A case study in implementing Profit First with Eric Wilkinson
We’ve met many contractors who were interested in Profit First but struggled to actually implement it. This week, we’re talking to Eric Wilkinson, a construction contractor who uses Profit First to gain cash flow clarity, address seasonality, and keep his business healthy. He also address some of the challenges he met when first implementing the system and how he overcame them.
Topics we cover in this episode include:
- Implementing Profit First while starting a new company
- Getting started and tracking your allocations
- When Profit First isn’t working for your business
- How much money should I keep in reserve?
- Advice for contractors getting started with Profit First
LINKS
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
Eric Wilkinson | https://www.sandhillglass.com/
TRANSCRIPT
[00:00:00] Wade Carpenter: Welcome to the Contractor Success Forum. In this episode, we are doing a deep dive into a case study implementing Profit First with a very special guest. Many business owners read the book or hear about the concept of Profit First, and they want to implement it, but they struggle to get started. In my experience, it can be even more complicated for a construction contractor.
We’re gonna talk about some of those things today, some of those challenges, as well as some of the results experienced when you’ve got the system implemented. So if that’s of interest, stick around and let’s get into it.
If you’re new here, I’m Wade Carpenter with Carpenter & Company CPAs. Stephen Brown, my co-host, unfortunately still will be out a little longer. He’s okay, but we’re looking forward to getting back very soon. Wish him a speedy recovery.
But my very special guest today is Eric Wilkinson of Sandhill Glass, a glass and glazing contractor in Michigan. And I’m proud to have worked with him for two and a half years or so and really look forward to seeing his insights and his perspective. Eric, thanks for being with us. Can you tell us a little bit about yourself and what you do?
[00:01:08] Eric Wilkinson: Yeah. Thanks Wade. Thanks for having me on. I have a glass company in Southeast Michigan. We’ve got a couple of locations in the Detroit Ann Arbor area. We do both commercial and residential glass, so we see some of those sort of long pay scenarios with the commercial type construction projects to working directly with homeowners.
So we’ve had a good mix of that, and then, yeah, we’ve worked with you and your team for the last couple of years. You guys are accountants that do all of our backend bookkeeping for us with our business.
[00:01:42] Wade Carpenter: Well We appreciate you and I think you actually came to us as a referral from Profit First Professionals when you were opening the glass company, but if I’m not mistaken, you already had some real estate rentals you were using Profit First with.
Getting started with Profit First while starting a new company
[00:01:55] Eric Wilkinson: Yeah, about two and a half years ago, I bought a glass company. I ended up buying two glass companies in 2021. But prior to that I had read Profit First and I had used it with some of the rental properties I had. I found it really useful in terms of keeping a breakdown for every month when we get the rents coming in. A little bit to go to vacancy, a little bit to go to repairs and maintenance, a little bit for property management and the like.
But with all of them, I had done a business case before I bought the property or renovated the property that, when I had it leased out, I was gonna get x amount of money every month as cashflow. And what I liked about Profit First is it kept that first, top of mind there that I’m going to all this trouble, all this work. I need to be seeing that return.
And so I had a couple years of using Profit First with those rental properties, had success with that, and so when it came time to buy that business I was gonna implement it from the get go for that business.
[00:03:04] Wade Carpenter: Okay. Well I know there are some definite differences between rental real estate and construction. So I didn’t know if you could kind of talk about some of the challenges. I know when we first started talking, you had already read some of the derivative books for construction Can you just tell us a little bit about some of the thoughts and challenges of getting started?
[00:03:22] Eric Wilkinson: So leading up to the closing of the buying the business and the like, I started out setting up all my bank accounts. And I took what the book said, that you’re gonna have these certain accounts, here’s a starting point for allocations and the like.
Fortunately the bank that I was working with, they made it easy. They didn’t really question, Hey, why are you setting up eight different bank accounts? What are you trying to do with this? They just said, okay, what do you want? And I was able to get things set up pretty easy.
You know, then once closing day came and turning those things on, then it was challenging. Trying to figure out okay, how is this gonna work for this business? Everything in the book or everything that you thought was gonna be the case, and now seeing it in real life, what’s gonna work, what’s not gonna work, and how to make changes.
What I struggled with, at least initially, was with those allocations when you’re starting a business, or in this case sort of starting the business while it’s moving pretty fast, in the, you have summertime here in Michigan, that’s construction time. There’s a lot of moving parts there.
And probably the biggest challenge for us was really getting the allocation for what the material allocation should be. I had some historical examples and averages to go off of, but it was difficult those first few months because we had one particular project that was probably the largest one that the company had done before, and it was heavy on materials.
It had some unique, specialized doors that were going into these school buildings, so it was really heavy on material spend. And then to compound the challenge when I bought the business, I was fortunate. Most of the vendors I was able to just transfer the credit accounts over. It was basically just fill out a credit application or a new form or transfer form and away we went without really any issues.
That same project with the main material we were getting, that vendor, the previous owner didn’t have credit set up for it. So we had a six figure bill that had to pay in the first couple months to ship out the material. So, I mentioned that it’s just that it made it challenging that way you think it was gonna work, might not work out that way. So you just have to manage things differently that I had to do some things like borrow from some accounts that I had set up to fund that material account and then use my line of credit to fund that materials account. But with time things settled in where, okay, now you’ve been doing those allocations long enough that you’ve got the right buildup of cash in there to cover those expenses.
But yeah, those first three to six months, it was challenging just because, you’re dealing with being a new business, essentially, dealing with regular cash flow type issues and it just hadn’t got up and running quite yet.
So it just took some patience and it took some flexibility to, okay, yep, it’s written in the book. Those are great guidelines, but it’s not carved in stone and it’s not the law that you have to follow. You can make adjustments to make what works.
[00:06:46] Wade Carpenter: You threw out a lot of issues I saw when working with several contractors over the years trying to implement this. One of the things you alluded to was the materials and subs and the traditional book by Mike Michalowicz talks about carving it out, but it’s really confusing.
I definitely advocate that needs to be a separate account, and sometimes figuring that out can be a little tricky, but, do you want to talk about some of the other issues getting started, figuring your initial percentages, because that’s another area that is just very confusing to start with.
Getting started and tracking your allocations
[00:07:19] Eric Wilkinson: Yeah, I’ve used that as starting point. I think there’s a contractor version book that had a sort of an Excel starter sheet, if you will, to enter in some of those rough numbers. And, what I found was, there were some allocations that just, I had way too much in there for say, tax over the last couple years. That like, I’ve gotta dial that back for where we’re at.
I didn’t have enough for materials, so it’s adjusting that. And then I found that I needed to have maybe some greater clarity with the accounts, so I ended up adding more accounts later on to be able to cover things like equipment. To cover the buildings that we own for our location, maintenance, updates to it. Created a bonus account so that, if we have a performance plan for our employees, that at the end of the year, It’s not just one big hit to my opex or operating expense account. That I can be having a small drip to that account over the course of the year, and then with each of the allocations, I would generally, I set out a plan at the beginning of the year, and each quarter I’d come back to it and I’d look at it. Like, okay, it seems like I got a little too much in my debt account than what I need, let me borrow half a percent there and move it to somewhere else.
Each quarter, also looking at, thinking of Profit First, I started with a little something when it started out, but my goal is to, each quarter ratchet it up because for everything as contractors, owners that you’re dealing with, it ain’t worth all this trouble, all the headache and everything that you go through, if you’re not putting aside that money for you as the owner, as the shareholder of that business. So each quarter, I’m making nudges to that and trying to move that towards the direction. And I mentioned business plans earlier. When I bought these businesses I had five year business plan with it, so I’m watching that shareholder account, my long term profit hold account to see, okay, am I on track to hit where I’m expecting to be five years from now? From a return on the investment and the time I’m putting into it.
But, that’s what I would really suggest is setting up just a basic spreadsheet, you put each account on one side. You put percentages there. If you’ve got a budget number for, you know, I think I’m gonna do X amount of sales this year, put that up there and then see what that percentage looks like.
Now, if it comes out and it shows that, for your debt, the percentage you had isn’t gonna cover what your debt payments are for the year, you got to fix that. Likewise, you can do some other sniff tests on them. With your operating expense, you know what your rent’s going to be, you know what some of these other fixed costs are going to be. Does that make sense? And then, you keep tweaking it from there.
And then you do get to the point where, wait a second, I need another percent on here. I need that 102 or something like that and that’s where you have to be making the decisions of, okay I need to push that purchase of that new glass van off a year.
I need to revisit our manning for this year. Do I got too many office people, do I got not enough glazers and working it that way. But it’s definitely not a fix it and forget it. It’s something that you gotta revisit every quarter, and then what I do is I use that same spreadsheet. When it comes time to do my allocations, I go look at my income account. I’ve got money in there. I take that amount, stick it in my spreadsheet, and it tells me how much I need to send to each of those different accounts.
That’s how I make my allocations.
[00:11:19] Wade Carpenter: Well, I mean, you threw out a lot more things. I was wanting to talk about some of the special purpose bank accounts. You already hit some of that.
A lot of people, they start trying to do Profit First, and it’s not fix it and forget it, but a lot of people think of it that way and they never change those numbers. And I think if the numbers are not working out, and I’ve seen it where a contractor would borrow from that profit and continually borrow from it and eventually say, this isn’t working.
And it really does work, I can tell you it works, but if you keep borrowing and you don’t make changes to it, then it’s not going to work.
So any thoughts on that?
[00:11:57] Eric Wilkinson: Yeah, I would say the first six to nine months were where I had the greatest challenge. In the infancy of the business and dealing with, that transition for getting established for working capital in the business. The cash flow that we had.
I had to do things like borrowing from different accounts. I had to use my line of credit to cover things, but I started seeing the change at about that end of that first year. At that point, I wasn’t having to borrow from accounts anymore. I was able to stop using my line of credit, which, that type of thing is expensive.
It’s a tool to have and I’ve used it and it has been helpful, but just in the last year and a half the interest rate I would’ve paid on it has doubled so it becomes even more expensive to use those types of tools.
After that first year, things started to stabilize. You start getting those balances in those accounts so that when you’re doing that daily management or weekly management check, you’re looking at your bank account, you’re starting to get a sense of how that cash blood flow is working in your business. You see the trends of, okay, this is when cash is coming in. I’ve got an income account, that’s where all my deposits come to. I don’t have any bills paid out of that. I just take what comes in there and distribute it.
So watching what’s coming in when it’s coming in is helpful to have a good pulse on the business. And then likewise watching those different expense accounts of where’s the money going?
Splitting it up more just gives you that greater fidelity of where do I need to put my attention? What doesn’t look right? Man, we’re spending a lot. So each week we cut checks to our vendors and one of my office employees puts together these are all the checks for your review, for me to sign each week to pay.
And it’s useful to see, okay, I’m spending a lot in materials this week. Why? Or I’m not spending a lot in materials. Why? Where’s this bill that probably should be here for one of the glass fabricators we’re sourcing, or why is this month higher? Why is this week higher? Are we billing out enough?
It starts really prompting those questions for you to be able to dig in further. It’s not going to give you the answers. It gives you those warning flags or other notifications if you will, that hey, you need to look into this. You need to ask some questions around this.
This is out of the norm. This isn’t typical. You know, why?
[00:14:34] Wade Carpenter: I mean, I feel it kind of gives you some clarity on the cash and when we were chatting right before we started here, I know you said something that I’ve said for years. In Profit First, we have this, game, this M&M game, they, it’s basically a comparison of running a business with one bank account versus having all these carved up.
[00:14:55] Eric Wilkinson: It keeps you lean. It keeps you hungry because if you got too much sitting there, to me, if I had it all in one account, I don’t see how I could really manage that. Yes, you’ve got your accounting system but there’s some lag to that.
Your bank account’s pretty quick. It went out or it came in within that day. That’s where I’ve found it helpful, and by having those different bank accounts you get a sense of, okay, where did it go or where did it come from? So that’s the first gauge that I really used in the business and continue to use as I try to add more, analytics to how we run our business and what are some of the other things that, you know, at the high level, the Profit First gives me some direction on where I might need to look, and now I need to build up those other reporting tools to be able to go figure out what the issue might be.
When Profit First isn’t working for your business
[00:15:47] Wade Carpenter: Well, I know when we were talking about doing this episode, you mentioned that some things work and some things don’t work. So can you chat real quick about, what are some thoughts of where you feel like Profit First didn’t work or may not have worked as well as you thought?
[00:16:01] Eric Wilkinson: Yeah one I would say is, a lot of times it talks about holding off on doing allocations, holding off on looking at some of the things frequently. I was looking at it every day. I might’ve been making allocations every day to, you know, your team’s probably frustration of me moving stuff around, but that’s what I had to do to be able to keep track of things like that. And there’s nothing wrong with that.
I’ve tried to spread that out a little bit, but in the book some of the things that says, just do it every month or something pretty long. I think it’s not a bad idea to do it as frequently as you need to do.
How much money should I keep in reserve?
[00:16:41] Eric Wilkinson: I would say the one area that I’ve struggled with is, with all these different accounts, how much do I need to keep in reserve? Because now, things start to build up in those individual accounts, and they may be needed for that at some point, but when you get eight different accounts, you start to get fat again, and you might not get that I wanna say healthy fear in you when you see that balance getting lower.
So that’s where I’m still trying to work through. I understand some of the other recommendations of paying off your debt and doing some of those things. But I also look at, if I got low fixed rates on some of this debt right now, versus, where the cost of borrowing is today, how can I put that money better to use? I also might not want to, not knowing what the future holds, if things are going into a recession or something like that, I’d rather have my cash in my bank account as opposed to have paid off some debt.
So it’s trying to balance okay, what do I do with this money? Do I keep it sitting in all these individual accounts where it’s not making anything? Do I move it to a different account where I can at least earn a couple of percent of interest or something like that so that, it’s getting some work for us?
That’s what I’m struggling with now of really, how much reserves do I need to keep, where do I keep it so that I can deploy that capital to the best return for the business.
[00:18:15] Wade Carpenter: Well, I mean, I know you kinda mentioned some things. It seems like it’s been overall positive?
[00:18:20] Eric Wilkinson: Yeah, I would’ve struggled if I hadn’t used Profit First with a lot of the things getting into the business as the new owner, not knowing what that seasonality was gonna look like. This definitely helped because, here in Michigan, there’s the joke, you have winter and construction. Those are the two seasons. And winter can be a little more challenging.
Having this discipline, if you will, with Profit First helps to make sure that you’ve got cash in March, that timeframe when the cash that might be coming in is at its lowest and you’re not just going on a spending spree when all those receivables start coming in from your labors in the summertime.
[00:19:04] Wade Carpenter: Well, any other thoughts or advice if you’ve got some contractors out there, if they were considering doing it? Or things you might have done different getting started?
Advice for contractors getting started with Profit First
[00:19:14] Eric Wilkinson: I would just say get started. It’s not too hard. Go to your bank. Tell them you wanna set up some accounts. If they look at you funny or they give you a hard time, want to charge you a lot of extra money, find a different bank. There’s ones out there that’ll make it easy.
If you’ve got some of your employees that are involved in the process of paying bills and the thing like that for you, talk it through with them, ’cause they’re gonna look at you like, you’re crazy. What do you mean? Why do you have all these different, what does opex mean?
These were the things I dealt with and you can make it simple for them. I’ve got two accounts that I use for checking. I’ve got a materials and a OPEX account. One has brown checks, one has green checks, and I say, these are the vendors we’re gonna pay with the brown checks. These are the ones with the green checks. it’s gonna take a couple months for them to get used to it.
If they ask you why are we doing all this? It’s we have a healthy business that, we can keep everyone employed. The business stays healthy. We have good equipment that’s kept up to date. All these things that you want out of good business, Profit First can help you. It’s not the only thing, but it’s a tool that can give you that insight into your business, help to maybe throw up some warning flags when you need it, and I think keep you hungry. Keep that healthy amount of fear in you when you start seeing some of those balances maybe a little bit lower, it nudges you to make those decisions, take those actions that you might not want to do, but you need to do.
I’m still new in it, so I, I know there’s contractors been doing it a lot longer than me. I just give you, that’s been my perspective the last couple years that it’s been a enormous help to me to get the business established, and also as a owner, to also feel comfortable, because you’re the guy that’s signing all these things, that’s like signing your life away, your family ‘s financial future away with all these different things. That’s a heavy burden on your shoulders, and having a tool like this can help give you some peace of mind, if you will, when you’re going through all that.
[00:21:23] Wade Carpenter: Okay. Well, this has been great. I know you threw out a whole bunch of things there that, again, the things that I see all the time. The fact that the 10/24 rhythm that he talks about in the book is really hard for contractors, and it is very common that I recommend that at least a weekly allocation. Maybe you pay your vendors on a 10/24 rule, but you’ve gotta cover that payroll every week, you–
[00:21:46] Eric Wilkinson: Generally, we’re paying weekly. We’re gonna make sure that we’re treating our vendors well because they’re part of our success, and if they’re not getting paid, then it’s gonna lead to challenges for us and our ability to do our work and for us to get paid.
I think that some of those rules that are in that book might work for some industries, but for contractors in whatever niche that you’re in for contracting, you might have to do things differently. I think as, as long as you keep first and foremost, you are getting paid as the owner.
There is a percentage coming to you. You’re paying yourself a salary. In addition to that, and above and beyond that, you’ve got a percentage of profit that’s getting set aside for you as the owner because if that’s last, that’s gonna be pretty small or non-existent.
I think with whatever you do outside of all that, all the other rules are just suggestions. You just try to find what works best for you and in your company’s situation.
[00:22:53] Wade Carpenter: Exactly. Okay. Well this has been great. Any other parting thoughts before we wrap up?
[00:22:58] Eric Wilkinson: Thanks for having me on. I’ve enjoyed listening to you guys’ podcasts. it’s been a help to me. I’ve taken tidbits from it, and I think I shared one of your talks on liens and bonds, I was able to use a tidbit there to get a payment uh, from a slow payer.
So–
[00:23:14] Wade Carpenter: I think I brought that up on the podcast, but can you tell that story?
[00:23:17] Eric Wilkinson: Yeah, there was a contractor we had been working with and it had been a while. We were way past due on when they were supposed to pay us and I suspected they were jerking us around Now, a person that deals in that area, she’s used to well, we get paid when they get paid.
How do I know that they’ve been paid? And listened to your guys’ podcasts, I think on bonding and things like that, there’s a bond number and these are the consequences of what happens to those contractors if someone makes a claim on that bond. So I took that, and it was a public project, so I just asked my receivables person, just reach out to them and say hey, what’s the bond number for this project?
Oh, we got, quick: what do you need to know that for? Why? Oh, the check’s coming tomorrow. Oh, okay.
[00:24:02] Wade Carpenter: I mean, Didn’t you get it within a few–
[00:24:04] Eric Wilkinson: It was, they responded quick. Let’s just say, we didn’t threaten, we didn’t say we were making a claim or anything, we just said, hey, what’s the bond number? Like your podcast said, it’s publicly available knowledge.
Even though we’ve asked multiple times, hey where’s your check at? it’s time for us to get paid. That at least helped put a point to it, and whether they were giving us the runaround, whether they just wanted to not threaten their bond capability, at the end of the day, I got paid.
So I appreciate the work you guys have done and bringing folks on with, different expertise and different experiences. There’s little nuggets out there that, you never know what’s going to pop up and how you can use it to help your business and maybe help make things a little bit easier.
[00:24:52] Wade Carpenter: Well Thank you Eric. I really appreciate you coming on and lending your time and insights. today. I wanted to thank our listeners for tuning in to the Contractor Success Forum. If you would, check out our show notes at ContractorSuccessForum.Com or Carpenter CPAs YouTube channel for more information.
Consider subscribing to this channel and follow us each episode every week as we post it. We’ll look forward to seeing you on our next show.A case study in implementing Profit First with Eric Wilkinson