Cash flow basics for small trade businesses

Plenty of trade businesses go under while they are flat out with work. The problem is not a lack of jobs. It is money going out before money comes in. This guide shows you how to see a cash crunch coming and how to avoid one.

Profit and cash are not the same thing

A job can make a good profit on paper and still leave you short of cash. That happens because of timing.

• You buy materials today, but the client pays in four weeks
• You pay wages every week, but invoices are paid every month
• A big job ties up thousands of dollars before the first stage payment
• Tax bills arrive months after you earned the money

So you need to watch two things. Is the job profitable? And will there be enough money in the bank each week to pay the bills? This guide is about the second question. For the first, see job costing: did the job make money.

Know your weekly outgoings

Start by writing down what leaves your account in a normal month. Split it into weekly amounts.

• Wages and your own drawings
• Van or ute payments, fuel and insurance
• Phone, software and subscriptions
• Rent for a yard or workshop
• Loan repayments
• Regular supplier accounts

Add these up and divide by four and a bit. That is the amount you need coming in every week just to stand still. Many tradies have never worked this number out. Once you know it, you know how much work you need on the board.

Build a simple cash flow forecast

A forecast is just a list of money coming in and money going out, week by week, for the next eight to twelve weeks. You can do it on paper, in a spreadsheet or in your accounting software.

For each week, write down:

1. The bank balance at the start of the week
2. Money you expect to come in, such as deposits, stage payments and paid invoices
3. Money going out, such as wages, suppliers, fuel and tax
4. The balance at the end of the week

Be honest about when clients really pay, not when the invoice says they should. If a client usually pays two weeks late, put the money in two weeks late.

A worked example

Say you start a bathroom job worth 24,000 dollars. Materials cost 8,000 dollars, bought in week one. Wages for the job are 2,000 dollars a week for four weeks. The client pays a deposit of 4,000 dollars, then 10,000 dollars at the halfway stage in week three, and the final 10,000 dollars two weeks after you finish, in week six.

• Week one: 4,000 in, 10,000 out. You are 6,000 dollars behind.
• Week two: nothing in, 2,000 out. Now 8,000 behind.
• Week three: 10,000 in, 2,000 out. Back to even.
• Week four: nothing in, 2,000 out. Now 2,000 behind.
• Week five: nothing in or out. Still 2,000 behind.
• Week six: the final 10,000 arrives. You are 8,000 dollars ahead, which is your profit.

The job makes 8,000 dollars, but at its worst point you needed 8,000 dollars of your own money to carry it. Take on two or three jobs like this at once and you need two or three times as much. That is where cash crunches come from.

Ways to improve your cash flow

Small changes make a big difference.

• Take a deposit that covers the materials. See getting paid on time.
• Use stage payments on any job longer than a week or two
• Invoice the same day you finish a stage, not at the end of the month
• Chase late payments early, with a friendly reminder a day or two after the due date
• Ask suppliers for a trade account with 30 day terms, and pay on time so you keep it
• Order materials in stages on long jobs, rather than all up front
• Keep variations in writing and invoice them with the next stage

Software helps here. TradeFlow, for example, can send quotes, invoices and payment reminders from your phone, so invoicing does not wait until the weekend.

Put tax money aside

Tax is the bill that catches most new tradies out. GST you collect is not your money. Income tax will be due later on the profit you make.

A simple habit is to have a separate bank account just for tax. Every time a client pays, move a set share of it into that account straight away. Your accountant can tell you what share makes sense for your business. Then, when the tax bill comes, the money is already sitting there. See GST basics for tradies.

When money gets tight

If your forecast shows a gap coming, act early. Don’t wait until a payment bounces.

• Call clients with overdue invoices and agree a date
• Talk to suppliers before you miss a payment, not after
• Hold off on new tools or a new vehicle until the gap is closed
• Ask your bank about an overdraft before you need it, because they are easier to get when things are going well
• Look at which jobs tie up the most cash, and change your payment terms for that kind of work

Being upfront with suppliers and the bank keeps their trust. Going quiet usually makes things worse.

Quick checklist

• Work out your weekly outgoings
• Keep a simple forecast for the next eight to twelve weeks
• Take deposits and use stage payments
• Invoice on the day each stage is done
• Chase overdue money within a few days
• Move tax money into a separate account every time you are paid
• Act early when the forecast shows a gap