Common Reasons Businesses Fail in New Zealand’s Trade Industry
Do you want to start a business as a tradie?
Are you worried that it might not work out?
Today I will present some frightening numbers regarding just how many businesses fail in the trade industry.
However, if you are passionate about your trade, you have already overcome many hurdles. And so you realize it’s not all doom and gloom, be sure to check out these 10 Top Business Tips for Starting Out As a Tradie in New Zealand. Not only will they ensure your success but you will understand you can thrive as a tradie in New Zealand.
Before you jump ahead though be sure to understand the common reasons for a business to go under in the trades. As a tradie you can absolutely be successful. Be aware of the common pitfalls will make that happen.
Why do so many tradie businesses fail? What are the causes of collapse?
Let me start by saying this. The high failure rate of tradies and their businesses is not unique to the trade industry.
Restaurants, retailors, IT companies and most other business struggle to make it to the 10 year mark. So don’t let anyone tell you it’s because your a tradie, OK?!!?
According to figure.nz over 90% of businesses will fail before reaching 10 years.
You know exactly what I’m talking about if you own or operate a construction company, run a plumbing or electrical business or are in any one of the many specialized trades. You probably know more than of or two contractors that haven’t made it on their own.
It is beyond difficult to become a successful tradie that operates their own business, and unfortunately and yet far easier to fail. Having owned multiple tradie businesses, I am speaking from experience. It took several years of iteration and learning before I finally figured it out.
You can avoid making the same mistakes most of us make early on. In this article, I’ll give you an inside look at the primary reasons why tradie businesses fail. Implement the outlined principles below to ensure that your company thrives in the top 4% of businesses in the trade industry.
Tradie businesses, general contractors, and specialty tradies universally face the same eight problems.
These Are the 8 Most Common Reasons Why Tradies Fail in Business
Here’s why tradie businesses fail:
1 – Insufficient Cash Flow
Cash flow is king. Without a constant positive cash flow, tradie businesses and specialty contractors are finding it difficult to keep their doors open for business. Whether that be because they are struggling to pay for materials, meeting payroll, keeping up with advertising demands, or any other number of reasons.
When cash flow is negative, companies often make hasty decisions and take on jobs that aren’t well suited to their company’s needs. This can result in further profit loss and more significant cash flow problems down the road – causing companies to fail. But, how do you maintain positive cash flow? Keep reading…
2 – Charging too Little
Most, if not all, struggling tradie businesses and specialty contractors do not charge enough for their services. Many companies don’t realize that they are charging too little because they don’t fully understand their overhead and operating expenses.
The billing price of each successful job must cover job costs, its share of overhead costs, plus a reasonable profit. To build a sustainable construction company I recommend a minimum of 8% profit. Failing to charge enough on each job will soon lead to problem number one: insufficient cash flow.
3 – Lack of Agreed Upon Payment Schedules
Outlining a cash flow protective payment schedule on estimates and customer contracts will set a construction company on the road to success. A payment schedule that requires the company to finance parts of the job will consume cash flow. And in doing so, ultimately limit success. Instead, ensure that payment schedules cover, at minimun, job expenses and associated overhead.
In my experience, a 40% down payment on approved estimates and change orders works best. Have the customer follow up with weekly or biweekly progress payments that coincide with the percentage of completed work as outlined on the estimate. Customers rarely have a problem with well-documented and communicated payment schedules.
Communication and managing customer expectations is the key to success here. Understanding and indentifying this is an issue is ceratinly the role of a business coach.
4 – Insufficient Number of Profitable Sales
Many tradie businesses fail simply because they lack consistent and profitable jobs. For almost all businesses, advertising and one or more salespeople are required to maintain a flow of consistent sales.
Additionally, a good website, search engine optimization (SEO), and a number of good online reviews will dramatically increase the flow of organic job leads. It’s common for tradie businesses to purchase job leads from online providers and business directories. Proper management of job leads and customer data will dramatically improve your ability to convert leads to sales.
For this, you may need a construction Customer Relationship Management (CRM) software solution. Finding a CRM system that meets the needs of your business, is absolutely something a business coach can help you with. Finding the best option for and your business can make attaining success, and avoiding failure, that much easier.
5 – Lack of Change Orders
Cha, cha, cha, changes… Unforeseen issues, customer scope creep, and upselling are just a few examples of why real time changes orders are needed on most construction and specialty contractor jobs. Waiting until the end of the job to tack on additional costs to the bill can be problematic. It will often result in customer sticker shock, bad reviews, and customer resistance to pay. Which in turn, leads to more cash flow problems and company failure.
When a job change occurs, the construction company should submit a change order to the customer for approval. Companies should request a deposit on change orders that are over a couple of thousand dollars. Customers can get excited about the work that is being done until the final bill comes. Then they find themselves overextended and unable to pay.
Having a signed change order and a deposit before the work begins ensures that the company and customer are on the same page. Ultimately improving cash flow and profitability. I highly recommend leaving very little money left on the table for the end of the job. Large payments due at the end of the project can be hard to collect.
Take away – Make consistent job progress, communicate progress and manage expectations with the customer, and pull progress payments to match. By the time the job is finished the customer should owe you a relatively small amount.
6 – Lack of Legal Contracts
It’s essential to establish common ground and strong communication between the company and customer. Creating a detailed estimate and contract for the customer to sign is imperative toward achieving this goal.
There are as many bad customers out there as there are bad tradies. Some of those customers simply want to get the work done for free. They will argue about things that, they claim, were promised. A signed contract and detailed estimate will help to prevent this from happening.
7 – Excess Overhead and Employees
Don’t get too excited to add employees. Company growth is what you want. Quite simple growth matters in the trades. However, growth isn’t always measured by more employees. A business coach that listens to you can identify the next step to grow your business sustainably and successfully. But only add each employee only when absolutely necessary and after ensuring that the company can afford to do it. Employee payroll is one of a company’s biggest expenses. Do the math to ensure an additional tradie will help the bottom line. Otherwise, it’ll consume its cash flow.
Finding a business coach that has the ability to teach you how to do math is key. Believe it or not, some are all hot air. In fact, there are only a select few coaches that legitimately understand the needs of the trade industry.
8 – Lack of Organization, Processes & Decision Making Data
For a tradie to grow a sustainable business it is impossible when the bulk of the business is operating out of one person’s head. In order to grow, you’ll need projects and issues that can be efficiently managed. To improve your efficiency you may need to hire to help. To do so, you’ll need more data transparency, processes, and organization.
For larger companies in the trades that use sticky notes and boxes full of folders, you essentially have the same problem on a bigger scale. Job leads and customer management, project details, task management, communications, schedules, progress tracking, equipment management, the list goes on and on.
Analyzing lead, advertising, sales, schedule, and project data from file folders and spreadsheets to make good business decisions is daunting. Each of these elements is extremely time-consuming, error-prone, and can negatively affect profitability and cash flow.
Summary: Get Help. The Right Business Coach Will Ensure Success As a Tradie
There are many common traits to successful businesses in the trade industry. One such trait is having a reliable resource on your side to help you identify potential issues, implement strategies to make sure they don’t become a problem, and ultimately help you grow and achieve all of your goals.
Growth isn’t always about making more money. Growth in the trades can be as simple as collecting more invoices in an easy and automated way. Or maybe it is about getting off the tools and moving into a management role.
Want more time to spend with the family on the weekends? That is another example of how you can grow your business.
Growth Matters for all tradies regardless of their specialty.
If you would like to talk to a business coach that specialises in helping tradies achieve more success can contact us several different ways.
You may call on 0210 270 2307
You may email Growth Matters at karl@growthmatters.co.nz
Or for your convenience simply fill out the form below and we will be in touch to discuss the needs of you and your business.
You have worked so hard to master your skills as a tradesperson. Don’t leave the success of your business to chance. We can make sure that you grow your business in all the right ways! Check this out for more tips for running a successful business in the trade industry
Growth can be measured in many ways. As a tradie Growth Matters and we can help make it happen
As your business coach, I will listen to what you are trying to do. We will create measurable goals. I will give you the right tools to get the job done right. After that, you will go to sleep each night knowing everything is just right. Growth Matters for all trades but it must be done right. Fill out the form below to get your grow on!
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https://growthmatters.co.nz/blog/10-top-business-tips-for-starting-out-as-a-tradie-in-new-zealand/
https://growthmatters.co.nz/blog/10-tips-to-become-a-successful-tradie/
https://growthmatters.co.nz/blog/what-is-business-coach/
https://growthmatters.co.nz/blog/tradies-and-the-trade-industry-8-reasons-why-businesses-fail-in-the-new-zealand/
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