time investments required to grow your business.
- Price Correctly – Ensure you account for all associated running costs, employee productivity and profit. Say NO to jobs if too cheap!
- Start Cash Flow Planning – Set up a 13 week rolling cash flow forecaster to gain control of your cash.
For more information on our programs to develop your business skills – check out our
Impact Coaching Program CLICK HERE
or call us on (02) 8011 4855 or 1300 665 922.