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Have you ever been curious why some businesses see so much profit and growth while most don’t? Many contractors fall into a trap with cash flow – they receive funds for a job, see it in the bank account, and spend it both inside and outside their business. Then a bunch of expenses come in and the cycle starts over. That’s where Profit First comes in. It drives profit in your business.
Transcript
Rob:
Alright, this is our latest episode! And this episode is why Profit First is good for contractors. And today we have with us me Rob Williams with IronGate Entrepreneurial Support Systems. I’m a Profit Strategist I work on profit strategies to drive profit in contractors’ businesses.
Wade:
I’m Wade Carpenter, I’m a better books so that they can take more home at the end of the day.
Stephen:
I’m Stephen Brown. with McDaniel-Whitley Insurance and Bonding Agency in Memphis, Tennessee, and I help contractors with their bonding and insurance.
Rob:
Stephen, how do, accountants and Profit First professionals like Wade and I help contractors who do bonded work?
Stephen:
That’s so important because the number one tool that I have to get contractor’s bonds is their year-end financial statement. And that financial statement, either looks good or it looks bad. It’s the accountant that helps the contractor learn how to account for their job cost, and how to track their business expenses and their income. And it’s Profit First coaches that help contractors understand how to make that financial statement look good before it’s put together at the end of the year usually. Wade , how does that kind of size up what you do and what Profit First?
Wade:
Yeah. When we’re working with a contractor kind of planning year end, those kinds of things. There are two main things that I would say there are a couple of rules of thumb in trying to get bonded. And they’re, number one about working capital or cash flow, making sure you have some liquid assets. And then there’s equity. And those are two of the main key components of trying to get bonded. And now most contractors if they are trying to pump up their cash and those kind of things, inevitably contractor is a cash game and you’re constantly chasing cash. And if there’s no plan to have cash and any profit at the end of the year, it’s just by sheer luck if you have any. And so many contractors worry about how much taxes they pay so they spend money at the end of the year that they don’t need to. And again, if you spend out all your cash, you need to leave something in there in retained earnings to pump up that equity. So a short answer, it helps you build profit in your business, sustainable profits so that you can build on your bond ability. Okay.
Stephen:
Okay. Rob, what do you do as a coach to help that financial statement look better?
Rob:
When we use Profit First as a Profit First professional, Profit First is a cash management system. It’s not an accounting program and it’s not a job cost system, but it’s a system that works on your natural tendencies. It’s behaviorly b cash management system that works on four basic principles. And the first one I like to call Small Plates. It works on Parkinson’s Law of you are going to use what is there. So we use the checking accounts to divide that, those plates up into smaller plates. So you’re going to consume what is in those plates. And in talking about the second rule of the Plate Theory here is Serve Sequentially. So you do things in order. So you take your profit first and then what is leftover after you’ve taken your profit, and your taxes, and the things you need to do. That’s how much you have left for your operating expenses. And you’re going to make your business work on those. And then the last two are: you remove the temptation of where’s that other money you don’t have it right in front of you because you’re going to spend it if it’s there at least I would spend mine when mine was there; and then the last one is, you establish a rhythm. That’s a really quick overview of the natural behaviors that we get through using Profit First. And that’s why it works.
Stephen:
Wade, how do you see Profit First helping a contractor run his business?
Wade:
Usually, I tell a story and I don’t have time to go all into it. But, for years, me as an accountant I’ve tried to teach people to run their business by the numbers: balance sheets, income statements, and cash flows statement. But at the end of the day if your excavators broke, you don’t, you’re not worried about, you just need to fix it. You go see how much is in your bank account and you figured out what you can do. And just those things that Rob was talking about, that, if you just leave it to where you can go pick from that one big plate, then magically the money disappears. You ended up borrowing from the next job to pay for the next job and that kind of stuff. So it’s a cycle that is hard to get out of. And again, works around your natural tendencies around money. It’s not trying to change a habit. That’s what I love about it.
Stephen:
The bonding business, we call it “robbing Peter to pay Paul.” One job’s underperforming and you have to prop it up from another one and then it gets into a vicious cycle that just repeats itself. And then at some point you say, how do I get out of this? Guys I was mentioning to you that getting data from contractors who fail on projects is unfortunately a big part of my businesses, what underwriters use to make their underwriting decisions on whether to bond a project or not. And as a result of that, that hard data always comes back to cashflow problems. Cashflow problems due to not anticipating a need of cashflow and cashflow problems, having to do with added job cost or unanticipated job costs. So Rob, how can you at Profit First help bonded contractors to not get into that cycle?
Rob:
Like we said earlier, starting early, the earlier you put this in your business, the better because that cycle starts. I have people come to me all the time “I just started this business. We’ll get into this later.” Start it in the very beginning before you get this cycle, because once you get into that cycle, we gradually help the people just by allocating 1% at a time. And then when we allocate the moneys to there, you can’t do it all at once because like you just said, they’re already in that cycle. So we have to unwind that cycle and we edge them in 1% at a time and slowly, gradually bring them back in. And Wade, would you want to comment on this too?
Wade:
I want to jump in on that. One of the biggest things I see, and I’ve done talks on this, and things like that. And people would go out and buy the book Profit First by Mike Michalowicz. And they say, “I can do this myself.” And one of the biggest hurdles is actually getting started, going out and getting new bank accounts. It may sound simple, they don’t know where to start and then there’s several little pitfalls things like that. Rob, I’m sure you can think of a few others.
Rob:
Well, I think the reason I got into this was actually, I didn’t know what Profit First was and I had a contractor client that I had been working with for a long time. but we had a situation that he needed some money that wasn’t there and he hadn’t planned properly. And a Vistage coach had actually told me about Profit First. We created a tax account and we did this and we started putting the right amount over there. So that tax money would always be there. So it’s a matter of doing that gradually. And we just started my web page where this will be posted along with the other places that said “Get started in three simple steps” to get started. You read the first two chapters of the book. You just create an account and you just start gradually putting some things there. So you start doing that, but Wade said, “it’s better if you can get Wade or me to make that happen a lot faster” because I went for a year or two before I finally started becoming a Profit First professional to really get the details. And it would have been a lot better had we started earlier and done all the accounts and got those put in place in 60 days, 60, 90 days or even faster.
Stephen:
I understand that, you heard the expression, “you can’t see the forest for the trees.” You’re so deep into a problem. You’re so deep into headaches for contractor, of course, financial part of it is just a small part or on a successful business. You gotta have your crew. You gotta know your work. You got a problem owners to deal with. That’s huge. How can this Profit First help take that stress off of them? You mentioned you set up a new system to concentrate on your profits. Why is that so hard for someone to implement themselves?
Wade:
Can I jump in on that? There’s two pieces I’d love to talk about and maybe we can come back to the concept of real revenue. But the other piece of really getting started is, they look at these percentages in the book and then sometimes they’ll even jump in and say, “Here’s the percentages. This is what I should be doing.” And they jump off too far, too fast and they can’t sustain it. So usually we work with a coach like me and Rob to work into that, as Rob was saying. But the other piece of real revenue, this is one thing that we talked about with the job costing. He simply says “materials and subs.” If you carve that out of your revenue and I always use the example, if you’re say a million-dollar general contractor, you do a million a year, but you spend out 900,000 in materials and sub, forget all the extra stuff. That really means you have a hundred thousand dollars in real revenue. That hundred thousand is all you got to work with. Rob, any comments on that?
Rob:
I really feel that I love that comment. We love benchmarks. When I had the home building business and then some of the other contracting businesses. But it never occurred to me that we were not a eighty million-dollar business or let’s just say a ten million-dollar business, make the math easier. If our margins there, we, yeah, we were a two million-dollar business managing 8 million dollars of materials. So those numbers and in comparing even within the industry, we all counted things differently. And so I was trying to get those benchmarks and goals to hit, but I definitely didn’t have Profit First. I wish I had this back then to even be ahead. We like to say we looked through the windshield with Profit First because it’s actually with the real money that, it’s the real sales that came in because we had a big pro forma and budgets and things like that. But they were all based on the sale we were supposed to have and the cash that we’re supposed to do. And our sales seemed to never match what was really happening, whether it was weather or sales, just not coming in, or we were too optimistic but our overhead always seemed to be higher than our revenue projections. We were always under on revenue and we were actually on target on our expenses, but they were not on target as a percentage. They were on target as a pro forma from our old accounting systems. I had a controller in different things like that. We usually don’t have it. I didn’t have it on some of my smaller companies. But we look at our bank accounts and what’s so great about this system is we manage our cash management system that I mentioned earlier based on your natural tendency to look at your bank account. So if you set the Profit First system up correctly and you manage your business based on the money left in those accounts, when you get your end of the year statements when you start looking in the rear view mirror on your financials those should be in line as the correct percentages even if your pro forma numbers were off because you make it work with what’s in your bank account. So we’re driving in the front windshield instead of just looking in the rear view mirror.
Stephen:
Yeah, now that makes sense. Now that’s kinda how we started this, this video discussion guys, was getting a financial statement at the year-end and looking at it over. And Wade is a CPA, the arguments you have with their contractors on what you put down. You’re like “Look, I’m sorry I’m just putting down what it is.” It is what it is. And it’s a tough situation so from our perspective, what was so exciting to me about Profit First, was just a system in place to let contractors know you can fight to know what that statement’s gonna say; you can fight to make it a good statement. And a good statement is just making more profit than you have in expenses, that is my definition of it.
Rob:
Wade, what about the rhythm? That was one thing we were talking about. What’s your comment?
Wade:
In helping contractors implement Profit First that’s one good point [ Profit First we typically talk about a 10-24 rule where maybe we pay on the 10th and 24th. But getting a contractor started on that is really tough a lot of times. They have that kind of rule because they are so tied to maybe they pay payroll every week and they’re chasing that cashflow every week. It is tough to get them in a rhythm, but if you implement the system slowly you eventually will get where you can extend that rhythm so you can be a lot more proactive instead of being so reactive to your cash. That’s the one thing I would say.
Rob:
One other thing, Wade you specifically, cause I know you do the back office CFO work as well as the Profit First. And you’ve worked with these contractors for actually, really, I guess I could say a couple of generations since you go back with family and everything. So this is in your blood. What specific things do the contractors run into? What other issues do you get into with them specifically as opposed to somebody that’s not a contractor using Profit First? Construction is a tough business and there’s a lot of other things that you got to think about. One point I’d like to go back to where we were talking about before the concept of real revenue. It’s a straightforward concept and that takes the ego out of revenue. A lot of guys won’t say I’m a ten million-dollar contractor. I can point to some examples over my career where people chase the big dollars and they chase themselves right out of business. So it takes the ego out of it. That’s one big thing. I can identify with that. We were always shooting for that revenue goal because our goal was actually to build it and sell it. So we weren’t watching our profits that much. And then when the 09 crisis hit or 07, whatever year you want to call it a crisis, whichever part of the country you were in, it hit. And we had not been taken our profits as much. We were just worried about our spreadsheet looking ahead at that. And it’s partially that, but it was partially an ego thing. Everybody talks about the volume, but we believe that revenue is going to be our profits because we see these pro formas. But the important thing is focus on profits. I love that one saying Wade that, “a profit first has is along with revenues comes responsibilities.” So if you can make more profit at a lower revenue with a higher percent, you’re going to be, your financials are better, but your life is better and you don’t have as many problems.
Wade:
You don’t have as many things to chase, yeah.
Rob:
That fight for the revenue is such a wrong thing to be looking at when you should be really focusing in on the profits. That’s my standpoint.
Wade:
Yeah. There’s definitely things in construction that you don’t have any other industry like retainage receivable. You take out 10% retainage, that’s cash you don’t have. And that’s deferring the profit and that kind of stuff, but you got to learn to live with within what you’re making. One of the biggest, other things that I see with Profit First in contractors is they read the book, but they should also be setting up another account for materials and subs. And you need to put the appropriate amount there because you get in this cycle of the money’s there and you take it for yourself or you got to pay taxes and tax is another story because everybody’s always short on their taxes. If you don’t set up this materials and subs account and put the appropriate money away, you’re constantly, well, you got this new job you got some, some upfront money on that, you put that on the paying for the old job. You never get out of that cycle. If you don’t have a plan for it. And the materials and subs having a separate account for that will definitely, it doesn’t happen overnight, but it will happen.
Rob:
We used to hear, there was a statement “you just, you can’t ever quit.” We used to talk about that because so many contractors use the draws on their future jobs to pay for where they got behind on their last jobs. So that also gets to be a problem if the economy turns down. You may not have as much coming in. So one you can’t ever quit because you’re always in that cycle. If you have Profit First and you have those materials, accounts and the subs, can’t you have that properly reserved where you have not spent that as the owner, you haven’t spent your future profits so you always have to take another job, or start another job to get that. I see that really hit a lot in the residential side, but, I think it happens in the commercial too.
Wade:
Actually, great point. 2008 for commercial became 2010. But so much of the work stopped and you’ve got to, so many people are deferring their tax stuff and all their, everything just stops. And the cash comes in the following year and they have nothing behind it. And so they’ve got this big tax burden and they can’t pay it. They get in a cycle where they’re constantly deferrals. So Profit First is another way to make sure that you’re building sustainable profit so that you can take more home at the end of the day.
Rob:
Yeah. I’m really looking forward to a lot of our future episodes as we schedule these out because we have so many topics that we’ve just briefly hit today that can be a whole episode. I’m really excited about everything we’re opening up here. But I think today we’ll go ahead and wrap this up. We did a great job. I think hitting a lot of the highlights today.
Stephen :
Yeah, I really appreciate it. Thanks Rob.
Rob:
Yeah. So I’m Rob Williams with IronGate Entrepreneurial Support Systems. I have profit strategies to drive profits through contractor’s businesses.
Wade:
I’m Wade Carpenter. I’m a CPA that helps contractors build better business so that they can take home more at the end of the day.
Stephen :
Thanks. And I’m Stephen Brown with McDaniel-Whitley Insurance and Bonding in Memphis, Tennessee. If we can help you with your bonds, we can help you with your insurance costs. Let us know. Thanks.
Rob:
All right, great. So everybody out there listening, be sure to wherever you’re watching this, click on where we are. Find out more about Stephen. Find out more about Wade. Look at our web pages of how to get started with Profit First. Go download the first two chapters of Profit First on which on Wade site, on my site. Probably where there should be links wherever you’re watching this or listening to it. Just gotta get started. That’s the best way to do it. Download those. Open an account and put 1% in your profit account. That’s a great way to get started. So even greater way is call Wade. Call me. Call Stephen, to get in touch with us. So thanks for listening to The Profitable Contractor and we’ll see you on the next episode.
