When you’re running a trades business, keeping an eye on the books is essential to avoiding money troubles. However, when the job book’s full, it’s easy to lose track of the financial side of things. Plus, with so many figures in front of you, where do you even begin? To help you get started, here are the six most important financial metrics tradies should be aware of, and why.
1. Cash flow
To survive in business, keeping track of your cash flow is critical. If you’re unaware of how much you have in the bank to cover your everyday costs, you’re in danger of overspending – and from there it’s a downward spiral. Cash flow, or working capital, is a rolling figure that constantly changes. To work it out, simply calculate your total revenue, a.k.a. everything you’re bringing in on a regular basis (e.g. daily or weekly), then subtract your outgoings. As long as you have enough at all times to cover all your expenses, you’re good. If your figures aren’t great, don’t worry, there are many ways to help you boost your cash flow.
2. Gross profit
Your gross profit is the amount you’re left with after taking your direct costs into account. Direct costs include materials and labour – the essentials. Ignore general business costs such as rent and admin salaries. As a simple equation, it would look like this: · Gross profit = revenue – direct costs To give you an example, if you billed a customer $2,000 after paying $650 for materials and $900 for labour, your gross profit would be $450.
3. Net profit
Also known as the bottom line, net profit is a figure you’ll definitely want to keep an eye on, as it’s the actual profit your business makes. It’s calculated by subtracting your fixed overheads (e.g. rent, insurance, tools depreciation) from your gross profit. Therefore, the equation would be: · Net profit = gross profit – overheads So, if your gross profit was $450 and your overheads were $200, your net profit would be $250. While it might be tempting to see this figure as money in your pocket, it could also be used to expand and grow your business.
If your books are in order, working out your turnover, or revenue, should be pretty straightforward. Just add up your total revenue – daily, monthly, and annually. If numbers and admin aren’t your strong point, accounting software such as QuickBooks Self-Employed can track and calculate it for you. Accountants recommend being across your turnover at all times, so you can take immediate action if it’s below average.
5. Debtor days
Your debtor days is the average number of days it takes for your customers to pay after you have billed them. They are worked out using the debtor days ratio: · Debtor days = year end debts / sales x 365 The lower this figure, the better. If your high figure is high – above 60 – it could be a sign that your invoicing or payment methods are inefficient, or hint at potential bad debts.
6. Creditor days
Your creditor days are similar to your debtor days. However, for this number you’re looking at the average number of days it takes you to settle debts with your trade suppliers and creditors. These are worked out using the creditor days ratio: · Creditor days = amount owed / cost of sales x 365 In general, a higher number here is good. Drawing out those payments within the agreed terms can help you manage cash flow better. Just beware that slow payment can lose you goodwill with suppliers.