This week we’re going beyond the basic concepts and psychology behind Profit First, and into the real impact it can have on your construction business.
Topics we cover in this episode include:
- Why too many contractors are not being rewarded for their hard work
- How even the smallest changes can have a huge impact on the health of your business
- How cashflow and profit drivers can increase the overall value of your business
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[00:00:05] Rob Williams: Welcome to the Contractor Success Forum! Today, we are talking about the impact of Profit First by the numbers. And at the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business. Check out our show notes and our show page ContractorSuccessForum.Com. Subscribe and learn how we can work with you. Share this show with your friends.
Today we have our three long-term construction industry professionals. We have Stephen Brown, 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 Wade Carpenter with Carpenter and Company, CPAs, helping contractors nationwide to become permanently profitable for over 30 years. And me Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, driving profit in your businesses with decades of vertical integration as a contractor, a manufacturer, an aviator, and a financial strategist in the construction industry.
So today, guys, this is such a great session. We talked to our clients and our prospects offline about the impact of Profit First by the numbers. What does this mean? By the numbers and Profit First and how much Profit First can impact business. And I bet we have some examples or some percent changes and what that might mean to somebody in bottom line dollars.
Wade, do you have anything to say with–
[00:01:58] Wade Carpenter: Well, yeah, actually I did a talk last week at the Build Expo here in Atlanta, and we were talking about the ups and downs of construction, things like that. And I threw out the fact that I had seen many times where the receptionist takes home more than the owner in a construction business.
And I was amazed. I looked around the room, there was six or seven heads were like, yeah, exactly. Too often, we don’t see the profit. We don’t see the reward from our efforts. And sometimes some small changes can make a huge impact on the profitability and what we get to take home.
[00:02:35] Rob Williams: And Stephen, I guess you probably see even more sets of numbers than we do, being a bond agent. You have a lot of these come across, seeing the bottom line and the percentages and the impact. And I bet you’ve never seen any contractors that took home less than their secretary, have you?
[00:02:53] Stephen Brown: Yeah. Oh yeah. And a lot of the vendors. Feeding everybody, but themselves. Yeah. I’ve seen that many, many times, Rob.
[00:03:01] Rob Williams: Well, Wade, I love the way Wade’s– we were talking about the cashflow drivers and– that’s the word I use– and the percent changes that we make, but we, do we ever bring that down to a bottom line? And when you’re using Profit First, what are some examples and some numbers? I don’t know if we want to use the word typical because nobody’s typical. Everybody’s different. But just some examples of, of real life? Say we have a $3 million business. That may be kind of on the smaller side, but anyway, maybe that’s in the middle of that, that has that, and they change. Can you talk a little bit about some of these drivers and these percent changes and maybe what, how many dollars is that?
[00:03:47] Wade Carpenter: Well, I mean, it depends on, we’ve, we’ve kicked around several things. I actually do have one we talk about in that Bootcamp we’ve got coming up on this, but that was actually right in the 3 million and it was about the range we were talking about. And we talked about these little 1% here, 1% there, and it doesn’t sound like much, but when we work on our price, when we work on our margins, if we work on overhead… and we’ve got an example where we were just doing these 1% here in these different categories, on the profitability side, it came out to about an 18%.
So I mean, bottom line on their profit, they were struggling and their profit went up just over half a million dollars.
[00:04:29] Rob Williams: Yeah. So, so 18%. Wow. So let’s see five…
[00:04:34] Wade Carpenter: I mean, if you do the math, it doesn’t work up to 18%. If you say one plus one plus one, it does not equal 18%, but when you compound these things, it definitely brings that. It’s a compound effect.
[00:04:48] Rob Williams: Yeah, so, so that’s great. So in Profit First, I guess maybe we’re talking to some people today that have actually looked at Profit First, and we have these target allocation percentages. And so if we’re talking about an 18% increase. So the way this works typically is we get where people are now, their, their present state and the percents.
Then we build what percentage targets we want, where we want to be after our time working with them, whether it’s four quarters or two years or whatever that is. But it’s very typical to see a 20% increase overall on these allocation percentages.
And I was just doing my math and that half a million dollar realization, I backed into it. And that may only be a $3 million company. So we’re not talking about, to realize a half a million dollars difference. You don’t have to be a hundred million dollar company, to do this. This is the everyday guys that we see, that you can have these really large impacts that may have been making $50,000.
Like Stephen was talking about earlier before we started the show where maybe that company should be bringing in to the bottom line about another half a million dollars, and we’re leaving that on the table. And when we talk about it in terms of percents, I think we lose the impact and people don’t get that.
[00:06:23] Stephen Brown: I agree, Rob, because that percent really makes all the difference in the world because not only are you talking about managing your profit, where you get that percent, that little extra amount and like Wade said, how it compounds, but also at the same time, you’re having costs that are compounding. You get little things in there that are compounding.
One of my general contractors was very successful at tweaking profits because they were so good to their vendors. They were always getting the best pipe prices, material prices. Their vendors so beloved them that they were just humiliated not to just kill to do the best job for them.
And it was just simply because they appreciated them and paid them on time. But that’s just one example. Then you’ve got all the internal costs of running your company. And so many times contractors get hung up on their fixed costs that they don’t even think about it.
That incremental change of compounding costs, like Wade just said, that’s what creeps up on you and catches you from behind.
[00:07:27] Wade Carpenter: It’s just these small changes. In the class, we were going through this example that we put together. It’s not only profit, but if you work on the cashflow drivers simultaneously with the profit drivers, then, in the case study that I had done, it bumped up the cashflow by not just $500,000, but $750,000 almost.
And the other piece of this as well, people don’t realize that, sometimes it’s hard to sell a construction company, but when they do, and when you build it so that you don’t have to be there and it runs by itself, you’ve got a great profitable machine, you are building the value.
Typically we express the value of a business in a multiple of cash, revenue, whatever. But in his his scenario, we actually bumped that value of his business by two and a half million dollars.
[00:08:20] Rob Williams: Wow.
[00:08:20] Wade Carpenter: And people do not realize how simple changes– they’re not simple. I shouldn’t make them sound like they’re simple, but small changes can have a huge impact.
[00:08:31] Stephen Brown: Small changes.
[00:08:33] Rob Williams: I love that the way you just broke that down Wade, because you have cashflow drivers and you have profit drivers and, and you just reminded me right then, you also have drivers of the value of your business and how that number can change. As a multiple, say, maybe it’s five times or 10 times of whatever that earnings that you’re making for that year, the value of your business can go up.
And, you know, a little bit on the cashflow drivers versus the profit drivers first. So explain a little bit on the cashflow drivers and how maybe that’ll have a one-time impact that you can sustain. Can you talk about that a bit?
[00:09:15] Wade Carpenter: Well, I mean, honestly, the cashflow drivers, yes. Immediately, you can sometimes get a bump, but you know, part of what we’re talking about is increasing how fast you collect receivables, how you process your WIP and, a lot of people don’t realize that you’re being the bank, with all your WIP that you’ve got sitting in place, you’ve got labor and stuff like that, and if you can’t bill it for 30 days, you’re sitting on money that you put out. I preached the contractors: don’t be the bank. I know Rob, you and I mentioned this the other day but, I don’t know if people know the story of Dell computers and how they built to be such a big-
[00:09:53] Rob Williams: Yeah.
[00:09:54] Wade Carpenter: You know that? Or you want to throw that out there?
[00:09:56] Rob Williams: Yeah,
[00:09:57] Wade Carpenter: Cause that’s a great cashflow story.
[00:09:58] Rob Williams: It is. I remember that in my education, talking about Dell and how they didn’t have cashflow to deal with when they were growing because they had positive cash flow. Tell me from an accountant standpoint.
[00:10:12] Wade Carpenter: Well, you have this cash conversion cycle, and they basically had a negative cash conversion cycle. They got money upfront whereas, you know, HP or something like that, they would go build a hundred thousand computers and they’d sit on a shelf for inventory,
[00:10:29] Rob Williams: Yeah. And that takes money. That costs money to
[00:10:32] Wade Carpenter: -money, but it also, these, these components, they, you know, they were constantly evolving.
[00:10:37] Rob Williams: Yeah. So they’re limited to their growth, how fast they can grow when it takes money to grow your company. But if you have negative cashflow, you can grow as fast as you want, and it doesn’t cost
[00:10:48] Wade Carpenter: Yeah, I mean, Michael Dell started out of his garage. You paid upfront, and he’d build you what you want. And by the current prices, he could get you a cheaper, faster, better computer, and he was getting the money upfront. So he was not being the bank.
[00:11:05] Rob Williams: Yeah, if somebody has a cashflow, maybe their cashflow is a 5%. So somebody wants to grow by $10 million, then it costs them $500,000 out of pocket to actually grow. They got to have that $500,000, which can bankrupt somebody. So if you have your cashflow drivers lined up, that each additional million dollars of sales, you don’t have to come up with that cash first to be able to finance those sales, to grow.
If you’re paid up front for that million dollars, then it costs you nothing to grow. So that’s something about the cashflow drivers and getting our business owners, our contractors to just create that. You know, It was just sitting on the table that if he just worked on turning his invoices in a little bit higher and making sure his receivables, and then taking care of the payables. A lot of times, without even being any more profitable, there’s hundreds of thousands of dollars of money just sitting there in waste because of paperwork. And I know as the builders, I never liked the paperwork. And,
[00:12:19] Wade Carpenter: Nobody does.
[00:12:20] Rob Williams: And getting these superintendents to do it when I was a superintendent, even, I don’t think I got it. I didn’t understand that.
[00:12:27] Wade Carpenter: Well, going back to the example I gave you, that case study, these people were stuck. If any of you ever read Greg Crabtree’s book, he talks about the black hole–
[00:12:38] Rob Williams: What’s the name of the book. Do you know?
[00:12:40] Wade Carpenter: Simple Numbers
[00:12:41] Rob Williams: Okay.
[00:12:42] Wade Carpenter: Something like that.
But I mean, he talks about the black hole of business and like from two to 5 million, It’s tough to get up, because you’re trying to grow. And this particular contractor we found, we pretty much weren’t doing the same thing, but we worked on these profit drivers, but we working on the cashflow drivers gave him working capital. You know, he, he grew significantly though the next year, because he had the capital to do it. And it didn’t come from a bank.
[00:13:09] Rob Williams: Yeah, and he didn’t have to actually be any more profitable to get that cash. He didn’t have to raise his margins on that– for the cash part, for the cashflow drivers. There are profit drivers. But there’s money sitting there that you can create. And I don’t think people understand that there may be hundreds of thousands of dollars to bring in on a small business. On, when you’re talking about 1 million, 2 million, $3 million businesses. And there’s actually, typically they’re not big enough to have worried about it that much yet.
Stephen, I know you like to see those in your numbers, on your bonding. The cash flow, the balance sheet type.
[00:13:46] Stephen Brown: It’s constantly frustrating when I have a client that I really care about and I’m looking at their numbers, you know, it’s just kind of my job, to look at their numbers. And there’s just been so many things over the years that caused contractors to go under. And that’s the opposite of what we’re about. I mentioned earlier, bonding companies want to see that you can make and maintain a profit. They assume you can do the job or they won’t approve it. And that’s the ideal situation where we want to be with all of our clients. We want them to understand those numbers and we want to help them.
And just like the Contractor Success Forum, you were talking about the cashflow impact. I think we had a couple of great series on ways to improve your cash flow. That’s a starting point. That’s my point. You, you’ve got to start somewhere. If you’re going to see an impact on numbers, you gotta do something right.
[00:14:43] Rob Williams: Yeah, in my head, I was just having the thought of, as builders grow, which we have seen so much of that right now with the, the boom in the economy. As they grow, if they’re not watching these cashflow drivers that are not profit ,because we’re used to watching profit that’s, everybody kind of gets profit, I think.
But if you’re growing, you can go bankrupt by being tremendously profitable, but not having cashflow. You can put yourself right out of business. So if you’re in that growth mode, you really have to talk to Wade or Stephen or me or somebody and concentrate on those cashflow drivers.
You don’t have to understand it, you just have to be able to contact somebody that can help you, well help point those things out and where you may be able to make some improvements and how you can do that so you don’t let your tremendous success put you out of business. Any more comments on that? And because I also want to talk about profit drivers after that.
[00:15:42] Wade Carpenter: Well, a lot of contractors, they’re so busy, they got work lined up and they can’t get to everything, they bid everything. And they say, well, I can’t raise my prices or I won’t get the job. Well, maybe you’re doing jobs that you shouldn’t be doing. You know, Martin gave the– was it last week or the week before? Talking about, should you do all these, you got a big lot of things, but you’re gonna cut your price, but you’ve already got way more stuff than you can do already. Why should you cut your price?
And the other thing that I was talking about at the Build Expo last week, everybody’s complaining about construction supplies, lumber, those kinds of things, have not gone down, but people are not raising their prices. And you have to.
[00:16:30] Rob Williams: Yeah. So, so now we’re talking about the profit drivers. We were talking about the cashflow drivers, your inventory levels and costs of things. And if you change that, that sort of a one-time kick that you keep working on that you get. But now that we’re talking about the profit drivers. You raise your profits and you get your percentages up there, and say you improve this by 1%. And this 1%, and this 1%, maybe something else, 10%. As we see that in our TAPs- Target Allocation Percentages, when you see that, that’s year after year after year. So if you make an improvement of let’s just say a 10% and some people make 20% or more. But if it was only 10% on a $3 million company. That’s $300,000 a year to the bottom line. That’s not sales. That’s profit in your pocket, maybe on the same amount of sales.
So that’s $300,000 this year, $300,000 the next year. Maybe it’s more than that because you’re going to grow. So the impact of looking at this, it’s not insignificant. Everybody’s always worried about making more sales, more sales, more sales, and they think working on this stuff is just a little tiny thing and they don’t have time for that. And when you’re looking at that, this, this is where your time needs to be, unless you don’t have any sales. So, cashflow drivers, Stephen, I don’t know if you’ve thought about that. Help me understand whether I’m communicating it well between cashflow drivers and profit drivers.
[00:17:57] Stephen Brown: Well, I think Wade, put it perfectly when he said, and you as well, when you said You can be making profit and have no cashflow and go out of business. Managing what comes in and goes out is how you stay in business.
I had a contractor once who had everything going for him. Everything going for him. He had always paid people promptly. And because of some circumstances that were out of his control, he had to pay him a little bit slower. And a lot of those people unbelievably just turned on him. And I said, did you explain to them the situation? Oh yeah, they don’t care. And I was like, wow, I couldn’t believe what the impact cashflow ended up having on his business. And unfortunately that situation put them under.
[00:18:48] Rob Williams: Oh, that’s, that’s terrible. Even though he may have been profitable on books, because people see that, then you have that cash flow, then the profit drivers. And then the third one that we were talking about is the value of the business. So–
[00:19:02] Stephen Brown: Why are people afraid to talk about that? That’s the measuring stick. You want your company to grow. So many of my contractors seem to think, it’s just about what I take out of the company. But just like you said exponentially, as you grow your company, think about having your company to the point where it’s close to running itself.
Wow. You, you can do that, but you got to have a net worth. You’ve got to have equity in your company, and you only build that up by making profits and keeping profits in the company. So it all ties together. And I think that what you offer is a great coaching service to help people understand that.
[00:19:45] Rob Williams: Yeah. And for some of these people that may be, I think there’s a three-year window or sort of magic window that people start looking at, maybe they’re looking at retirement or getting out of their business for some years, and they kind of wait until those last three years to clean things up, but they usually wait until one year, but at least.
When people look at the value of their business, that’s not what your balance sheet, that’s not the equity thing. The value of your business is typically– I was at a dinner last night and they were talking about the way that they used to value businesses. It was the net present value of all the future profits, where actually I kinda think it’s the net present value of all the future cash flows, I think may be in our realm, as opposed to a stock on the stock exchange. I think ours it’s not necessarily even the profit, it’s the net present value of all those future cash flows.
So each year discounted back to this year. So they’ll look ahead five years and count each one of those and take that value back. So it’s not just your profit for this year. When you make these changes to these profit drivers, that drives your value of your business. So not only are you making the cash from your cashflow drivers, which may on a $3 million difference, just the example we said there’s $300,000 created without even more profit, but then there may be hundreds of thousands of dollars of difference in a business for profit as well, so there’s a few hundred thousand dollars more that somebody could make on the difference.
But then there’s the value of the company also, which typically is a multiplier. I don’t mean, I don’t know what the multipliers are in construction. Let’s just say it was five or something, but they would take that net cash flow or maybe it’s the profit, it depends on who’s looking at your company, multiplying by that five. So if it’s a few hundred thousand dollars difference that you make, you may have just made a million and a half dollar difference. So, in a year you can make that value, that million and a half dollar difference to your business value.
You can make a few hundred thousand dollars possibly on your profits, and then your cashflow, a few hundred thousand on it. And this is a typical this is not, I’m not even saying it’s typical. I don’t want to say this is not a promise that we make that change to everybody. But that’s what’s happening in real life, out there for lots of people and it’s not a fairy tale it’s really happening.
And just getting that point across. Wade, Wade, I’m talking too much.
[00:22:27] Wade Carpenter: Part of what we said at the beginning, I mean, contractors that run their own business, a lot of them won’t admit they don’t understand financial statements. They don’t have any inclination to go home after a hard day at work and go look at numbers. And they hate the paperwork, but by learning a little bit of these concepts, put certain simple things like Profit First in place, that runs itself once you’ve got it set up and get going. So that’s how we get the permanent profit and it takes out these things that we self sabotage ourselves. By the way we spend cash and those things.
[00:23:03] Stephen Brown: Rob you were talking about your former business doing $80 million a year in sales, trying to hit a 10% profit margin of $8 million. So, the casual listeners say, oh, that’s great. Well, I mean, who’s complaining? The partners divided up $8 million, but that’s not the case.
You’ve got taxes, that money’s got to sit in the company for years that you don’t make your margin, and then think about the years you made 2% or 1% or no percent. And you,
[00:23:32] Rob Williams: Is that all the years or some of the years?
[00:23:35] Stephen Brown: Yeah. Well, you threw all that effort out. And even though there were big numbers, there were big risks involved. And when there’s big risk involved, just the smallest amount, throws it off. Thinking about using a fulcrum and a lever, you know how you can lift something heavy by moving that fulcrum just a little bit. I think that’s what we’re talking about.
[00:23:57] Rob Williams: Yeah.
[00:23:58] Stephen Brown: Move it, you tweak it just a little bit and you wouldn’t believe the leverage you have.
[00:24:04] Rob Williams: Yeah. I used to love those fulcrum examples.
[00:24:08] Stephen Brown: There you go. Makes you crazy. But how did you, I mean, how did you feel when that was happening?
[00:24:16] Rob Williams: Well, I wish we had had Profit First because we were always making our sales projections and we were always very optimistic. So even as we grew, we always thought we were gonna sell more. I don’t know that we ever sold more than we thought we were going to sell.
We had some monthly targets and we did some great goals, but when we were budgeting, it was budgeted off of what we thought we were selling and everything I can remember, I’m sure maybe we made our sales goals sometimes, but we always. Overestimated, how many we’re going to sell. And then construction was always falling behind.
So are our margins to the bottom line were always much, much lower and we didn’t have a Profit First system. And that’s actually what attracted me to Profit First. When I saw it, it was just like, the lights came on and the clouds opened and I was like, Hey, where has this been for the last few decades?
Because that constant monthly accountability of seeing those bank accounts and seeing how much is in there would have changed our budget because we just, we had our budget, so we were always on budget. I stayed on budget and stayed on budget. And a lot of years I was right on budget for a loss, so our costs were right there.
But you’re right. Even there, I mean, those little bitty percentages made millions and millions of dollars of difference, and we didn’t think about the impacts of those. So when we, and heck, we would know for six months, how much we, it was the middle of the next year before we finally figured out how much money we made for the previous year.
[00:25:52] Stephen Brown: Yeah, one half of 1% of your sales would have been $400,000 if you were doing $80 million a year. But
[00:26:02] Rob Williams: Yeah.
[00:26:02] Stephen Brown: Nevertheless, I think the most interesting part of this talk today was that the comment that Wade made about the compounding of things. You can’t just say it’s 12 months worth of expenses or income. Everything compounds in this life of ours by increments.
And that’s what you measure. That’s what you help get on top of.
[00:26:29] Rob Williams: Yeah. Wade, do you have any more comments?
[00:26:32] Wade Carpenter: I mean, the one thing you say about the cash flow, there is usually a big bump to begin with, but those things continue as well. I mean, if you continue to maintain those systems that get you to that cash flow, that will stop you from spending so much money being the bank for everybody else.
[00:26:51] Rob Williams: Yeah, there’s so many things, so we’ll have a lot more ideas and shows and talking about like this. And taking some real numbers in here is really impactful to me because I even forget, I think I told you all before the show is I’m talking to people and I’m doing this on a daily basis.
And I make mistakes in my head about how impactful this is by a whole decimal point, or even two. Sometimes, I’m sitting here talking to somebody and I’m thinking, okay, there’s $5,000. We’ll do this. I’m like, wait, no that’s $50,000. No, wait a minute. That would be $500,000. And I get excited sometimes when I do the math, because our brains don’t let us instinctively do that math in our head. And, and you have to write this down. So, talk to some people. Get an assessment done. Do something and look at your business from somebody that can give you that information and see what potential might be there.
If you’re wondering about this, you don’t have to know this. You need to know how to go build this stuff and, and deal with running your operations. You don’t have to be a math major to figure this out, or a finance guy. There are people out there that just do that. They can’t do your job!
[00:28:05] Stephen Brown: Yeah. You remember back in the seventies and eighties, those metal ball things they had and you click one and they would click back and forth. You got to pull that first ball out and click it first. And you’ve got to start somewhere to get that momentum going.
[00:28:21] Rob Williams: Yep. Well, great. We’ll wrap up for today, and today was a great day talking about the impact of Profit First by the numbers and how much impact that can actually have in terms of dollars. This is definitely no promise or any scheme or something that, that you’ll get these things, but we do see it every day. We see these things. These are the type of potential impacts you can have if you’re not watching this, not working on your business because you’re working in your business. as everybody says over and over again.
So, thanks a lot. This is the Contractor Success Forum. Go see us at ContractorSuccessForum.com, and we have Wade Carpenter with Carpenter and Company, CPAs. Look in the show notes for his contact information. And Stephen Brown. With McDaniel-Whitley bonding and insurance agency. And I’m Rob Williams with IronGate Entrepreneurial Support Systems. And thank you for listening today and drive those cashflow drivers, profit drivers, and the value of your business.
And have a great day. Thanks.