The importance of cash flow
Cash flow is a critical component of small business success. This is especially true if you run a trade business. Your ability to purchase tools and supplies, pay staff, and keep your vehicles running relies on having cash in the bank.
Emma Crawford-Falekaono, CRO at Tradify, sees cash flow issues reflected in customer data on the number of jobs completed and invoices marked as paid. She explains, “For small business cash flow is really important as often there is a minimal amount of capital available to the business to fall back on when times get tough. Cash flow issues can lead to the inability to pay staff, provide services, order materials, commit to work, invest in R&D etc. Positive cash flow isn’t a goal for everyone though. Startups in growth mode deliberately run at a loss. These types of businesses recycle all revenue back into the business to fuel growth and fund the shortfall with external capital.”
Xero Small Business Insights have analysed data from tens of thousands of small businesses, and have noted interesting trends both in the trade and construction industry, and in the wide small business sector. Throughout the year, cash flow and profitability fluctuate seasonally. In the construction industry in particular, there are some interesting trends, including a large dip in cash flow during Jan, which takes until March to recover.
This January dip is interesting, because it coincides with a significant spike in December – consistently the best month of the year for construction companies getting paid.
Why are tradies getting paid so much in December, but struggling during January?
On the surface, this probably relates to the Christmas/New Year shutdown and summer holidays. In a labour-led industry, if you’re not working, you’re not being paid, and because many tradies take their own holidays in December/January, and all their clients are also on holiday, the work dries up post Christmas. The December glut can be accounted for by clients who want their work done before the Christmas holiday, and they’re willing to pay for the privilege, especially as the boom in the industry stretches resources.
Clients in the construction sector are slow-paying at the best of times, when compared with the New Zealand average. However, since Xero started analysing data, they’ve been consistently lower than professional services and agriculture. This is a positive trend and, as Xero have noted, may reflect the adoption of technology and cloud-based accounting, where it’s easy to see what has/hasn’t been paid and send reminders. (Overdue invoices with a reminder are paid on average four days sooner than those without).
How to improve your cash flow
Getting paid on time is a huge hurdle across all small businesses, who exert only limited control over timely payments. More tradies are utilising features within their technology suites – such as reminders and accepting deposits up front – to help mitigate the damage late payments cause to cash flow. Some tradies are also integrating Stripe and Paypal payments into invoices, which Xero points out invoices paid via Stripe or Paypal (in conjunction with the Xero platform) are paid 10 days faster than other invoices.
As small businesses make up 97% of all businesses in New Zealand, Government are also making an effort to help manage cash flow. The new Accounting Income Method (AIM) introduced in April enables businesses to pay provisional tax in line with their monthly income. It’s too early to assess results, but it’s hoped it will help manage cash flow across the year.
“We’re excited about what AIM will mean for our tradie clients,” says Dan Henderson, Managing Director of enablebusiness, an accounting firm operating across New Zealand specialising in business development & coaching. “Being able to pay provisional tax based on what you actually earn that month makes a huge difference in businesses like the trades where income is uneven across the year. enablebusiness work with their clients to achieve Financial, Mind & Time Freedom. By focusing on Financial Freedom and through coaching, enablebusiness clients can gain control of their cashflow, ease the day to day financial pressures and improve the stability of their business.
“If you’re managing your work and finances in the cloud, you can use reports to understand the fluctuations in your business,” explains Crawford-Falekaono.
“You can identify the months when work has historically been slow, and try to book ad hoc jobs in advance to smooth out your workload. You can also see the types of jobs that bring in the most profit for the least amount of work, and focus on acquiring more of that work.”
Things are looking up for tradies worried about cash flow, but the key to managing your profitability is the ability to measure it. Small businesses like tradies are always susceptible to market changes and seasonal shifts, which can wreak havoc on cash flow if you’re not prepared. Cloud-based software like Xero and Tradify enable you to gain visibility over your cash flow so you can effectively manage your business.