Every day, business owners work hard to increase their profit. But far too often, they lack a clear strategy and practical plan to make that happen. Your Profit & Loss Budget should be a direct reflection of your Strategy and Plan.
What are Income Streams?
Think of an Income Stream as a micro business that operates within your own company. Different Income Streams are determined by:
- Servicing a different target market (e.g. Commercial or Residential).
- The type of work (e.g. Service or Project).
Most trade businesses have at least two or more Income Streams. However, most of their Profit & Loss statements would be set up incorrectly or too simplistically. For instance, it is common for a business to have all of their jobs listed in only one category such as ‘Sales’ or “Income’ in their Profit & Loss which makes it very difficult for you to know where your profit is coming from.
In a trades business, in its simplest form, there are only two core things being sold; labour and materials.
Depending on the type of work being done, the amount of materials and labour (both sub-contracted & employed) will vary. Additionally, different types of work may attract different mark-ups and could also vary between quoted and do-and-charge work, all of which will impact on Gross Margins and Gross Profit.
To understand how much profit your business may be able to generate in a coming financial year, we need to have a clear idea of how many different Income Streams are in your business and the expected Gross Margin and Gross Profit within each.
Expert tips on setting up your Income Streams
Create Income Streams using the following items as a guideline:
- Is it a Residential or Commercial job?
- Service, Maintenance or Projects?
- New Build or Existing?
- Small Jobs or Large Jobs?
Be clear on what the Gross Margins of each Income Stream are:
- How much labour and materials you would typically use on a standard job within that Income Stream?
Once you have an estimate of average labour and materials used per job, you can then easily work out what your average dollar sale, average Cost of Goods Sold (labour and materials) and average Gross Margin and Gross Profit per job are. With that knowledge, you have all of the information you need to create a budget for that particular Income Stream in your business.
Record what your labour and materials are for each Income Stream:
- Whatever your final Income Streams are in your business, you should create the duplicate Streams in your Cost of Goods Sold.
- Then, as you use materials and labour, allocate the cost of those materials and labour to the Cost of Goods Sold Stream for that job.
- This way, you will be getting true Gross Margin and Gross Profit numbers for each of your jobs as well as Income Streams.
- If you have any un-billable time for employed labour, allocate those to non-chargeable outside of your income streams. That way you can see the amount of time you didn’t charge as well as maintaining clarity of margin within your Income Streams.
Make sure you can service all of your Income Streams
- Earlier we mentioned Strategy and Plan. Using your completed Profit & Loss Budget with Income Streams, you should be able to work out how many clients and jobs you will need per Income Stream and in total. Essentially, the total mix of different types of clients and work across your various Income Streams is your Business Model (or your Strategy). These are the markets you are targeting, the types of work you will perform and the total number of annual clients.
- Then, looking at your mix of Income Streams, ask yourself if your current team can handle that volume and mix of different types of work.
Correctly setting up Income Streams in your business will:
- Help you create more realistic budgets and estimate your current capacity
- Allow you to see which areas of your business are performing well and which need improvement
- Allow you to have plans for each Income Stream in terms of when to bring on new types of trades and how to find, keep and grow the right customers for each Income Stream
- Make future decisions about your Business Model, e.g. keep your current Income Streams, add more Streams, reduce or eliminate Streams etc.
Having visibility and clarity in your business is critically important, setting up Income Streams in your Profit & Loss budget as part of your Business Model and Strategy will be a big step towards consistently achieving profit!