There are always warning signs in business before trouble appears. But unless you are actively looking for them, they can take you by surprise.
In military training, they teach how to look out for warning signs that could affect the mission. They call this situational awareness. Potential threats might include the environment, the enemy’s position, the shape you and they are in mentally/physically. You need to pre-empt what to do if things go wrong and know what your next move would be.
It’s the same in trades - there are always warning signs when your business is heading for trouble. After personally having coached hundreds of trades businesses over the past 12 years, I know nine warning signs to look for. Deal with these early, and chances of success improve dramatically. Left too long, they can cause major problems at best, complete failure at worst.
Early warning signs
These usually start small but become bigger over time if not dealt with. Tackle them early, and your business will stay out of trouble further down the line.
1. Bank account is at low tide, often
This is the one that everyone pays attention to. If I have money in the bank then I must be ok, right? Not necessarily. If the bank account looks good but you’ve just taken some large deposits on jobs or there are suppliers bills that have not been paid for yet, then things will look better than they are. However, if the bank account always seems to be low and you are constantly scrambling for money, that’s a bad sign.
2. Owners not getting paid
Not being able to pay yourself a regular wage as the owner is a common warning sign. Time spent in the business, either on the tools or organising, should be costed into jobs so the money is there to pay you. Too many trades business owners, in their early years, are making less than if they were working for someone else.
There should be enough for a wage and a healthy profit as well. The same applies to your partner when they are working in the business. If cashflow can’t support their wage, it’s a sign that you are just not currently making enough for a sustainable business.
3. You’re confused by the numbers
It is essential that the numbers you see are accurate and are being checked at least monthly. It’s easy to fix one month, but hard to fix 12.
I still see a lot of tradies’ financials that show incorrect margins because wages or other direct costs are coded as expenses, rather than direct costs.
If you are finding that your profit and loss shows large profits one month then big losses the next, even though not much else has changed in the business, it’s likely you are not including ‘work in progress’, which takes into account deposits on jobs or costs incurred that cannot be billed yet.
Not watching the numbers, or having inaccurate figures, is like flying a Boeing 747 with no instruments, while your copilot is yelling instructions as they are looking out the window. Dangerous!
4. Going in different directions
When the owners or the team are pulling in different directions. This could be owners who are out of alignment on the big issues or a clash between management and staff. I am not talking about the odd disagreement here and there, when looking for the best solution to a problem. That’s healthy and challenges wrong assumption. But when there are core issues that can’t be resolved, deep seated family disagreements or frustrated team members who are working against the company’s objectives, that can spell trouble.
5. Discounting when things get quiet
If work is a little thin on the ground, it’s tempting to discount
jobs to keep the team going. But how low is too low? A mistake I see a lot is people discounting rates to get that big job, to later discover they have spent the past six months breaking even or losing money on this.
Big jobs usually have a few surprises, and it doesn’t take long for extra hours to add up. A builder client I worked with told me, at our first session, that he had completed a $800,000 job and made nothing from it. That doesn’t happen anymore.
Discounting margins to get the work, combined with growth is a slippery slope. You won’t really know how profitable the job was until the end, so a buffer is essential. Larger companies can lose a lot of money here and may not realise until it’s too late.
6. Collecting too many barnacles
If jobs are consistently taking longer than they should, this will be eating away at your margins. Or if you have too many clients complaining about price, trying to get something extra for nothing, they become like barnacles on the bottom of a boat.
Left long enough, they accumulate, slowing momentum. Over years, they will also strip away the paint and water will erode the metal. Too many barnacles will do this to your business too.
Late warning signs
Late warning signs are much harder to fix. At this point, the business is in intensive care and requires immediate intervention to survive. Cashflow will be bad and its likely loses have been accumulating for years, at this stage time is running out.
7. Constantly being chased by suppliers
Suppliers chasing you for money that is significantly overdue, maybe some have put the business on stop credit. Your front desk is hesitant to answer the phone in case it’s another creditor asking for money they haven’t got. Payment arrangements get made and then broken, losing further credibility. Paying for old jobs with new money from current jobs. Robbing Peter to pay Paul. Taking an approach of whoever is yelling the loudest might get something. Jobs are constantly delayed as materials aren’t available to finish the work. All these signs can spell significant trouble.
8. Employees not getting paid on time
Is there not enough money for wages some weeks? Are pay runs being delayed? Do you have lots of mistakes and callbacks on jobs as employees are no longer invested? At this point, the team has lost confidence in the business and staff are likely applying for more secure jobs. Some may have already left. There may even be talk around town that the business is in trouble.
9. Legal
Owing a lot of overdue money to suppliers and the IRD is a massive sign that trouble is at your door. One or more creditors may have lost patience with you and taken legal action against the company to get paid. Costs will be accumulating, with lawyers are heavily involved adding even more expense.
The reality is that, at some stage, every trade business will experience some of these early warning signs of trouble in their business. This could be working though a small cashflow issue with a supplier, extending payment terms or making an arrangement with the IRD to pay the GST this month. But if there is a cluster of these signs, or they are happening often, then act early as they are much easier to fix now than later.
Even at late stages the business can sometimes be turned around, depending on how big the deficit is and if there is enough profitable work to trade out of it. However, this often involves convincing lawyers,
creditors, staff and the IRD to back your plan which can be a tough sell. I have coached companies who have traded out of these final stages, but sometimes it’s just too late, the hole is too big. Better to deal with the warning signs early, way less stressful and much better odds of success.
If you recognise these warning signs in your business and want to get ahead of them, book a free business checkup and let’s look at the numbers together.
