Month: November 2023

Cost Of Sales Explained

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Understanding Cost of Sales: A Valuable Tool for Tradie Business Owners

In the world of business, knowing your numbers is crucial for making informed decisions and ensuring profitability. One essential aspect of financial analysis is the “Cost of Sales,” which plays a significant role in helping tradie business owners comprehend their financial performance and make strategic choices. Let’s explore what Cost of Sales is, its purpose, and how it can aid tradie business owners.

Cost of Sales, Explained:

The Cost of Sales represents the direct expenses incurred to produce the goods or services sold by a business. For tradie businesses, these costs typically include materials, wages, subcontractors, equipment rentals, and permits related to completing specific projects or jobs. Essentially, it encompasses all the direct costs associated with providing the services or products that generate revenue.

The Purpose of Cost of Sales:

The primary purpose of Cost of Sales is to enable business owners to gain a clearer understanding of their financial performance by separating direct expenses from other operational costs. It helps in evaluating the profitability of each job or project, making better pricing decisions, and predicting the impact of changes in sales volume on the overall profitability of the business.

Understanding Cost of Sales with an Example:

Let’s consider a simplified Profit and Loss (P&L) statement as an example. The P&L consists of three key components: Sales, Cost of Sales, and Operating Expenses.

Sales: This represents the total income generated by the business from its services or products.

Cost of Sales: This includes the direct costs incurred to deliver those services or products, such as materials, labor, subcontractors, equipment, and permits.

Operating Expenses: These are the fixed costs that remain relatively constant, regardless of changes in sales volume. Examples include rent, utilities, insurance, and administrative expenses.

For instance, suppose a tradie business with $100,000 in sales incurs $50,000 as Cost of Sales and has fixed operating expenses of $25,000. The calculation would look like this:

Sales: $100,000

Cost of Sales: $50,000

Operating Expenses: $25,000

Profit: $100,000 – $50,000 – $25,000 = $25,000

The Impact of Sales Growth:

Now, if the business experiences a doubling of sales to $200,000, the Cost of Sales would also likely increase the same ratio  to $100,000. The fixed operating expenses would remain unchanged at $25,000. The revised calculation would be:

Sales: $200,000

Cost of Sales: $100,000

Operating Expenses: $25,000

Profit: $200,000 – $100,000 – $25,000 = $75,000

The Significance of Cost of Sales:

As seen in the example, analysing Cost of Sales helps business owners predict the impact of changes in sales volume on profitability. By separating out direct expenses from fixed operating costs, tradie business owners can make more accurate pricing decisions, assess project profitability, and identify areas for cost optimisation.

For more insights on profit and loss, be sure to explore my other videos on the subject.

More tradie tips can be found in my free book “The Wealthy Tradie Book 2- How To Make Your Business Rake In The Cash”, you can grab a copy by following this link. Or you can book a free strategy session here. 

cost of sales

How Can You Be Making A Profit But Not Have Any Cash?

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How Can You Be Making A Profit But Not Have Any Cash?

As a tradesman or small business owner, you might wonder how you can make a profit, yet still have no cash available. It’s a common concern, and I’m here to simplify the explanation.

Let’s say your profit and loss statement in Xero or another accounting system shows a profit, but your cash is low. The reason for this disconnect is that your profit and loss statement doesn’t include certain essential factors that impact your cash flow. These factors are:

Taxes: Any taxes you pay, like instalment tax or withholding tax, don’t show up in your profit and loss statement. This means the money goes directly out of your account.

Debtors: If you have unpaid outstanding invoices from completed work (receivables or debtors), it can tie up your cash. Even though you’ve earned the money, you haven’t received it yet.

Loans: Payments for loans, like those for excavators, trucks, or vehicles, don’t appear as expenses in your profit and loss statement. They go towards reducing your debt, which affects your cash flow.

Stocks: Buying more stock than before can also reduce your available cash.

So, while your profit may look good on paper, these factors can affect your actual cash flow. Remember, most trades businesses use accrual accounting, meaning income is recorded when the work is done, not necessarily when the money is received.

If you need more information, I have other videos that explain profit and loss in greater detail. Feel free to check them out!

More tradie tips can be found in my free book “The Wealthy Tradie Book 2- How To Make Your Business Rake In The Cash”, you can grab a copy by following this link. Or you can book a free strategy session here. 

single door ute

How to Secure More Work Effortlessly

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Unveiling the Trade Business Secret: How to Secure More Work Effortlessly

For tradespeople, finding a reliable way to consistently secure more work might seem like a puzzle with a missing piece. Surprisingly, the key to boosting your workload might already be right under your nose: your past customers. Yes, those clients you’ve worked for in the past hold the potential to become your most valuable source of ongoing projects. In this article, we’ll delve into the power of nurturing your relationships with past clients and how to implement a system that keeps your trade business ahead of the curve.

The Untapped Goldmine: Past Customers

Think about it – why do you want to work with your past customers? The reasons are crystal clear: they’re familiar with your work, they trust your expertise, and they’re far more likely to engage with you again compared to cold leads. Past customers tend to be hassle-free, they respect your pricing, and they are more open to collaboration. However, the challenge arises when it comes to maintaining a connection with them over time.

It’s surprising how many businesses, especially in the trades industry, overlook the value of staying in touch with past clients. Without a system to nurture these relationships, you risk missing out on potential work. Imagine if you had a method to not only retain these clients but also to be at the forefront of their minds whenever a new project arises.

Crafting a Winning Strategy

Create Your Key Customer List:
Begin by identifying your top customers – those who have provided consistent work and whom you’ve built a rapport with. A downloadable resource below can aid you in kickstarting this process.

Quarterly Engagement:
Set up a simple reminder system, whether in your calendar or digital tools like Outlook, to prompt you every quarter to reconnect with your top 30 past customers who you haven’t heard from in the last three months.

Personalised Engagement:
When it’s time to reach out, make it personal. Give them a call, visit their location, or even treat them to a coffee or snacks. The idea is to foster genuine interaction.

Open the Conversation:
Approach the conversation in a friendly manner. Ask them about any upcoming projects they might have and inquire if there’s anything they’d like you to take a look at or offer pricing assistance for.

Why It Works Like Magic

When you actively reach out to past customers, it serves as a powerful reminder of your professionalism and dedication. By expressing genuine interest in their upcoming projects, you not only display your commitment but also position yourself as a solution provider. Because the interaction is recent, your name becomes the first to pop up in their minds when they require services in your field.

Your Actionable Step Forward

The concept is simple, yet the impact is profound. Begin by creating your list of key customers and setting up your quarterly engagement reminders. The small effort of a personal call or visit can lead to substantial rewards in terms of increased workload. By keeping past customers engaged and connected, you’re not only ensuring a steady flow of projects but also fostering a sense of loyalty that can lead to referrals.

Don’t let your hard-earned client relationships fade away into obscurity. Embrace this systematic approach, and watch as your past customers become a consistent and reliable source of work that keeps your trade business thriving.