The plumbing industry, like many sectors, is full of challenges that can impact a business’s profitability and sustainability. Whether you’re in the projects space or running a maintenance business, being able to reliably predict how you’re travelling month in month out from a cashflow, and profit perspective is not an easy thing.
It can also be difficult to make decisions about when and how to grow your business, what the impact will be to your profit in the short and longer term of adding additional team members, and what this means in terms of your ability to take on more work.
Many of these questions are answered, and more business certainty is introduced, through having a solid budget process. Unfortunately, lots of business owners we meet haven’t got a budget in place or they think putting one together is too hard or they don’t have time (or simply don’t see the value in it!)
So, we’ve put together a budget template specifically for plumbing businesses – it’s easy to use and provides the clarity you need to make good business decisions.
Download our Plumbing Business Budget template and watch an instructional video we created with Master Plumbers – visit our Budgeting for Plumbing and Gas Businesses page.
The Common Financial Pitfall
- Profitless Growth: Despite noticeable top line growth driven by strong demand, businesses often find themselves trapped in a cycle where increased revenue doesn’t translate to increased profit. The lure of securing more work by undercutting margins or second guessing what you think people will pay often leads to a scenario where businesses are busy but not necessarily profitable.
- Margins – what you are chasing v what you are getting: All too often we see a material difference between what margins a business owner thinks they’re making and what they’re actually making. There’s a range of issues at play here, but ultimately, these businesses need to tighten up their bookkeeping processes to get more reliable data and need to get better reporting in place to reveal where profits are genuinely made or lost.
- Gross Profit v Overheads – Whilst most accountants will focus on “cutting overheads” the answer to driving strong returns for plumbing businesses is found in mastering an understanding of gross margins: the difference between revenue and direct costs.
- Managing by Bank Account: A surprisingly common practice is measuring success purely on bank account balances. This method, while straightforward, overlooks the nuanced and fluctuating nature of business finances, leading to potential financial distress.
- The “Fake It till You Make It” and a DIY Approach to Business Finances: Accounting technology is getting easier and easier to drive. While optimistic, the idea of faking it till you make it, often leads business owners to mishandling, overlooking or misunderstanding critical aspects of their finances.
Knowing the Business Models: Commercial vs. Residential
Before you build out your budget or start planning for the future – it’s important to understand the different business models at play in the Plumbing sector – and how profit is generated.
- Project/Commercial: This model focuses on larger-scale projects with “lumpy” revenue streams from staged claims or end-of-month billing. Success in this domain requires meticulous estimating and costing up front and then disciplined project and financial management throughout a job to ensure target margins are met. The complexity of irregular cashflow increases as you take on multiple projects so it’s critical that you have a budget to provide the visibility you need.
- Maintenance/Residential: Conversely, the maintenance/residential model thrives on consistent, less variable revenue from services such as emergency callouts and routine maintenance. This model is all about the profitability and utilisation rates of team members, making sure you have catered for the unforeseen costs in your labour rates and having a swift billing process to tighten up cash flow.
Solution: A Rock Solid Budget
- Myth vs. Reality: A Proper Budget cuts through all the assumptions or gut feelings you have on how your business is travelling and presents the reality of your actual performance and a more accurate view of what’s coming ahead.
- Early Warning System: A well-structured budget acts as an early warning system, identifying potential financial pitfalls before they become crises. It allows businesses to adjust course proactively, rather than experiencing unexpected financial shocks.
- Scorecard and Roadmap: Budgeting provides a tangible scorecard to measure actual performance against targets, serving as a roadmap for decision-making. It facilitates strategic planning, from team allocation to project scheduling, providing a more structured, accurate blueprint for achieving financial goals.
Download the Plumbing Businesses Budgeting Tool:
Success in the plumbing industry goes beyond just technical acumen; it requires the ability to properly understand and manage your finances, particularly if you’re keen to grow.
By understanding the common pitfalls, differentiating between business models, and recognising the importance of budgeting, plumbing businesses can chart a course towards sustainable growth and profitability. This strategic approach not only ensures financial health but also empowers owners to navigate the complexities of the industry with confidence and clarity.
Check out our Budgeting for Plumbing Businesses webinar in collaboration with Master Plumbers Queensland and CSQ.
If you would like to request a one-on-one consultation with our CFO Advisory team at Xact Accounting, please click on the button below:
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