In business, you never know what’s around the corner.
And it’s for this very reason every contractor needs to build what we call a ‘safety net’.
Your safety net is your business’s internal piggy bank that you use as protection against the imminent storms that come with trade businesses, as well as give you some cash reserves to invest in critical business assets that allow you to continue delivering the work that you do.
This is usually referred to as working capital.
But a better name is core capital safety net!
How big should your safety net be?
That depends…
How much cash would you need if sales took a serious dive (think when COVID first hit)?
A critical team player walks out the door?
A big client stops honouring your payment terms?
Or you’re unexpectedly struck by an illness?
In Australia (where seasonality isn't as much a factor), a good rule of thumb is to have at least 2 to 3 months’ worth of cash on hand, and nothing drawn on a line of credit to cover your operating expenses.
This will allow you to comfortably cover your overheads if things go south, as well as cover the ups and downs of operating cash flow.
If you haven’t got a big enough safety net in your contracting business, now is a good time to start building it.
If you're an electrician, plumber, painter, carpenter, or any other trade business owner who is looking to take their business to the next level, click here to learn more about how our team can help!
