Make More Profit Without
Working More Hours

In This Episode

• From Goals to Growth

  Last week we covered the foundations of the Serve SME podcast and what this series is all about. This week, we're getting right into the practical stuff with one of the questions I get asked more than almost anything else.

  How do I make more profit? And while we're at it, what do I actually do with it once I start making it?

  I go through a five-pronged approach to increasing profitability, covering everything from goal-setting through to eliminating material wastage in your vehicles and your workshop. Then I get into the money management fundamentals that far too many trade business owners skip entirely, and I wrap up with what I still believe is the single most effective way to grow a trade business.

• The Five Ways to Increase Profitability in a Trade Business

  Before we get into the detail, here are the five things at a glance:

  1. Set a goal
  2. Focus on gross profit on every single job
  3. Run a monthly profit forecaster
  4. Reduce or eliminate five overheads
  5. Eliminate material wastage

• 1. Set a Profit Goal

  You would be surprised how many people tell me they want more profit but have no idea how much more profit they are actually trying to make. I ask the question all the time: how much profit would you like to make? And the answer I get back most often is just more. It is very difficult to achieve something if you do not know what you are trying to achieve.

  You need four foundational financial goals for your business: a revenue goal, a gross profit goal, a net profit goal, and a cash goal. And of those four, cash is the one most people underestimate. So many people focus on revenue. Some focus on profit. Not enough people focus on cash. Cash is the most important part of a business.

  To set these goals properly, find some quiet time. Whether that is in the morning, after work, on a weekend, or somewhere away from your usual environment. Think about where you want this business to be in five to ten years. Get very clear on the financial picture. Then bring it back to twelve months. Where do you want the business to be at the end of this year? Set your revenue goal, set your net profit goal, and use that net profit goal to calculate what gross profit you need and how much cash you want sitting in the business at year end.

  If you are not sure where to start with your profit targets, here is a good rule of thumb. First, pay yourself the correct wage and superannuation. If you were working for someone else in your trade, what would you actually be paid? Pay yourself that. Do not pay yourself less than what you are worth. Once you have done that, aim for a minimum of 10% net profit. Below 10% and it is genuinely not worth the pressure or the hard work. Above 20% and you are probably working harder than you need to, or your team is. The sweet spot for most trade businesses sits around 15%.

• 2. Focus on Gross Profit on Every Single Job

  Once you know your net profit target for the year, you can work backwards to a gross profit figure using a spreadsheet. For most businesses chasing 10 to 20% net profit, you are looking at a gross profit of between 40 and 50%. If your target is 15% net, you are probably aiming at around 46% gross.

  The reason we focus on gross profit rather than net profit is simple: gross profit is easily and accurately calculatable for every single job. All you are doing is taking the invoiced value, deducting your material costs, and deducting your labour costs. Net profit is much harder to determine at a job level. Tools like simPRO make tracking gross profit per job very straightforward in real time.

  This strategy works in two ways. The first is that energy flows where focus goes. Just by having that gross profit target visible on every job, you will start hitting it more often. The second is that when you are pricing a job and you can see it is sitting at 30% gross profit instead of your 46% target, something in your brain kicks in. You start asking: can I get that number up? In many cases you can, and there are levers you can pull to move it. That is something I work through with my clients regularly.

• 3. Run a Monthly Profit Forecaster

  This is a simple spreadsheet, and it can be built from the data in simPRO or whatever operating software your business uses.

  At the end of each week, you look at a few things. What has been invoiced for the month so far. What is sitting in your complete basket and what is the estimated invoiced value there. What is in progress, what is pending, and if you have any projects running, what the progress claim for those is likely to be. That gives you an estimated revenue for the month. Underneath that, you plug in your known material costs, your estimated remaining material spend, your labour costs, and your overhead costs for the month. The result is a forecasted net profit or net loss.

  In week one it is more of a best guess. By week four or five you have a very accurate picture of where the month is going to land.

  The value in this is not just the number. It is the conversations it creates. I have seen this work in my own businesses and in the businesses of people I coach. When you are sitting in week one or two looking at a forecasted loss, you can start having real conversations. What can be brought forward? What can be invoiced now? Are there quotes we can follow up? Is there high margin work we can pull in? Can we get more people on site to complete more work and progress a claim? You can start asking the right questions and taking action while there is still time to change the outcome. Energy flows where focus goes, just like with gross profit on every job. And if you adopt all three of these strategies simultaneously, you will become more profitable.

• 4. Reduce or Eliminate Five Overheads

  Businesses have a way of getting fat. One of the first things I do with a new client is look at the annualised profit and loss for the business. And one of the interesting things that happens when you look at your overheads across a full twelve months is that you get surprised at how much you actually spend on certain things. Your advertising budget for the year might be a lot more than you thought. You might be spending significant money on fuel, parking, and tolls month to month that does not seem too high on its own but looks quite different annualised. Every time I did that exercise in my own businesses, I felt a little bit sick.

  The goal is to look at every overhead annualised and find five that you can reduce or eliminate within a month. Here are some places to start. A lot of businesses are paying for subscriptions they no longer use or no longer need. You might have business motor vehicle insurance spread across multiple providers, and if you spoke to an insurance broker, there is a real chance you could bring it all into one place and save money. If your advertising spend is higher than you expected, sit down with your agency and have a conversation. If you are spending $30,000 a year with them, ask whether there is a way to reduce that if you commit to a twelve month contract. Five wins in a month. That is the target.

• 5. Eliminate Material Wastage

  For trade businesses running vehicles, this one can be surprisingly impactful. If you have ten vans on the road, when did you last do a stock take? If the answer is never, now is a good time to start.

  Imagine bringing all ten vehicles in and lining up everything that came out of them. You would be surprised at what you find. Regular stock takes, ideally monthly and at least every two months, do two things. They give you and your team a clear picture of how much stock you are sitting on that is not being used. And they bring it to the front of mind for your guys to manage their materials properly.

  Here is a common example. A team goes to a job to replace three lights. They pick up two replacements from the wholesaler. When they arrive, one of the original lights starts working again so they only replace one. But they do not take the other one back for a credit. It goes in the van and never gets used. When stock takes are happening regularly, that behaviour changes because the guys know it is going to show up.

  The same applies to your workshop. How much material has come back from jobs that has not been used? Where are you keeping track of it so it can be used on future jobs? In my own electrical business, we ended up with a significant amount of XLPE cable back from projects. Some short lengths of ten to fifteen metres, some drums with ninety or a hundred metres on them. One day I did a full stock take, listed all of it inside simPRO, and we made it a focus over the next twelve months to use as much of it as we could on upcoming jobs. It became a bit of a game. I cannot recall exactly how much we saved but it was thousands and thousands of dollars. Roll that out across your business and the impact on profitability is real.

• What to Do With the Money Once You Start Making It

  This is a question I get asked regularly by clients once they start making good profit, and it is a great problem to have.

  There are two things to sort out before you get profitable, not after.

  The first is to talk to your accountant about the most tax-effective structure for your situation. A good accountant will ask you where you are now and where you want the business to go, and put strategies in place that suit you.

  The second is to adopt a multiple bank account structure. This is something I learned in my late twenties from a book. I cannot remember the name of that book but there is a much better one available now that explains it incredibly well, and I recommend it to everyone. It is the Barefoot Investor. If you have not read it, go and get a copy. There is not a better book I have ever read for learning how to manage money properly. Money is a terrible master but a great slave, and if you are not the master of your money, you will be a slave to it.

  At a minimum, set up four accounts: a cashflow account, a tax account, a savings account, and an investment account. If you are carrying bad debt, add a debt elimination account as well.

  Your cashflow account is your main operating account. All cash comes in here and all suppliers and staff get paid from here. Take 20 to 30% of everything that comes in and move it straight to your tax account so that when your BAS comes in, the money is already there.

  On debt: there is good debt and bad debt. Good debt you generally do not need to rush to pay down. Bad debt needs to go as fast as possible. A quick example of bad debt is anything on a depreciating asset at a high interest rate. Credit card debt is bad. Overdraft debt can be bad. Anything in that category needs to be eliminated as a priority.

  Once that is under control, start putting a percentage into savings and investments regularly. The savings account is there to take pressure off. Whatever number makes you feel comfortable as a buffer, whether that is $10,000 or a million dollars, get it there and keep it there. It removes a significant amount of the stress that most business owners carry around money.

  For your investment account, the goal is to find income-producing assets over time. One of the best strategies I have seen trade business owners use is buying the premises they operate out of through a separate entity, whether that is a holding company or a self-managed super fund. Instead of paying rent to someone else for ten or twenty years, you pay it to yourself. You would be surprised how many people have been in the same location for twenty years paying rent to someone else. If they had bought that property twenty years ago, they would own it outright today. It is a simple and powerful strategy for building real wealth on the back of a trade business.

• The Best Way to Grow Your Trade Business

  People are pouring more money than ever into marketing, and marketing works. But in my view, the best way to build a trade business right now is the same as it has always been: face-to-face sales meetings. And because fewer people are doing it, it works even better than it used to.

  Here is how it works.

  Start by building a list. On that list, put your ideal A-grade clients. Who are they? Once you have the list, do your research. Figure out who the right person to speak to is at each of those businesses, and ideally find someone who can introduce you. If not, you go cold. Pick up the phone and say something like: "Hi Bob, it is John here. I am expanding my electrical business and I would love to buy you a coffee for ten minutes. Would that be okay?" You are going to get a yes more often than you think. Some people will not be interested. Some will not have time. That is fine. Some will say yes.

  Now here is where a lot of people go wrong. They get to that coffee meeting and they think the purpose is to sell. To talk about how good their business is, what they can do, why the prospect should give them the work. That is wrong. The purpose of that first meeting is to build rapport. And the way you build genuine rapport is by being genuinely interested in the other person. Ask them about themselves, their family, what they do outside of work. If you are sitting with a business owner, ask them how they started the business and how they grew it to where it is. You can learn an enormous amount from successful business owners just by asking them what they did. If you walk out of that first meeting without having talked about your own business once, that is a success.

  After the meeting, send a thank you email. A couple of weeks later, give them a call and say: "Hey, thanks again for the coffee. Just wondering, is there anything we can do for you?" If yes, great. If they say not yet, your response is: "No problem at all. Do you mind if I give you a call in about a month?" Most people will say yes. And that matters, because now you have their permission. You are not bothering them. You are calling because they said it was okay.

  Most people who go through this process do not follow up enough. I was guilty of that myself more than once. But if you follow up enough times with enough genuine interest, you will eventually get the work. The only way it ends without getting the work is if they tell you directly to stop calling, that they are happy with who they are using. And if that happens, you thank them for their time and let them know you are there if anything ever changes.