As a tradie, you’ll be well aware of how important it is to understand the financial side of your business. But at the end of a busy day, going through all those numbers is often the last thing you feel like doing!
Monitoring your financial health is absolutely vital for making important business decisions, especially when you’re taking on new staff or purchasing new equipment. Cash flow, gross margin, profit and loss; these things are all measures of how well your business is doing.
There are many different ways to measure these numbers – and figuring them all out can often seem like a job in itself. And when all of your services, hours and materials come with their own invoices, the numbers get even more complicated. In this article we cover some basic accounting tips for tradies that you should consider when running a business.
Here are the numbers that every tradie should be keeping up with.
Cash Flow: The most important factor in any business! Ensuring you get paid on time and proactively monitoring cashflow means you’ll be able to pay your bills and stay in business.
But because cash flow is ever changing, it can be difficult to keep track all the time. Your revenue will be affected from month to month, just as your outgoings will be affected by everything from staff wages to the power bill for your workshop, GST and tax payments.
If you lose track of your cash flow, you can lose track of your entire business.
Gross profit: This is the amount left over after the costs of getting a job done are taken out – i.e., labour and materials. Increasing your gross profit should be one of your main goals. After all, the more profit made on jobs, the more money you’ll have left over when your overheads have been accounted for.
Again, this is easier said than done!
Net profit: This is the ‘real’ profit generated by your business. It’s the amount left over in your gross profit after subtracting fixed costs and overheads such as rent, insurance, and advertising. Your net profit (after tax) can be used to invest in assets such as new equipment.
The Quick Ratio (aka The Acid Test): This involves working out the ratio of your cash equivalent assets vs your immediate liabilities, such as supplier bills and taxes. Cash equivalent assets include anything you can turn into cash within 90 days, such as any amount you’re owed by your customers. The Acid Test doesn’t include stock, as stock often can’t be converted to cash within 90 days.
Ideally, you have more cash on hand than what you owe. You’ll need to monitor your quick ratio if you’re planning to grow your business. Trying to scale when you have inadequate cash resources is a fast track to ruin.
These numbers are just the beginning of a successful tradie. You’ll need to keep track of them on an almost daily basis to make sure your business is doing well.
Understanding every aspect of your finances not only keeps you in control, but allows you to make the right decisions for the future. As your business grows, however, it can be overwhelming to invest time in these functional areas. That’s where you may need a helping hand.
Q2 are that helping hand!
Q2 not only make the numbers game much easier, they cater specifically to helping tradies increase their cashflow and profitability.
Q2 Accountants and Business Strategists don’t just do accounting. We help you understand your financials to make better business decisions so you can achieve your business goals.
At Q2, we provide the accounting and advisory services along with personalised attention that you won’t get from a big firm. If you want your business to grow profitably and become more valuable, you must get the basics right. You’ll need experienced business advisors, so you understand your numbers, that will help you plan for practical business growth.
If you’re at a stage where you’d like to understand your financials better, and learn how to improve your business, speak to the accounting team at Q2 accounting today.