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Greetings to you savvy tradies! It’s another month and that means another blog and this time, it’s all about breaking down your financials and what they can tell you about your business. So, let’s get stuck into it.
Running a small business as a tradie (as much as it sucks to admit) does require more than just being an expert in your field! It involves expert management of your finances to ensure sustained growth and profitability in these wild economic times, which of course we can provide for you right here at illumin8!
So, in this little handy dandy guide, we’ll break down everything you might see when it comes to your business (like what you see on Xero for example!) so you can confidently make decisions and understand the numbers we’re working out for you on our end as accountants. Let’s get cracking!
- Mastering the basics: Financial Statements
These are the foundations (pun intended) of understanding your business’s financial health and there are two primary areas to focus on for you.
Profit & Loss Statement
- This statement summarises all your revenue, expenses and profit over a specific period of time (usually a month, quarter or year) and helps provide the best insight into whether your business is making a profit or a loss. Super handy for knowing if you have made money over a specific period of time, even if you don’t get paid for a while after.
Balance Sheet
- A little different to the above. This provides a snapshot of your business’s financial position at any given time. It shows your assets, liabilities and equity giving you the best overview of what your business owns and owes.
- Revenue & Expenses: Tracking your cashflow well!
Scary cashflow chats incoming. Nah, it’s really not that scary once you understand what it all means! Here are some important phrases that you need to know.
Revenue
- Revenue in its simplest form is the money you have earned from customers, as well as money from investments, grants, and similar things. Revenue is typically shown on your profit and loss when you earn it, as opposed to when the cash hits your bank. Here it’s valuable to categorise your revenue streams, such as project fees or service charges. Regularly monitoring which rev streams contribute the most to your bottom line will help you identify areas and opportunities for growth.
Expenses
- Expenses are the costs your business incurs to be able to generate its revenue. Similar to the above, expenses are typically shown on your profit and loss when you incur it, as opposed to when the cash leaves your bank. It's best to categorise your expenses into fixed (like rent, insurance) and variables (materials, labor etc) so you know what costs go up when you sell more (variable costs), and what costs stay the same (fixed). Tracking expenses well and accurately (like we can do for you here!) helps identify the best cost-saving opportunities and ensures you price your work appropriately.
- Profit Margin & Pricing Strategies
Profit margins are, you guessed it, a big key indicator of your business’s profitability. So how do you calculate it?
Net Profit Margin = Net profit divided by total revenue and work it out as a percentage.
This indicator then shows you that on average, when you make $1 dollar of revenue, how much money do you make as profit as a result. A healthy profit margin ensures your business remains sustainable going forward.
It’s a tricky spot to land, but pricing your work is extremely key. Underpricing leads to financial strain, but overpricing can drive away potential customers who are looking for a great build, that’s also good value.
- Taxes
That scary word taxes. It can be scary for some, but for you, we’ve got you covered since we specialise in the trades industry (we’ve got some damn legends who know the industry inside and out!). If you’re keen to talk a few strategies around tax, then we’re ready to give you a hand and some expert advice.
Remember, putting some of that juicy profit aside for taxes is important as well, because your quarterly BAS and income tax comes around quicker than you might think!
- The Wrap Up
So, there it is, a quick little summary and round up of what a few things you might see on your Xero file and what they mean. By understanding these you can not only hone your craft on the job site, but in your business as well.
