Building Financial Confidence as a Trades Business Owner
Financial confidence has very little to do with knowing accounting terms. It comes from looking at your numbers and knowing what to do next. A lot of trades owners have accurate books and still don’t have that confidence, since the books show totals and leave out the specifics that would change a business decision. These are the four places I’d look first.
1. Know Your Profit by Service Line
A single gross margin number for the whole business can hide a lot. If you run more than one service line (mowing and hardscape, install and service, repair and replacement), each one almost certainly earns a different margin, and a strong overall number can be one service line carrying a weak one without anyone realizing it.
Getting there is mostly a setup job. Each service line gets its own class or income account, the direct labor and materials for each job get coded to that same line, and then a P&L by service line shows the margin for each one side by side. Once you know the margin by service line, you know which work to sell more of and which work needs a pricing fix or might not be worth chasing.
2. Understand How Pay Structure Feeds Your Margin
How you pay your people is a margin decision as much as a payroll decision. Hourly, commission, piece-rate, or some blend all change how labor cost moves with revenue, and a comp structure that made sense at one size can become the wrong one as you grow.
Let’s say one tech is paid about $30 an hour loaded and another is paid a 20% commission on the ticket. Here’s what the same jobs cost in labor under each:
| Job | Hourly tech ($30/hr loaded) | Commission tech (20% of ticket) |
|---|---|---|
| $500 repair, 4 hours | $120 (24% of the ticket) | $100 (20%) |
| $1,500 replacement, 6 hours | $180 (12%) | $300 (20%) |
| $300 service call that runs 3 hours long | $90 (30%) | $60 (20%) |
With hourly pay, labor cost follows time, so slow jobs and long drives hurt the margin and big tickets help it. With commission, labor cost follows the price, so the margin stays steady but big tickets cost more in labor. Neither is right or wrong, but it’s worth knowing which one you’re running, since it changes how every other decision plays out.
What that means for a price increase
Let’s say a business does $1M a year at a 40% gross margin, so it makes about $400k in gross profit, and it raises prices 5% without losing any volume. That’s $50k more revenue.
- With hourly pay, labor cost doesn’t change, so nearly all of the $50k lands in gross profit. That’s a 12.5% jump in gross profit from a 5% price change.
- With a 20% commission, $10k of that increase goes to the techs, so gross profit goes up about $40k instead.
Both are good outcomes, but they’re different outcomes, and the pricing decision should be made knowing which one to expect. Reviewing comp and pricing together, instead of as two separate conversations, is one of the more overlooked ways to improve profitability. Changes to how people get paid also have wage and overtime rules attached, so any new structure is worth running by your payroll provider before rolling it out.
3. Match Costs to the Job and the Month They Belong To
It’s common to buy materials in one month and use them across several jobs over the following weeks without tracking which job they went to. That makes individual job profitability hard to trust, and it throws off the monthly numbers too.
Let’s say you buy $12k of materials in March for jobs that run in April. If that purchase gets expensed in March, March looks like a terrible month and April looks like a great one, even though nothing about the business changed. Decisions made off either month would be based on the timing of a supplier bill.
A few things fix most of it: putting a job number on every purchase order and supplier receipt, recording materials pulled from stock against the job that used them, and holding materials bought for future jobs in inventory until they’re used. It’s unglamorous work, but it’s what turns job costing from a rough estimate into something you can make decisions on. If you don’t want to do any of that, simply override your cash deposits with invoiced revenue in the period and compare to cash expenses, and that can get you close.
4. Know What “Good” Looks Like in Your Part of the Trades
A margin that sounds fine on your own P&L can still be below what similar businesses are running, and there’s no way to know that without benchmarking against your specific corner of the trades. HVAC, landscaping, and pest control don’t share the same healthy margin ranges, and comparing yourself to a generic service business number can leave money on the table without you ever seeing it.
A few places to find useful comparisons: trade associations that publish member surveys, peer groups or franchise systems in your industry, and your own numbers from the last few years, which is the most reliable benchmark you have. One caution: benchmarks only compare cleanly if the numbers are built the same way. If your cost of goods includes truck costs and the benchmark’s doesn’t, your margin will look worse than it is. So before reacting to a benchmark, it’s worth checking what’s in it.
Where Budgeting and Forecasting Fit
Budgeting and forecasting matter, but they work best once these four pieces are in place, since a budget built on blended margins and mistimed costs is a guess with a spreadsheet around it. With service line margins, a clear labor cost picture, accurate job costing, and a sense of where you stand in your industry, the budget becomes something you can manage the business against. And make sure that you do both a budget and a forecast, since they serve very different purposes. More on that in a future article!
Where to Start
If you want one thing to do this week, pick the one of these four you know the least about and pull the numbers for last month. For most owners, that’s either margin by service line or how much labor costs as a percentage of each job type.
If you want a clearer picture of where your numbers stand, a free 15-minute discovery call is a good place to start.
