How fast are you making profit?
This week, we’re talking about the best way to turn over revenue and make profit more quickly. We address the question of taking one big job with profit in it or turning over several smaller jobs, and choosing the right jobs that you can turn around efficiently.
Topics we cover in this episode include:
- Choosing between one large job or multiple smaller jobs
- How to analyze potential jobs
- Considering gross margin vs. top line
- Throughput accounting and overhead
LINKS
Find all episodes and related links at ContractorSuccessForum.com.
Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs
FIND US ONLINE
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
TRANSCRIPT
[00:00:00] Wade Carpenter: Welcome to the Contractor Success Forum. Today we are talking about a way of looking at profit that you may not have considered before, but could have a major impact on your profitability.
Here on the Contractor Success Forum, our mission is to provide game-changing financial education for contractors to help you be more profitable, grow and succeed in your business.
And who is here to help us do that? As usual, my partner in crime, Stephen Brown, with McDaniel Whitley Bonding and Insurance Agency. And I’m Wade Carpenter with Carpenter Company CPAs. Stephen, what we talking about today?
[00:00:39] Stephen Brown: Yeah. Hey, Wade. Game changing. That’s the topic for today.
[00:00:42] Wade Carpenter: Okay.
[00:00:43] Stephen Brown: All of our podcasts are game changing, we like to think. But this one really is game changing. We’ve talked about it before, but it’s just this whole concept of turning over revenue. Is it better to get one big job with profit in it or turn over smaller jobs?
And just because you’re doing more in sales doesn’t mean you’re making any more money necessarily. It all has to do with gross margins. And there’s nothing gross about them. They’re fantastic. The margin is exactly what you want after a job. It’s your, what would you call a gross margin? Your comfort?
[00:01:20] Wade Carpenter: Well, it is ultimately what you’re looking for. We’re not looking for top revenue if we can’t take anything home at the end of the day. Right?
[00:01:28] Stephen Brown: That’s right. Your gross margin is everything. It’s your profit, it’s your padding. Right?
[00:01:35] Wade Carpenter: Yep. So let’s give them a little context. About a year ago, we did a podcast on this and we talked about throughput accounting, and I think a lot of people had no idea what throughput accounting meant. Or, if they read the title they probably saw accounting and tuned it out. But, kind of revisiting this topic today, really it’s about how fast are you making profit or making margin on your jobs.
So, that’s really what the subject is about, and we’ll get into it in a minute, but I think, we got some examples of why, as Stephen said, chasing revenue is not the right thing to do all of, you know.
[00:02:12] Stephen Brown: That’s right. That’s right. Well give us an example of what you’re talking about. Turning your profit over faster.
Choosing between one large job or multiple smaller jobs
[00:02:19] Wade Carpenter: I’ve created a couple of different examples over the years, but I’m gonna use the same one I used about a year ago, which I think illustrates a point.
But suppose you had one crew and you had a choice of two different paths. You could take one job that’s gonna last an entire year that is going to do 1.2 million dollars and it’s got a 20% gross profit margin, right? Or you could do a $300,000 job, it’s 17% gross margin, and you would basically have to do four of these $300,000 jobs at 17% gross margin to do the same level of revenue as well as it being a lower gross profit.
[00:03:01] Stephen Brown: Okay.
[00:03:02] Wade Carpenter: Does that make sense?
[00:03:04] Stephen Brown: So far I’m following you.
[00:03:06] Wade Carpenter: So if that’s all the facts I told you, which one would you logically take?
[00:03:11] Stephen Brown: Well, on the $300,000 job, you’re making $51,000 a job.
[00:03:18] Wade Carpenter: Right.
[00:03:18] Stephen Brown: Right? And at the 1.2 million dollar job you’re making 25%, right? So you’re making 300,000.
[00:03:26] Wade Carpenter: 20%.
[00:03:27] Stephen Brown: Oh, 20%. Okay.
[00:03:28] Wade Carpenter: Yeah. So you’d make 240,000.
[00:03:31] Stephen Brown: All right.
[00:03:31] Wade Carpenter: And a lot of people, I think, would say, well, yeah, we’re gonna make more money. We’re on one job all year. It makes more sense to make more margin and we don’t have to do four different jobs, right?
[00:03:43] Stephen Brown: Right.
[00:03:44] Wade Carpenter: So that would be true, assuming that the $300,000 jobs take us basically three months to complete each, right?
So 13 weeks to complete those, we would come out to the exact same revenue of 1.2 million. So if we had four different jobs at the same level of revenue, we still would come out with a lower gross profit on these jobs. Right?
[00:04:11] Stephen Brown: Right.
[00:04:11] Wade Carpenter: But what if we could turn these jobs a little faster on the smaller jobs, $300,000 jobs?
If we brought that down to say, 11 weeks, we shaved off two weeks, did that two weeks faster, we would actually make a little more profit than we would over the course of, the year. Or we could take eight weeks off during the year and make the same level of gross margin.
Right?
[00:04:37] Stephen Brown: Right.
[00:04:38] Wade Carpenter: So, that translates to, If we say we did it in 13 weeks, that’s, basically $3,900 per week. But if we did it in say, 10 weeks, that’s $5,100 per week. So if we could shave that $300,000 job down to 10 weeks, just, and sometimes we can get in and out of these smaller jobs a lot faster because we got fewer moving parts, even though the gross margin is lower, we could either choose to do more of these jobs and turn them.
Again, assuming that we only had one crew and we could only work on one job at a time, we still could make more profit and still take more time off during the year and take more money home at the end of the day.
[00:05:24] Stephen Brown: So you got basically eight extra weeks if you shave two weeks off of each of these smaller projects. So you’ve got two months you saved that you could do another project and make more money. You know, I think that’s, I think that’s a great idea. The time, everybody knows that they make money if they do a job faster and they get in and out.
That’s a success every contractor I’ve ever done business with, it’s get– then there’s other jobs that last two, three years or more. And they’re smaller profit, but it just it works real well with their program. And you’re big enough that you can handle those and the smaller jobs too.
But in, in this scenario, I think it’s a a great way to explain the value of your time.
[00:06:10] Wade Carpenter: Right. Yeah, well absolutely, and like I said, if you do it in say, nine weeks or eight weeks or it’s something that you get really good at and you can turn really quickly, on a bigger job, you’ve probably got more moving parts, you’ve probably got more subs or material supply issues and things like that can go wrong.
So I think there’s a lot less risk, but you can’t just blanket say that, you have to look at the numbers.
[00:06:36] Stephen Brown: Right, and I would argue that on the bigger jobs you, you’re able to make less gross profit than on the smaller jobs. Just as a general rule, people would say if you’re taking a multi-year project, it’s multi-millions of dollars, but it’s a smaller percent of gross profit,
[00:06:55] Wade Carpenter: I absolutely would agree with that. But again, in my example, I think we were talking before this, too many contractors chase top line revenue. And they think these bigger jobs are their salvation. And I think we’ve kicked that around many times over the years.
How to analyze potential jobs
[00:07:11] Stephen Brown: So you’re analyzing jobs that are coming up for a bid and you’re looking at the time. What can you do, Wade, from an accounting standpoint to help analyze these things?
[00:07:21] Wade Carpenter: Well, I think there’s a lot of things we can do. But you know, going back to what the throughput accounting was. It originally came from a guy named Eli Goldratt who was like an Israeli physicist and he applied the whole thing really to manufacturing. And there’s been a lot of problems with people considering what are these concepts In manufacturing. It’s a lot easier when you got a manufacturing process and it’s a defined process.
With construction, it’s a little messy. You got a lot of moving parts and no two jobs are exactly the same.
[00:07:56] Stephen Brown: Yeah.
Considering gross margin vs. top line
[00:07:57] Wade Carpenter: But in trying to figure out how this works, we always preach job costing is the key thing to your profitability. I still believe that and I always will.
But again, looking at how fast we’re doing this, that’s a different dimension. And so, we’ve had multiple things that we’ve talked about over the years about selecting the jobs and our partner, Rob, is still writing his book on Pumpkin Plan for Contractors, where he is talking about, how, selecting the right job and finding that sweet spot. But this is a dimension that most people don’t look at.
[00:08:34] Stephen Brown: It definitely is. The first thing that a lot of contractors think about is first of all getting the jobs booked. They’ll make all their expenses and meet all their payroll. That’s the most fundamental primary feeling a contractor has. But once that’s met and that’s under control and you’re rolling, then you gotta analyze these jobs for not only how well they fit, but your profit margin.
I would think in this example, you probably ought to make the gross profit margin on the larger job less.
[00:09:08] Wade Carpenter: I made it look higher just for illustration.
[00:09:12] Stephen Brown: Yeah, just to show. You gotta keep it higher to show folks that, look at this example, that, look, even with a lower profit margin, a smaller job that you can turn over faster means more profit. And it doesn’t mean just more profit, it means less stress. And it may potentially mean less risk. So.
[00:09:32] Wade Carpenter: Well, that’s absolutely true, but I don’t think that’s universally true. And so I think you really need to look at it. And as much as I was gonna preach the job costing side, I guess if you’re in there bidding, I think you and I probably both would agree most contractors will, if it’s something that they can do, a lot of them will bid pretty much anything and everything out there that they think they could do. As opposed to maybe really looking at what they’re really good at.
But usually most contractors do have a gut feel of how that job will come out, even if– they may have distorted pictures of what their job cost is and what their overhead is, but they usually have some kind of picture in their head of how that gross margin’s coming out.
So I guess what I would say is, if you’re looking at two different jobs, I would look at number one, yes. Do we have more gross margin on the top line versus the, for the overall project. But I also would say like, how long is this taking us to do it?
So you may want to express throughput as not– a lot of people, again, look at how fast can we turn revenue? And it’s again, not about how fast we turn revenue, but if you say this gross margin on job A is going to be, X amount per week or per month, or even per day, and you’re comparing job A with job B and just looking at the gross margin as opposed to the top line, I think sometimes you may get to a different answer. Does that make sense?
[00:11:08] Stephen Brown: Yeah, it definitely makes sense. I’m just kind of thinking of a practical way for our listeners to apply this. What information they need in order to apply this analysis of where they can best turn over their, you know, I, I know it’s a gut feel. Every, Every contractor knows or believes they know what they do best. Or do better than their competition.
And of course not always do the perfect jobs line up just like you want. But sometimes they do. And the value of time is huge. I think when we talk about through put accounting, I think about compounding interest. I think about that and then I think about the time to get a project done.
But then again, every now and then you can look into a very large job with a huge profit and you analyze it, and that’s what you should do. But at the same time I really liked this concept, Wade.
Throughput accounting and overhead
[00:12:02] Wade Carpenter: Yeah. Well, I guess to kind of address what you said, as far as looking at throughput, we’ve had the conversation about what goes in job costs many times, and there’s a lot of different definitions. What Generally Accepted Accounting Principles say versus tax method versus what the owners say should go in job costs versus what project manager feels shouldn’t go on their job.
But, as long as you’re consistent in looking at it from this standpoint, if you’re looking at gross margin consistently from job A to job B. As long as you’re looking at apples to apples, then that really actually takes the conversation about your overhead out of the table.
Now, we have to cover our overhead. And so the concept of throughput is we’re gonna make margin at a certain rate. And we need to make the margin fast enough to cover this overhead and make profit.
[00:12:56] Stephen Brown: Right.
[00:12:56] Wade Carpenter: I just did that off the top of my head, but does that make sense?
[00:12:59] Stephen Brown: It sure does. And so many contractors forget they even have overhead. So gross profit versus net profit, net profit, you take your overhead out of gross profit. And in this situation, when we’re talking about a job that’s going on for a year, for example, or more. If that’s the only job they’re doing, that has to cover their overhead for that year. And when you cut it up into smaller jobs, you can allocate that, that overhead and a lesser amount, were you saying?
[00:13:33] Wade Carpenter: Well, you just you got the same pool of overhead one way or another. So it’s just how fast do you generate your margin to cover that.
[00:13:40] Stephen Brown: Okay.
[00:13:41] Wade Carpenter: So it’s a little different way of looking at it, but the faster you can cover it, ultimately the more profit you’re gonna make.
[00:13:47] Stephen Brown: Okay.
[00:13:48] Wade Carpenter: To go back to something you said just a minute ago and I was saying this too, is most contractors really do have a gut feel for how they’re coming out on a job.
But I’ve had actually two dif different situations with two new contractors that I’m working with this in the last two or three weeks, where in one case, and again, I don’t want to give any names or anything like that, but plumbing contractor. It actually started by grandfather, father’s still in the business, and son’s now kind of taking over.
But they were quoting things on lineal feet of pipe and stuff like that. And their factors in their head were wrong. And their pricing was so wrong from years ago, and they really haven’t updated this stuff, and they really had absolutely no idea of what this overhead was and a job was costing them.
[00:14:43] Stephen Brown: Yeah, or materials probably.
[00:14:45] Wade Carpenter: Absolutely. Well, the, yeah, the materials. And they, to their credit, they were actually going and carving some of the major pieces of the materials out, but they were still missing the boat.
So again that really isn’t the topic of today, but you know, your gut feel of what your overhead and what your job costing and your profitability, in their case, some things that they were thinking they were making a ton of money on, they were losing their shirt off of them.
So it’s sad and, it goes back to having good books and having good tracking of it.
[00:15:18] Stephen Brown: Right. And then the more people that you have as owners in the organization, the more important it is to look at these financial information regularly amongst yourselves. because you never know who’s gonna come up with a different interpretation of what they’re seeing.
[00:15:32] Wade Carpenter: Right. Well, again, I do see, I work with a lot of contractors that, they’re one owner firms and they’re overwhelmed. They work in, they try to work in the field all day and go bid everything all night and do paperwork all night and they don’t really have anybody helping them.
[00:15:48] Stephen Brown: They hate the paperwork.
[00:15:50] Wade Carpenter: Yeah, absolutely. But I feel like I’m on a soapbox here, but this is something I see all the time. But, if you can actually stop and maybe take a look at some of these jobs and what you’re doing, I, just, take a hard look at it or get somebody to help you and sit down with a different eye of what are you actually doing? I think that can go a long way.
[00:16:11] Stephen Brown: Well, I suggest a good construction oriented CPA such as yourself would be just that person. But I think this is a great topic, Wade. I think it’s something that all of our listeners need to think about. And if they have any more questions, they can reach out to you.
[00:16:26] Wade Carpenter: Well, absolutely. But again I, when I started doing this about a year ago, I actually started putting a book together on some of my thoughts on this because that’s not something that I know of anybody really approaching discussing this in the construction arena.
[00:16:42] Stephen Brown: No, you’re right. Anybody discussing throughput accounting would be manufacturing accountants.
[00:16:48] Wade Carpenter: Yeah but I guess I’m just a geek on this, but like I said, I love the topic and.
It’s
[00:16:54] Stephen Brown: good a geek about it.
[00:16:55] Wade Carpenter: Actually have some other thoughts. Maybe we can revisit the topic if people want to hear it. But I guess to kind of bring this one to a close, I think if you would just, when you’re bidding your jobs, a lot of contractors, they’ll take anything and everything.
And if you look at it on what, even if your gut feel, even if it’s wrong or whatever, but it, whatever your gut feels is how fast are we generating margin? How fast are we generating revenue? How fast are we generate that margin and then divide it by however many weeks it’s gonna take or months, or whatever your criteria is. I think that might give you a different answer.
[00:17:36] Stephen Brown: I love it because there’s no doubt in my mind that over all the contractors I’ve worked with over the years, the ones that consistently make the most money get in and get out of their projects.
[00:17:48] Wade Carpenter: Yeah.
[00:17:48] Stephen Brown: And they do what they do best.
[00:17:51] Wade Carpenter: Right.
[00:17:52] Stephen Brown: But nevertheless, there’s a lot of moving parts. I think it’s a great topic, Wade and I hope you finish your book.
[00:17:58] Wade Carpenter: Well, I got a little ways to go, but it’s just something I’ve just once I started, I mean, it’s all goes back to The Goal by Eli Goldratt, which was written way back in 1984 and the guy’s dead now. But it’s just concepts that people are forgetting about how fast you’re making profits.
[00:18:18] Stephen Brown: Wow. Okay. Well thanks Wade. I think it’s a great topic.
[00:18:22] Wade Carpenter: Okay. I think we go ahead and wrap this up.
Thank you all for listening to the Contractor Success Forum, wherever you might be tuning in from. Find us on all major podcast platforms, on the contractorsuccessforum.com or on the CarpenterCPAs YouTube channel. For more information, be sure to check out the show notes for more free resources.
If you haven’t already. We would sincerely appreciate it if you would consider subscribing this channel, ring the notification bell to follow us each episode as we post it every week. We sincerely appreciate your support and comments in this journey, and we will look forward to seeing you on our next show.