With every quote adding to your schedule and every new job bringing a new challenge, financial planning often takes a backseat to the day-to-day running of your business. That needs to change, according to James Chillman, UK Country Manager of Fergus.
Mastering the art of business financial planning is something all tradespeople should be doing: it’s what keeps your electrical contracting business strong and growing.
When it comes to financial planning for your business, budgeting is crucial to financial success. It’s all about knowing what you need to spend money on right now, predicting upcoming payments and preparing for what might be down the road.
Making a budget means carefully calculating what each job will cost, how much you’ll spend on materials and how you’ll pay for your team.
Here are four steps towards creating a strong budget and plan:
1. Assess your current financial health
Before you can plan for the future, you need to understand your present. Analyse your income, expenses and cash flow to get a clear picture of your financial status – look at what you know you need to pay out for and take into account anything that might be accruing, such as tax payments.
2. Set clear financial goals
Whether it’s expanding your services, investing in new tools, or saving for a rainy day, having specific, measurable, achievable, relevant and time-bound (SMART) goals will keep you focused. It’s an approach that eliminates guesswork, sets a clear timeline and makes it easy to track progress and spot missed milestones.
3. Create a detailed budget plan
Allocate funds for different aspects of your business. This should include direct costs like materials and labour, as well as indirect costs such as marketing and transportation.
4. Monitor and adjust regularly
A budget isn’t set in stone. Regularly review your budget against actual expenses and adjust as required.
Making a plan should include financial forecasting. This lets you make informed decisions about the future of your business. You can do it by using historical data; look at your past financial performance to identify patterns and trends. Consider the market conditions and stay informed about the economic climate and how it may affect your business.
Plan for different scenarios and create best-case, worst-case and most-likely financial scenarios to prepare for uncertainty. Job management software can help you do this, especially when you integrate it with an accountancy software package, like Xero. Cash flow It is an often-used phrase, but “cash flow is king” for any business. Effective cash flow management means you have enough money on hand to pay bills, purchase materials and invest in growth opportunities.
There are three basic ways to make sure cash is flowing regularly into your business. The first is to invoice promptly, so make sure you send out invoices as soon as a job is completed to ensure timely payments. The second is to manage outstanding invoices and follow up on late payments. Thirdly, control your costs, expenditures and avoid unnecessary expenses.
Maximising your profit margins
Profit planning is about setting targets for your income and creating strategies to achieve them. It involves looking at each aspect of your business to identify areas for improvement and increase profitability. Here are three ways to do it:
1. Review pricing strategies: Ensure your pricing reflects the value of your services and covers all costs.
2. Optimise operations: Speed up processes to reduce wasted time, energy and money.
3. Invest wisely: Reinvest profits into areas of your business that will generate the highest returns.
Smaller business
If you’re a small trade business, financial management can be particularly challenging. However, there are some basic principles to look at. Keep personal and business finances separate and don’t make things tricky for your accounting. Keep things simple by sticking to these boundaries.
Use technology like software to automate financial tasks, manage your day-to-day and provide real-time insights into your business performance. Always seek professional advice and don’t hesitate to consult with financial advisors to help with complex financial decisions.
When creating your budget, don’t forget to allocate funds to areas that will contribute to long-term growth. Whether it’s new equipment, additional staff or professional development, thoughtful investment can set your business apart from the competition.
Here’s a few final things to think about in terms of financial planning:
Evaluate ROI: Consider the return on investment for any potential expenditure.
Diversify investments: Don’t put all your eggs in one basket; spread your investments to reduce risk.
Plan for retirement: Even if you’re just starting out, think about your long-term future and invest in retirement plans that suit your needs.
Financial risk assessment
Remember to protect your business by managing financial risks. Conducting a risk assessment to identify potential threats and develop strategies to mitigate them is a good use of your time.
Ensure you have adequate insurance coverage for your business assets, liabilities and income. Set aside funds to cover unexpected expenses or downturns in business and use clear contracts to protect against client disputes and non-payment.
Get more information on Fergus and access a free trial of the software here
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