Tradie Business 101: A guide to finance

Remember the days of trade school? Still half asleep as you shuffled in to 7-Eleven to grab a coffee and a sausage roll for brekky before knuckling down to learn. When it comes to the world of tradies — whether plumbing, electrical contracting, HVAC installation, landscape construction, carpentry, or residential building — trade schools are the entry to technical education. TAFEs and vocational schools equip tradies with the practical skills and technical know-how required to excel in their chosen field. However, as tradie business coaches one of the most common things we hear is, “I didn’t learn how to run a business at trade school.” So what’s missing in this education model? Business 101.

As a tradie, technical proficiency is undeniably crucial. Yet, when many tradespeople go out on their own, they realise that running a business demands more than just technical expertise. Financial management, client relations, marketing, and navigating legal and compliance issues are integral to a good business. Unfortunately, these are areas where trade school often falls short. And that gap that can be the difference between the success or failure of a trade services business.

This series will address each of these skills that are essential to running a good tradie business. As a tradie business coach to many specialist trades, my advice is backed by 20 years of experience.

As we build a bridge to cross this knowledge gap, the goal is to provide tradies with insights and tools to not only survive but thrive in the competitive world of construction services. By integrating business acumen with technical skills, tradespeople can elevate their careers, expand their businesses, and achieve new levels of professional success.

We’re kicking off with the most important business skill: finance

Finance 101 for tradie businesses

In construction trades project costs, material expenses, and labour charges can fluctuate, so financial literacy is not just an asset; it’s a necessity. For tradies running their own business, understanding the basics of financial management goes beyond mere bookkeeping. You need to know how to control the profit gears: budgeting, cash flow management, pricing strategies, and financial forecasting.

Unfortunately, these skills aren’t taught at trade school. Despite the fact that knowing how to manage the money side of business is highly important, tradies often finish their tertiary education without learning this core function.

However, tradies aren’t alone. Research published in the Journal of Small Business Management (2022) highlights how frequently learning happens after launching a business. And not just for tradies – owners of all kinds of businesses usually find that the learning curve is steepest in the early days. It may sound counter-intuitive, I get it. But from my experience coaching tradie businesses for 20 years, I know this: it’s better to face the pain early before you grow your business to death. What? Why would a tradie business coach say “grow your business to death”? Because it’s a real risk. If you don’t have the right financial practices in place early, you’ll be faced with dwindling profits and unmanaged cash flows.

As a tradie business owner your best bet is to admit what you don’t know. Learn to adopt a strict budgeting regime, align your expenses with project timelines and predict your cash flow needs. When I implement these basic practices with the trades business I coach, we get immediate results typically 30% increase in profits within a year.

The Role of Cash Flow Management for Construction Trades Services Businesses

Cash flow is the lifeline of any construction trade business. Efficient management of cash flow ensures that a tradie business has enough money to take on good jobs, purchase materials, and pay workers, and ride out the bumps in times of unexpected payment delays or expense blowouts.

An article in Engineering, Construction and Architectural Management (Vol. 21 No. 2, 2015) detailed the factors that most significantly impact cash flow. Their findings will come as no surprise to any seasoned tradie: the flow of cash gets disrupted by changes of progress payment, over-extended payment terms, project delays, and poor planning. You can read the full research in the article, “Cash flow modeling for construction projects”. Great night time reading if you’re having trouble falling asleep!

Understanding Pricing and Financial Forecasting for your Tradie Business

Accurate pricing is critical in trades. It’s a delicate balance between competitive pricing and ensuring profitability. In my experience, the tradies who manage their pricing well have a rock-solid understanding of market rates, cost of materials, labour costs, and overheads. With that in place the next step is easier: budgeting.

Budgeting is the cornerstone of sound financial management. It’s about understanding your costs – from the obvious ones like materials and labour to the less visible but just as important costs like statutory payments like IncoLink and Coinvest and finance costs.

Typically budgets are for a 12 month period, and almost always for the financial year. This short-term plan gives you visibility and also agility to change as you see fit.

For longer term periods, you’re making more predictions with a bit less certainty, which is fine for forecasting. Financial forecasting helps in anticipating future expenses, revenues, and profitability, allowing for informed decision-making and strategic planning.

Right, so HOW do you get good at this? Here are some dos and don’ts for budgeting and forecasting:

Budgeting and forecasting DOs

DO: Invest time to get your budgets set up properly and set realistic revenue targets. Emphasis on realistic. Not optimistic, not hopeful. Unrealistic budgets never deliver real money to your bank account.

DO: Use historical data and current market trends to predict future revenue and expenses. For example, if you historically have more aircon installs in summer, plan your financial year with those peaks and troughs. Allocate budget to run higher staffing costs starting in October and scale back in quieter periods.

DO: Regularly update your budget to account for fluctuating costs of materials and labour. For instance, if the price of steel rises, adjust your project budgets accordingly to maintain profitability.

DO: Use financial modelling tools that are specifically designed for specialist trades. At Tenfold, we use chargeable rate calculators, billable hours analysis, cash flow forecasts incorporating retentions, construction profit focus which is exclusively for builders, job profitability reports. Just to name a few.

DO: Regularly monitor cash flow and plan for contingencies. For instance, maintain a reserve fund for unexpected expenses or delays in payment.

DO: Use technology to your advantage: Tech tools can streamline financial tasks, from invoicing to expense tracking. Invest in job management software that integrates with your financial software. This tech-savvy approach not only saves time but also provides a more accurate financial picture of your business. Find out more about how to choose the right software your business here.

DO: Keep your eye out for new ways of doing things that could allow you to make more margin. For example, one of our electrical contractor clients moved to buying materials in bulk from an online wholesaler rather than ad hoc buying from Middy’s. It saved them 30% in costs which increased their profitability and the delivery service also saved them time, an additional profit kick.

Budgeting and forecasting DON’Ts

DON’T: Copy and paste last year’s numbers. Instead, set yourself and your team of technicians, apprentices, and subbies some stretch targets (but make sure they’re also achievable).

DON’T: Rely solely on your accountant to be proactive about telling you about tax obligations OR potential deductions. Yes, they should be keeping an eye out for your business. And every other business they service. But the ATO doesn’t care how you get your advice – you’re the director, so you’re ultimately responsible.

DON’T: Make large financial commitments without thorough analysis. For instance, taking on asset finance to buy a vehicle or an expensive piece of machinery without evaluating its long-term impact can strain your business finances.

DON’T: Underestimate the financial burden of carrying retentions. Winning a big construction project can be a huge boost for your business, your brand and your team’s commitment. But if you haven’t allowed for the delay in getting paid the retention, it can significantly impede your business growth.

DON’T: Enter into long term leases without having a realistic business plan that forecasts at least two-thirds of the lease term.

DON’T: Try to do it all yourself. Get yourself a sounding board, someone who has experience in the complexities of managing dynamic finances of construction trades businesses.

By applying these dos and don’ts, construction trade service business owners can build their financial literacy for meaningful business growth and success.

Bridging the business knowledge gap for tradies – next up

The transition from a skilled tradesperson to a successful business owner in the construction trades sector involves a steep learning curve. Now that we’ve touched on financial management, we’ll be looking at other core skills they didn’t teach you at trade school: marketing, leading teams, operations and strategic planning. Stay tuned.