Budgeting can feel like a burden, especially if your days are filled with managing job sites, working with clients, and keeping your crew organised. But if you are a business owner in the trade industry, a carefully crafted budget is the foundation that helps keep your business running smoothly. A realistic budget is not just about crunching numbers; it is about creating a roadmap for your business that helps you predict expenses, manage cash flow, and make more informed decisions. Below are some ideas for how to create a realistic budget for your trade business.
1. Understand Your Income Streams
Before anything else, you need to know exactly what money is coming into your business. This can vary for tradespeople based on the number of jobs, their sizes, and timelines. Start by looking at your income from the past 12 months to get an average monthly revenue figure.
Are some months busier than others? Recognise the peaks and valleys to prepare for times when business may be slower. Sometimes clients take longer to pay, especially for larger jobs. Factor in delays in getting paid and identify your average collection period. To avoid chasing payments, encourage clients to make early payments in exchange for a small discount or implement better payment terms to keep cash flow consistent.
2. Track Your Expenses Thoroughly
Expenses can make or break a business, especially in industries where equipment, materials, and employment costs fluctuate. Your expenses fall into two categories, fixed and variable.
Fixed Expenses: These costs stay the same each month, such as rent, utilities, insurance, and salaries for full-time staff. They are easier to predict, making them the base of your budgeting plan.
Variable Expenses: These vary, including materials, subcontractor fees, fuel, and equipment maintenance. Keep a close eye on these and try to develop an average by looking at your expenses over time. Add a little buffer here as costs in the trade industry are known to fluctuate.
3. Estimate Future Projects and Costs
Budgeting means planning for the future. List upcoming projects, estimate the costs involved and ensure to factor in materials, subcontractor costs, and the duration of the project. Having a clear idea of what jobs are lined up will help you allocate your resources effectively and avoid surprise costs.
Remember, underestimating costs is a common problem, so add a contingency fund of 10-15% of the project’s estimated cost for unexpected expenses. This will protect your budget and prevent you from needing to dip into your personal or emergency funds.
4. Don’t Forget Overheads and Hidden Costs
Avoid the common mistake in budgeting of ignoring overheads and ensure to account for them carefully. Your overhead costs include things like tools, equipment depreciation, advertising, and vehicle maintenance.
Hidden costs are often minor, but they add up. Think about admin supplies, permits, employee training, or fuel. The more accurately you capture these smaller costs, the more realistic your budget will be.
5. Set Financial Goals
Setting clear, realistic financial goals can guide your budgeting process. Do you want to save for new equipment, hire more employees or expand your services? These goals will dictate how much money you should set aside each month and will help you make smarter decisions about your spending.
Divide goals into short term (e.g., paying off debt, building a 3-month emergency fund) and long term (e.g., buying new machinery, expanding your service area). Allocate a small percentage of your income to these goals to ensure you are building towards growth and not simply operating from day to day.
6. Monitor Cash Flow Weekly
Budgeting is a consistent process and not something done once per year. For trade businesses, cash flow can be inconsistent as payments might come in bursts, while bills arrive monthly.
A weekly cash flow check can help you stay ahead of any shortfalls. Keep an eye on what is coming in and what is going out and this will allow you to make adjustments quickly if needed. This will mean you do not need to overhaul your budget each week.
7. Use Budgeting Tools and Software
Gone are the days of relying solely on spreadsheets. Today, many simple and practical software options are available to make budgeting easier. Tools like Syft, Xero, or even Jobber (tailored for trades) can help you track income and expenses and generate reports to provide a snapshot of your financial health.
With cloud-based software, budgets can be updated on the go, from the office, your van, or even on a job site. This level of flexibility can save you both time and money.
8. Review and Adjust Regularly
A budget is a dynamic tool and not set in stone. Set aside time each month to review your budget versus your actual financial performance. If you notice that certain costs are regularly higher than budgeted, adjust accordingly. This will help ensure your budget remains realistic and useful.
Also, look for trends. Are there months when cash is tighter? Are material costs increasing consistently? Knowing this will allow you to pivot before financial challenges become too big to manage.
9. Seek Professional Help if Needed
Lastly, never be afraid to ask for help. Accountants and bookkeepers can help you create a sustainable budget, manage your cash flow, and provide insights you might have overlooked. Outsourcing your financial management can give you peace of mind and free up your time to focus on running your business.
In conclusion, creating a realistic budget for your trade business might seem daunting, but it is one of the most powerful tools you have. It gives you control, visibility, and a growth plan. Start by understanding your income, tracking your expenses, preparing for the future, and setting realistic goals. A little bit of time spent on budgeting today can save you countless headaches tomorrow, helping you make informed decisions that keep your business on a path to success.