Answering your questions about Profit First

On this week’s episode, we’re providing the answers to your questions about Profit First. What are the most frequently asked questions by contractors about implementing Profit First? Find out now, and don’t miss your chance to win a free copy of the book.

Questions we discuss include:

• Can I implement Profit First in my business from simply reading the book instead of working with a Profit First Professional? 
• What is unique about implementing Profit First in a construction business? 
• What does the book not include that contractors need to know about Profit First?
• What does the process of working with a Profit First Professional look like? 
• Why does Profit First say to hold out only 15% for profit? 

LINKS

Enter to win a Kindle copy of Profit First by Michael Michalowicz at contractorsuccessforum.com/giveaway

Visit the episode page at contractorsuccessforum.com/questions for more details and a transcript of the show.

Subscribe for free resources and to be notified of future episodes at contractorsuccessforum.com/subscribe

Find all episodes and related links at ContractorSuccessForum.com.

FIND US ONLINE

Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com

TRANSCRIPT

[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today, we have a special episode about questions and answers. We will give the answers. The questions came in from our listeners, or some of our clients. So today we are going to answer these questions about Profit First. Or, some of them may be general questions about construction.

So, we’re going to be answering those today and you should ask more of these questions. We thank those people that have sent them in and you can go to ContractorSuccessForum.Com to send these in, or any of our email addresses. We will get those.

So on the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business.

Check out our show notes and ContractorSuccessForum.com. Subscribe and learn how we can work with you. Share this show with your friends and meet our three long-term construction industry professionals. In the one corner, we have Stephen Brown, a construction bond agent with McDaniel-Whitley bonding and insurance agency with over 30 years of experience, underwriting and placing bonds for you as contractors.

And in the other corner, we have Wade Carpenter with Carpenter and Company, CPAs helping contractors nationwide to become permanently profitable for over 30 years. And I am Rob Williams, not your referee, but your profit strategist with IronGate Entrepreneurial Support Systems, driving profit in your businesses with decades of vertical integration as a contractor, manufacturer, aviator, and financial strategist in the construction industry.

So today, Stephen, you got a bunch of questions lined up from all of our many, many listeners and very curious contractors to know things, right?

[00:02:03] Stephen Brown: Well, you do sound like a WWF announcer or maybe not a referee.

[00:02:09] Rob Williams: Yeah. Oh, very good. I like your punch in, the guys can’t see your punch ins when, if they’re just listening. If they’re not watching this, you gotta get excited over there, man.

[00:02:18] Stephen Brown: Well, it’s those wrestling refs that are never very effective. Never seen them keep anyone out of the ring. But anyway, I think this is a great topic because I think a lot of people have a lot of questions about Profit First and what it is and what you do. And people kind of already have an idea of who you are, but you know, why can’t I get this book and do it myself, or give it to my Chief Financial Officer and tell him to read it and tell him what he thinks. Why do they need you?

[00:02:47] Wade Carpenter : Well, short answer is yes, they can do it themselves from reading the book, but a lot of people don’t implement it properly. And especially if you’re listening to this show, we’re about contractors. And there are definitely some quirks to construction in accounting and the way they do things that I think that you really need somebody that’s versed in working with people to get this implemented properly and help you build cashflow in your business.

[00:03:15] Rob Williams: Yeah. And, you know, I can speak personally from trying to implement it. I’m supposed to be a numbers guy and a consultant and these things that help people. And I tried it for a year and a half, and there’s a lot in the book. The book gives you a general guideline, maybe for a small business. But even with a small business, there are so many small details that you just can’t get out. I tried for a year and a half and I had the things in the wrong accounts and I had personal ownership of one account that should have been business accounts because I was doing this personally and business wise.

And then with some of my clients that I tried to help do this with beforehand, we kind of partially did it. And we didn’t do that. We didn’t have the assessment. We didn’t know what we were looking for. And we didn’t know the psychological impact and things to work with.

You know, what is the comparison Wade there they’re talking about, would you hire a plumber to wire your house, or an electrician to do brain surgery? They’re both electrical signals in there, but you know, there’s a little bit, there’s a little bit different.

Wade and I, before this topic, were we’re talking about another topic for a show of things that are even very complex for us, especially for contractors that you have to work on that individual situation.

So like Wade said, you can do it yourself. But it may take you a few years to kind of start working the kinks out of it.

[00:04:45] Wade Carpenter : A lot of other people, they fail at it because they miss little things that, had they been doing it or, they don’t implement it properly, they slip a little bit and they need some extra cash, and then the system goes out the window.

[00:04:59] Rob Williams: You know that actually that’s the best answer. I wish I had come up with that first. People, when they try to do it themselves, they actually fail. Then you don’t get it because you make a mistake and you don’t have somebody to pull you back in line; to identify where that is. Just like when you have a teacher, when you’re learning your engineering or something, you make a mistake on your mat. Well, you got somebody to pull you back in there. If you don’t have somebody to guide you and show you that way to bring you back in line, you’re not going to see the benefit of it, and you’re going to have a bad opinion of it. And you’re probably going to quit.

Everybody that tried that starts, this does not finish it and make it. And I think the larger percent of the people that quote fail or, or quit are the people that don’t have a coach or somebody to help them.

[00:05:47] Stephen Brown: It’s like saying, I want to go into a gym and create the absolute perfect body for myself. I need a personal trainer. I’m sorry, it’s just out of my bailiwick. But you know, you don’t know what you don’t know. Well, we talk about that all the time. You don’t know what you don’t know. How do you know what you don’t know, and how do you know what other people know?

Well, you don’t know until you engage folks and start working with them, and start having problems and start having situations that need to be addressed. The book, to me, just kind of outlines what the program is.

[00:06:20] Wade Carpenter : You know, I’ve been around, I’m a CPA working with construction for over 30 years, and I started this, and I started thinking about things differently. And I started implementing it with people, but when I joined the Profit First Professionals and heard other people talking about other situations, you know, I was like, well, it’s just add a bank, stuff like that. It’s simple.

But then you start thinking about these intricacies, things like seasonality and drip accounts, and those kinds of things that, especially in construction, there are definitely some things that you need to think about that are not in the book and not in the derivative book.

[00:06:59] Rob Williams: I think some people don’t realize that there are hundreds of us Profit First people. I forgot how many of the Mastery members there are. I think it’s under a hundred. Yeah way under a hundred. But we have a board or whatever you call it a page together.

And I’m in there every day. Well, unless I’m really busy, but I get in there all the time and people are posting questions, what do you think about this? And I’m just guessing I like to do that because it makes me think and learn. So we’re getting experience, not even just from the people we work with, but from the hundreds of clients of our peers. So we’re constantly having puzzles put up there for us to have discussion groups over, to see how we would do that. I don’t think people realize that we have that behind the scenes. So really when you’re hiring a Profit First Professional, you’re getting a group consortium of all of these knowledge brain powers coming in there.

[00:07:52] Wade Carpenter : Well, the other thing is, a lot of the, especially the Mastery people, specialize in something like dentists or doctors or whatever, the, e-commerce, stuff like that. And yes, a dentist may have nothing to do with a contractor, but a situation that a dentist may have, may make you think of it slightly different for a contractor.

[00:08:13] Rob Williams: Yeah, it does. It does. Yeah. I do learn a lot from situations in other industries.

[00:08:20] Stephen Brown: Yeah, but isn’t the profit, isn’t it just dictated by the economy? How can you guys come and dictate what kind of profit I can– how can, how can I control what kind of profit I’m going to make?

[00:08:32] Rob Williams: That’s a big question. We have our cash drivers, there’s so many different things in there that we can make happen because we have a lot of different tools. I think I saw one of those questions that asks some more specifics so it’s a better one to go for, but we have our cash drivers and we have our profit drivers.

And then we have our sales analysis, things that, all these things don’t just add up. They multiply together to make huge impacts and I’ll kind of save some of that for the examples that Wade has, some great sources and examples that we’ll make available to you guys to see some demonstrations. We haven’t made the videos on that yet, but we’ve been practicing that one.

But, but yeah, it all amplifies together. That is a huge question, Stephen. What do you think Wade?

[00:09:21] Wade Carpenter : There is a lot to that question. I was going to pull out, I’m going to paraphrase that other question: the biggest thing that the Profit First book doesn’t go into that contractors should know.

Like I said, there’s a lot, but you know, Mike Michalowicz couldn’t go into all this. He’s trying to do a general audience.

[00:09:38] Rob Williams: Yeah, and those publishers only want to give him a certain number of pages, don’t they?

[00:09:41] Wade Carpenter : Yeah, well, even the derivative book, I mean, that’s one of the big failings. The materials and subs carve out. Setting up a separate bank account for the materials and subs is one of the biggest things that in working with people, if you will put that money aside, you get away from that reactionary mode where you’re always borrowing from the next job to pay for the last job.

And it gets you out of that, to where you can become proactive at it. And that’s, that is huge. If you can carve that out, that gives you a lot better picture of what you can spend, and then, carving it down into the smaller buckets really does help you control your overhead and, make sure you have something put aside so you can take something home.

[00:10:29] Rob Williams: Yeah. That’s a really good thing, because there are multiple ways to skin a cat, as dad used to say. I’ve seen Profit First Professionals say that it’s too mixed up for some of these contractors that do materials sometimes, and not do materials other times.

I know this guy’s recommended you put them all in the op ex, but for the clients that I’ve seen, that’s not the best way to do it. And that’s the other reason why you need to get a Profit First Professional to analyze your situation. But usually– for me, it’s always– you want to put those materials and the subs in another group, even if you have to get a little bit more complicated on your materials and subs, or maybe some drip accounts or some complex formulas.

So if your jobs are not consistent on whether you’re providing materials or not, then you don’t want to do your bank accounts in a spreadsheet and track them, but you may use a spreadsheet to analyze your, what we call a drip account or, or some way to do some of those allocations for the materials and the sub. Because if you’re only doing labor on one job, you don’t want to put 40% in the materials, because there were no materials. So, so you may have to have a little complexity, but the bottom line is, just like Wade said, get those materials in sub separate from your other ones, instead of having everything in your operating expense, and then you lose the whole psychology of Profit First.

[00:12:01] Wade Carpenter : Yeah,

[00:12:02] Rob Williams: Did I say that okay, Wade?

[00:12:04] Wade Carpenter : I think so. Absolutely.

[00:12:05] Rob Williams: Yeah. Well, we’re just merging all these questions…

[00:12:08] Wade Carpenter : Something you brought up that it’s like multiple revenue streams or, types of jobs that is something we could do a whole show on.

[00:12:16] Rob Williams: Oh yeah, there, there are. Actually, that’s what we probably need to be doing. We fans and family, and if only my fans are family, actually my family, I think they’ve quit watching this. The the, the shows in the future, we really need to probably every few shows do a Frequently Asked Questions.

So, I think we have time for another. Are we wrapping up on that one? You want to ask another question?

[00:12:43] Stephen Brown: No, that’s fine. That’s good. I mean, it’s kind of detailed as a non-Profit First individual, I’m just a bonding and insurance guy.

[00:12:52] Rob Williams: Yeah. And we’re really trying to stay specific to construction. So hopefully …

[00:12:56] Stephen Brown: I think you are. I think that understanding what it takes to get involved as a Profit First contractor to engage your help is probably the main question I have.

I think getting the information in front of everyone so they can do a little background study on Profit First is a great idea. And I think from time to time, as we start talking about this, we all have our area of expertise, background, Rob you in construction and MBA, and Wade as a CPA. And with me just working with hundreds of different type of contractors that have ups and downs. We kind of make up the Contractor Success Forum, and I just wanted people to know a little bit more about getting started and Profit First.

[00:13:45] Rob Williams: You know, that is a good question. That wasn’t one of the questions I sent in, but I just updated that on my LinkedIn profile and stuff about how you do business with us. That is another question.

Typically, I think Wade’s process is similar but you just call us and, and I have a 20 minute call to find out more about you and I have a series of questions. Hopefully they go naturally. To try to find out whether this is where you are yet. Is this what you need? And then there are a lot of people that I’ve said, well, you’re just not quite there yet. I’d say actually almost half of them.

But you do that meeting and then we’ll follow up with an enrollment meeting at my company, which will start us off on doing an assessment for you. I think some people that, that process kind of looks a little bit different, but people don’t know how that works.

So don’t be afraid to call us and talk to us. I don’t think any of the Profit First people charge for the first call, because we got to find out where you are and are you a good fit? Are we a good fit for you? I get a lot of people that are not in construction calling me too. And we have to decide, a lot of times I’ll find, since I know a lot of these Profit First people, I will find the right person for them as well. Wade, how does your process work?

[00:14:57] Wade Carpenter : Well similar, but I mean, I’m doing different things. You know, typically we’re also wrapping bookkeeping and tax services around it.

It’s not uncommon for me to spend easily an hour on the first call or more. And usually spend several meetings, actually, to make sure that, what you want out of it, we get you. From a tax standpoint, from a bookkeeping standpoint, and building the profits out of Profit First.

[00:15:26] Rob Williams: That’s great. And by the way, as Stephen and Wade probably know, my 20 minute meeting rarely is only 20 minutes I talk too much. So, so be prepared block out, even though it says 20 minutes, maybe block out a few extra minutes on the end, it might even be an hour or so. Because we, we get involved in these conversations.

[00:15:44] Stephen Brown: Well, thanks. That answered my question guys. I appreciate it. And

[00:15:49] Rob Williams: Do we have time for one more?

[00:15:51] Wade Carpenter : Can we take the taxes one?

[00:15:52] Rob Williams: Okay. My CPA says I need to hold out 40% for profits, not 15%. I usually add 50% to my costs for profits. Why would Profit First say to hold 15%? I’ll end up owing money at the end of the year.

Wade. I’m going to be ciphering over here. My Jethro ciphering to kind of put these numbers together for a second.

[00:16:18] Wade Carpenter : Well, but you know, if we’re saying 40%, we’re talking probably of your net income after expenses. If you’re a sole proprietor and you’re having to pay self-employment taxes, it may be that. But a lot of that has to do with your real revenue and how much you’re taking home on it.

The other part is, say you’re a general contractor, you’ve got your gross profit. You might have huge high revenue, but your gross profit’s only, five, 10% at the most. Well, that percentage as a percent of revenue may actually be 4%. It depends on what your cost and your structure is. So that’s one of the ones that we always kind of do an analysis of. What’s your total revenue, and what should that number be?

[00:17:03] Rob Williams: Yeah. So, so I guess I would say that, when the CPA– this is a really common quesiton, especially in the beginning. When the CPA is telling you your percent, that is your percent, as Wade said, of your bottom net profit and

[00:17:20] Wade Carpenter : Taxable profit, too. Not–

[00:17:22] Rob Williams: Taxable profit.

[00:17:23] Wade Carpenter : We’re talking about cash basis profit.

[00:17:27] Rob Williams: Yeah. And you get that number from your CPA.

So what we’re talking about is the percent, not even of your total revenue, you take out your materials and your subs. And then that leaves you what we call a real revenue.

The real revenue is the money that you have left after your materials and subs to run your business. So that 15% is just an estimate. It’s a starting point of the real revenue, the leftover. So if you’re a $5 million company, there may be two and a half million left over to run your company. Everybody’s going to be different. So then it would be 15% of that 2 million. Two and a half million. That would be, what, 220,000. So it might be 40%. If your net profit was 600,000, then maybe that 200 and something thousand, I didn’t write that down– might be 40%. And like Wade said, that’s a starting point.

If you don’t know what your percents are, that is a conglomerated average of what people are doing. And hopefully when you, it might actually seem high. That’s, what I’ve seen. It’s, it’s higher than what you paid the year before, because when you become Profit First, you’re going to be more profitable.

It’s actually going to be a higher number than what you historically had paid, typically, because you’re going to be more profitable with Profit First. Anyway, that there’s a lot of numbers. That’s a great question. And you may have to hear the answer five times to try to realize what that answer really is.

How did we do on that one, Stephen? Is that confusing?

[00:19:04] Stephen Brown: No, I think, I think it’s good. We have questions already, and I think we’re going to have more questions coming in as you make the book available to them.

[00:19:14] Rob Williams: Yeah.

Oh yeah, the book. Okay. Is it okay? Can I do this on the show?

[00:19:18] Stephen Brown: It’s okay with me.

[00:19:19] Rob Williams: It’s okay with you. Okay. I’m just going to say, we, we have decided to give away five free Profit First books on Kindle.

Whoa, amazing. Now that’s for the people that made it to the end of this show. So all you people that didn’t listen to this, you don’t get the special offer, but you won’t know it because you didn’t listen this far. But! We are going to put down in the show notes, if you go to the show notes and the first five people that sign up through there, we can send you a free copy of Profit First on Kindle!

Wow. Where’s the, we don’t, I need one of those applause buttons, I need one of those machines like Mike has. Yeah, woo! All right. So that’s exciting news there. So that’s very exciting. Calm down.

[00:20:09] Stephen Brown: Okay, but I I’m beside myself.

[00:20:12] Wade Carpenter : think there is a subscribe button there.

Yeah. Yeah.

[00:20:15] Stephen Brown: Do we have time for another question? Because,as always, we go through a lot on these podcasts.

[00:20:21] Wade Carpenter : We probably should–

[00:20:22] Rob Williams: Well, let’s wrap this one up.

So look, you guys, Stephen’s got this biting question! So listen to the next episode because you’re probably listening to this later. All you gotta do is keep listening ! It’s a week for us. It’s only one minute for them to hear the next episode.

[00:20:36] Stephen Brown: Fantastic stuff. I can’t get enough.

[00:20:39] Rob Williams: They can travel through time like that. You can’t get enough. All right. Okay. Roll up your pants–

[00:20:45] Stephen Brown: And remember,

It’s getting deep in here. don’t know what You don’t know

Remember

[00:20:48] Rob Williams: that.

You don’t know what you don’t know, and you don’t know how much to put Profit First percentages.

So contact us. We’ll figure it out. And listen to more of these shows. We’re having fun now, guys, on the Contractor Success Forum. So go to ContractorSuccessForum.Com. We call this episode a draw between Stephen Brown, the contractor bond agent with McDaniel Whitley bonding and insurance agency and Wade Carpenter with Carpenter and Company, CPAs. And Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems.

Have a great day and listen to that next episode. Thanks.