Small businesses in the skilled trades sector experience delayed client payments 50% more frequently than other industries, according to a survey of 750 small and medium U.S. businesses from the online business banking company Relay.
The Cash Flow Compass report found that 65% of owners in skilled trade industries experience anxiety or burnout because of financial stress, often linked to delayed payments.
Author Mike Michalowicz, who focuses on financial advice for small businesses, sat down with WFB to discuss tips wood floor businesses could implement to alleviate cash flow problems and potentially resolve financial stress.
“I hope over time businesses can become more successful at handling their cash flow and, hopefully, move away from being one of these bad statistics,” Michalowicz told WFB.
Here are five financial tips for small business owners in the skilled trades.
1. Don’t Ask for the Paycheck at the End of the Job
Michalowicz’s book “Profit First” provides actionable tips for small business owners in skilled trades. In his book, he suggests trade businesses collect payments in installments at various checkpoints during a project instead of collecting it in a lump sum once the project is finished.
This method can provide more security in getting paid for a job, as you’re not waiting until the end for the paycheck.
If the business is getting payments throughout the project, Michalowicz says that can also help provide cash flow for purchasing materials necessary for the next steps in the work.
2. Don’t Spend Your Paycheck All at Once
Michalowicz finds small businesses are often working paycheck to paycheck: They get a check from one job and use all the money to pay for the business expenses and materials, without setting any money aside.
This can leave businesses in trouble if there is a lull period in business or an unexpected expense. To get ahead of that, Michalowicz suggests setting aside payments from each job to go toward expected year-round expenses.
That way, if a client falls through on a payment, there is still a cash reserve to fall back on.
Michalowicz also suggests businesses don’t plan ways to spend money before they have it.
If you have a big project coming up that you know will bring in a lot of money, don’t think of new tools or materials you can buy with it. Make those decisions after you get the money. Michalowicz says people often make impulsive money decisions when they think a big paycheck is coming in. Waiting until the money is actually in front of you can lead to more rational decisions about how to spend it.
3. Itemize Your Business Bank Account
Of course, it’s always a good idea to keep an eye on where your money is being spent, and an easy way to do this is by setting up different accounts within your business bank account for every aspect of your business.
Michalowicz suggests setting up accounts for salaries, material costs, repairs, etc. “This lets businesses know what money is going where and what money is available for what purposes,” he says.
By understanding what money you have for each aspect of your business, Michalowicz says owners have more authority over their finances and confidence about where their money is being spent.
4. Hide Money From Yourself
If people have money, they’ll want to spend it, according to Michalowicz. This is why he suggests setting aside a percentage of revenue in an account that is hard to access.
A nice reserve of cash can be helpful if the business falls on hard times or an unexpected expense comes up. Michalowicz suggests having three to six months of operating expenses set aside in a savings account.
5. Consider Ways to Make Money During the Off-Season
A lull in work can be common for businesses, so it can be helpful to consider a secondary service your business can provide to make some easy side cash, Michalowicz says.
Wood floor installers or sand and refinishers could consider promoting wood floor cleaning or recoating to generate more revenue, for example.
