There are always warning signs in business before trouble appears, but unless you are actively looking for them, they can take you by surprise.
In military training, they teach you how to look for warning signs that could affect the mission. They call this situational awareness. Potential threats might include the enemy’s position, the current environment, the shape they are in mentally/physically or position if things went wrong and what the next move would be.
It’s the same in the trades business – there are always warning signs when your business is headed for trouble.
Having personally coached hundreds of trades businesses over the past twelve years, there are nine warning signs I look for. Deal with these early, and chances of success improve dramatically. Left too long, they can cause major problems at best and failure at worst.
Early warning signs:
These usually start small but will become bigger over time if not dealt with. So, tackle them early, and your business will stay out of trouble further down the line.
- Bank account is at low tide often
This is the one that everyone pays attention to. If I have money in the bank then I must be ok, right?
Not necessarily. If the bank account looks good, but you’ve just taken some large deposits on jobs, or there are suppliers’ bills that have not been paid for yet, then things will look better than they are. However, if the bank account always seems to be low and you are constantly scrambling for money then that is a bad sign. - Owners not getting paid.
Not being able to pay yourself a regular wage as the owner. Time spent in the business either on the tools or organising should be costed into jobs so the money is there. Too many trades business owners in early years are making less than if they were working for someone else. There should be enough for a wage and a healthy profit as well.
Same applies to your partner when they are working in the business. If cashflow can’t support their wage, it’s a sign that you are just not making enough for a sustainable business. - Confused by the numbers.
It’s essential that the numbers you see are accurate and being checked at least monthly. It’s easy to fix one month but hard to fix twelve.
I still see a lot of tradies’ financials that show incorrect margins because wages and other direct costs are coded as expenses rather than direct costs.
If you are finding that your profit and loss shows large profits one month, then big losses the next, even though not much else has changed in the business, it’s likely you are not including “Work in Progress”, which takes into account deposits on jobs or costs incurred that can’t be billed yet.
Not watching the numbers or inaccurate figures is like flying a Boeing 747 with no instruments, while your copilot is yelling instructions as they are looking out the window. Dangerous! - Going in different directions
When the owners or the team are pulling in different directions. This could be owners being out of alignment on the big issues or a clash between management and staff.
I am not talking about the odd disagreement here when looking for the best solution to a problem. That’s healthy and challenges wrong assumptions. But when there are core issues that can’t be resolved, deep seated family disagreements or frustrated team members who are working against the company’s objectives – that will cause major problems. - Discounting when things get quiet.
If work is a little thin on the ground, it’s tempting to discount jobs to keep the team going. But how low is too low?
A mistake I see a lot is discounting to get that big job and then later discovering they have spent the last six months breaking even or losing money on it.
Big jobs usually have a few surprises, and it doesn’t take long for extra hours to add up. A builder client I worked with told me at our first session he had completed a $800,000 job and made nothing out of it. That doesn’t happen to him anymore.
Discounting margins to get the work, combined with growth, is a slippery slope. You won’t really know how profitable the job was until the end, so a buffer is essential. Larger companies can lose a lot of money here and may not realise until it’s too late. - Collecting too many barnacles
If jobs are consistently taking longer than they should, this will be eating away at your margins. Or you have too many clients who keep complaining about the price, trying to get something extra for nothing.
Like barnacles on the bottom of a boat, left long enough they accumulate, slowing momentum; over years they will also strip away the paint and water will erode the metal. Too many barnacles will do this to your business too.
Late warning signs
These are much harder to fix. At this point, the business is in intensive care and requires immediate intervention to survive.
Cashflow will be bad, and it’s likely losses have been accumulating for years; at this stage, time is running out.
- Constantly being chased by suppliers.
Suppliers are chasing for money that is significantly overdue and some have put the business on stop credit. Your front desk is hesitant to answer the phone in case it’s another creditor asking for money they haven’t got. Payment arrangements get made and then broken, losing further credibility.
Paying for old jobs with new money from current jobs. Robbing Peter to pay Paul, whoever is yelling the loudest might get something. Jobs are constantly delayed as materials aren’t available to finish the work. - Employees not getting paid on time.
Not enough money for wages some weeks, pay runs are being delayed. Lots of mistakes and callbacks on jobs as employees are no longer invested.
At this point, the team has lost confidence in the business and is likely to be applying for more secure jobs. Some have already left and there is a lot of talk around town that the business is in trouble. - Legal
Owing a lot of overdue money to suppliers and the IRD. One or more creditors have lost patience and have taken legal action against the company to get paid. Costs are accumulating and lawyers are heavily involved, adding even more expense.
The reality is that at some stage every trade business will experience some of the early warning signs in their business. This could be working through a small cashflow issue with a supplier extending payment terms or making an arrangement with the IRD to pay the GST this month.
But if there is a cluster of these signs or they are happening often, then act early as they are much easier to fix now than later.
Even at these late stages, the business can sometimes be turned around, depending on how big the deficit is and if there is enough profitable work to trade out of it.
However, this often involves convincing lawyers, creditors, staff and the IRD to back your plan which can be a tough sell. I have coached companies who have traded out of these final stages, but sometimes it’s just too late, the hole is too big. Better to deal with the warning signs early, way less stressful and much better odds of success.
If you recognise these warning signs in your business and want to get ahead of them?
Then book a free business checkup and let’s look at the numbers together.
Article supplied by Daniel Fitzpatrick
www.nextleveltradie.co.nz
Published in Business, Health & Safety, Environment in WIRED Issue 71 / December 2023 by Fencing Contractors NZ
