Wade, Stephen, and Rob sit down this week with Martin Holland of Anneal Business Coaching to discuss changes business owners in the construction industry can make for more profit and fewer headaches.
Topics we cover in this episode include:
- The importance of having good books for making sound business decisions
- Why you need to know your true break-even sales numbers
- How to stick to your target margins with intentional bidding
- How these strategies come into play when you implement a more advanced version of Profit First specific to your industry.
Subscribe and download the episode:
Learn more about Martin Holland and get his book, The Profit Problem, at AnnealBC.com.
Watch a video of the episode and read the transcript below.
Rob Williams: [00:00:07] Welcome to the Contractor Success Forum. Today we have with us Martin Holland of Anneal Business Coaching. He also wrote the book, The Profit Problem, and he has an amazing podcast just like ours called the Cash Flow Contractor. So go check that out too, because I was on there! Go look for that one. So it was great. And you also had Mike Michalowicz of Profit First on there.
Martin is taking the confusion out of the financial statements so you can make better decisions. I got engrossed with his book that he had sent me, so I, it was great. And I used it for doing my own accounting and it was a great quick summary for a non-accountant, maybe even for an accountant, but it was great.
So, check out our show notes where we’ll put all the contact information where you can go find Martin and you can find all the information about these other three wonderful guys also on here. We have Stephen Brown, our longterm industry professional. He’s a construction bond agent with McDaniel-Whitley bonding and insurance agency with over 30 years of experience, underwriting and placing bonds for you, his contractors. And Wade Carpenter with Carpenter and Company, CPAs, helping contractors nationwide become permanently profitable for over 30 years. And me, I’m Rob Williams, your Profit Strategist with IronGate Entrepreneurial Support Systems, driving profit in your businesses with decades of vertical integration as a contractor, manufacturer, aviator, financial strategist in the construction industry. Welcome Martin, man, after we got all that out.
Alright, how you guys doing today?
Martin Holland: [00:01:56] I’m doing well.
Rob Williams: [00:01:58] Great! Well Martin, we were talking about taking the confusion out of financial statements and, and we were also talking about bidding and different things. Where do you guys want to start today? Do you have any, you guys have any questions for Martin also?
Wade Carpenter: [00:02:14] I know you, you preach having great financial statements. I’d love for you to chat a little bit about, a lot of coaches don’t focus on that. And I really appreciate that message because that’s where it starts. And I know Stephen can’t get bonds for people that don’t have great financials.
Martin Holland: [00:02:33] Yeah, first of all, thanks for having me on here. I love this stuff. This could be a four-hour podcast because we were talking ahead of time and we’re like-minded folks and we don’t have to put our people through four hours of this, our listeners, but financial statements, I say and said earlier that there are 30.2 million businesses in the United States. And just about 30.2 million of them do not have financials sufficient to make business decisions. And I’ve had over 400 paying clients, so I don’t know how many more times than that have I talked to, and I mean, maybe three, maybe five.
I’ve even got clients $200 million, $80 million sales, don’t have good books. They have good books sufficient to pay taxes because they have to do that, but not good books sufficient to make business decisions. And that’s really one of my great passions. I don’t think it’s necessary that business owners know how books are kept or how the reports are created. But they do need to recognize good books so that they can insist on them and get the information they need to use to make decisions.
And that’s really my passion in life. And most people, when you, or most business owners, I know when we talk to them about books, their eyes roll back in their head. It’s a necessary evil. They don’t understand it. It costs money it’s associated with taxes. When they learn how to use it to make decisions, it gives them clarity. I often say it’s like, if you don’t have books, it’s like the last four minutes of an NBA finals game, and somebody puts a blanket over the scoreboard. You don’t know what you’re supposed to do, you know, if you’re supposed to shoot three free throws or take three desperation threes, or stall, or what. When you have books, you have the information you need to make decisions. So getting books and teaching people how to use them is, is one of my favorite pastime.
Rob Williams: [00:04:35] That’s so interesting. We talk a lot about Profit First on here, and it was the first time I met you and talked to you and, and, and you were interviewing Mike Michalowicz of Profit First, and it was interesting. Part of our conversation is, well, Profit First is great, but I believe people should have books. And there’s a misconception that Profit First means you don’t have to have books. And there are some people that do construe it that way, and I guess since you do have a cash flow system, it seems like you don’t need books. So people do sometimes run a, you know, getting their books behind. So how did you find out about Profit First?
Martin Holland: [00:05:16] I was thinking about that. I don’t really know. I don’t remember where I first came across it, but I, I read I’m an avid reader and if anybody mentions a book, I buy it and it sits on my stack and I get to it. And so, I mean, it’s been some number of years I’ve known about it.
The basic principle I have, all of my clients create a, what I would call a savings account. Mike might call it a profit account, whatever label you want to put on it, separate from their earnings. So we would always do that kind of thing. But your point about Profit First is a cash.
I love the way Mike Michalowicz describes it. It’s a behaviorally-based method of keeping books, right? So I get that. You’re going to look at your bank account. If there’s an abundance there, you’re likely to spend, so you distribute it, you see what you’ve got in the various categories. That doesn’t really answer all the questions, or at least I haven’t seen it answer all the questions for many of my companies where they have assets such as inventory, and accounts receivables that are significant. There’s a whole lot going on that doesn’t hit the bank account directly concurrently. And to make decisions, you can’t just look at your bank account. I love the enforced discipline and taking the profit first. I love that. But you need more information than that, not just to pay taxes, but to do business.
And I’ll just give you an example. One of the critically important questions every business owner should know absolutely is what’s my break even sales? And I have never, ever had a business tell me what their breakeven sales were. They’ll tell you, well, my overhead’s $9 million, or, or a million this month. So I guess it’s a million. No. It’s not a million. You can’t understand what your break even is, unless you understand the difference between fixed and variable costs. And unless you understand what your margins are.
And literally, I’m shocked. I was in business myself for 42 years, 40 years, 41 years. And I thought everybody would know this stuff. And basically the answer is I haven’t met anybody who knows it and that’s not because I’m smart. It’s that it hasn’t occurred to them.
That is a fundamental, any listener right now needs to ask themselves, how much do I have to sell every month to break even on my expenses? Then, how much do I have to sell every month to break even on my expenses, plus my debt service, which I have to pay every month, which comes out of profit? And then to make an available profit above that? Oh, well, look at what several things you’ve got to figure out. What are my expenses? What’s my fixed expenses? What’s my debt service? Most people can’t tell me their debt service without going, well, I’ll get back to you on it. What you don’t know, $20,000 a month, a hundred thousand a month in fixed payments on your long-term debt.
They don’t know that. Well, you ought to know that. And then what’s a reasonable target? Why are you in this business? So anyway, that’s a fundamental question. There are many others, but that’s the basic number one, from an operating standpoint, not necessarily balance sheet management, but from an operating standpoint, that’s the thing. You need to know what your margins are and what your break even is for those different targets.
And I’ve never met anybody in my conversations who knew that. And Profit First methods and cash management really don’t deal with that. I mean, maybe it makes you think about it so that you go deal with it, but the amount, and if Mike Michalowicz were on here, or maybe Rob you you’ll correct me if I’m wrong, but it just doesn’t deal with that.
And so it supplements, the two things go together.
Rob Williams: [00:09:07] But the advanced Profit First does. Yeah.
Wade Carpenter: [00:09:12] Implementing it in construction actually does if you put in the materials and subs.
Rob Williams: [00:09:16] Yeah, Wade, Wade’s seminar, it’s interesting. The one that he and I give the contractors and we in there,
Wade Carpenter: [00:09:22] We were just teaching breakeven.
Rob Williams: [00:09:24] We were just teaching, break even. You take your expenses, your debt service and your owner’s profit, and then what’s your break even? So, so how do you do that? And I love that about Profit First is adding that a hundred thousand dollars a year to it or whatever your, maybe it’s a million dollars a year, w whatever your profit you need.
And then that is your break even. And Wade’s even got a really neat drill where he figures out the margins, in there too. So it’s, it’s a great little seminar that you can put in there, but that’s
Martin Holland: [00:09:55] Well, we’re aligned. I mean, we think
Rob Williams: [00:09:59] Yeah. Oh yeah, I know we are. Yeah. That’s why we had you on here, man.
Wade Carpenter: [00:10:04] We were teaching it in the concept of like, exactly what you’re saying. What do you need to break even? But you know, if you try to chase that top line by giving away your margin, that break even number jumps on up. Martin, I know you just told a story. I didn’t know if you wanted to go into that about contractor…
Martin Holland: [00:10:22] Well, I have a contractor who came to me about two and a half years ago in a lot of trouble and principally, it was from lack of understanding margins. If he wanted the business and if somebody was doing it and a builder or contractor that he works for said, well so-and-so is at this price and he would match that price, right?
So he was in a lot of trouble. Well, we got him to understand margins and he has good books. And so our target is 40. Our real margin is 35%, so that’s his gross profit margin on what he does. But he called me yesterday. And this is after two years of working together– more than two years.
And he said, Martin, he said, I got an opportunity. This guy came to me with 80 units, uh, of what he does, which is a lot. And he said, man, 80 units, the only problem is he wanted me to come down to a price that would have yielded my client at 18% margin. He said, wow, it’s 80 units. And I said, yeah, it’s 80, joke about, get a bigger truck. You’re losing money. You need a bigger truck. He said, I I’m just so tempted to take this.
And I said, well, you can’t do that. He has all the work he can do right now. So this would have taken a month, maybe two months of his capacity and filled it up with cheap work, which he, if he got super efficient, you can’t double your efficiency in a factory in a week. But if he did that, maybe it could work, but that’s not going to happen. So it takes a month or two months of his capacity and runs it at 18%. Meanwhile, he turns down or pushes out to the distance his jobs that paid 35%. And he said, well, I knew that’s what you’re going to say. But man, he said 80 units.
I said, remember the purpose of business is not sales, right? It is to make a profit and then to turn that profit into cash. And if something that you’re wanting to do, you’re going to have this pipe dream that if I get that big sale, I’ll find some way to reduce costs or something. I said, well, what do you mean? That’s not what happens. You get the job, and then what really happens, more– I mean, sometimes it does, but what usually happens is you break some of the material, or your guys don’t show up. Or you figured three hours for this, and it takes four.
So that’s what usually happens. Because you bid it with a sharp pencil, trying to make it real trim. And then the reality of it is that’s not what happens. So your 18% margins are really going to be a 10% margin and you’re going to actually wind up losing money. So just don’t do it. And he didn’t. But after two years of hearing this every week, he still had to call and ask because the temptation was so– he goes, oh man, 80 units! I go, I know.
I had a builder one time and he had an inventory of 60 homes, which I know you guys relate to. And he would just be moaning. Because I’m always trying to get the margins up but builders, it’s a little different, as you know, the market is kind of set a little bit. But he said, man, I’ll tell you, sales, everything’s gotta sell. I said, I will sell every one of those 60 houses in 60 days and I’ll guarantee it.
He goes, oh my God. I said, you aren’t going to like the price. And of course I can! I can sell everything. I’ll just cut it in half, take my 10% sales commission. Well, no, no, no, no. I gotta make– oh, okay. Now we’re back to you got to make money. It is not about sales. It’s about sales that give you a realistic opportunity to, to make a profit and that profit with a high likelihood will get converted to cash.
Rob Williams: [00:13:57] Yeah. That’s a big problem right now. Getting an appraisal when the prices are going up.
Martin Holland: [00:14:01] Right?
Rob Williams: [00:14:02] A lot of times stuck with the appraisal. Not all the–
Stephen Brown: [00:14:04] I’d like to ask Martin a question if you don’t mind. You were talking about intentional bidding and how that ties into the whole thought process. Intentional bidding, well, every time I throw out a bid my intent is to try to get it, or my intent is to try to hit a home run, and maybe everybody’s asleep and I’m the only bidder.
And then I’ll still have to go back and negotiate because I’m two times the engineer’s estimate. But that’s gonna happen. It costs money to bid jobs. What does intentional bidding mean? Because you were telling me about giving a talk about it.
Martin Holland: [00:14:37] I’m giving a talk next Wednesday to a group, a subcontractors association. All methods of building. I mean, that’s one of the things, when I work with what I’ll call industrial type clients is, I want to see your bid process. And I wish I had it laid out, but basically intentional bidding is, you know your capacity. Okay. I can do a million dollars worth of work a month. I can do $25 million worth of work a month, whatever. And if you’re a general contractor, you’re thinking, well, it’s unlimited because I can hire more subs. Well, no, you can’t because you still have to bond it, right? You still have to pay, you know, you’ve got finance– but what’s my capacity to do work?
It starts there. And then you say, what’s my break even? Okay. So what margins must I have to break even. And then debt service and profit. And that gives you a minimum margin that you have to bid. Now, there are some other things in there. I like to really know what my margins are, real costs.
People say, well, I use a thousand dollars a day for labor. I said, well, how much does your labor really cost? Well, 650 bucks. Well, plus your payroll tax and your– okay, yes. $700. Well then use $700.. Don’t use $1000, because that’s how you bid yourself out of a, if you’re not using real numbers and you apply a higher than what you think margin to it, you’re grossing up what you already grossed up.
So knowing your real costs, knowing your capacity, know what you have to have, and it’s a pipe dream if you figure that out and you bid for less. You just stand there and say, you cannot do that. And what I hear oftentimes is, well, if I get the bid, I’ll figure out how to keep some of that funding. Or I got to keep the guys busy, right? Until a good bid comes along. Well, no. You have to know what you have to have. And then the last thing in this talk, I have four steps in this thing, but the last thing in this talk is confidence. You have to go bid, what you have to go bid. You can’t bid 25% margins if you got to have 30% and hope you’re going to get it. You have to go bid what you’re going to bid. And if it’s impossible to do that, then there’s two things: one, you’re grossly inefficient, and you need to fix that. Or two, you need to get the heck out of that business, go do something else, because it’s a guaranteed way to lose money.
And I have another client, he’s a long time client and we knock heads. He does construction type work, but he also does service work in his industry. He makes a lot of money on the service work. He sells a lot in the industrial work. Well, I’m always telling him you got to get your margins up and he’d always telling me, add value other than just price and things like that.
He literally told me this the other day, he said these general contractors don’t give a damn if you send them a Christmas card, they just want the lowest price. And I said, well, how’s that working for you? Because he lost $300,000 last year or 19, he lost $300,000 and on January 1st, he had $750,000 worth of accounts receivables. said, how’s it working for you? What the hell are you? What are you doing?
Sorry, I’m getting a little stride here, but what he’s doing is he likes taking his company that was $3 million a couple of years ago. And it’s now $8 million in that’s really cool. I get to talk about that. I said, well, you know, I really don’t care. I’d rather have a guy that made a half million dollars on a million dollars worth of sales than the guy that had a hundred million dollars worth of sales and lost 25 million. he’ll agree to that, but that’s not what he does. Right? His intent is to get the sale and he won’t admit it, but it’s for bragging rights. And I just said we’re at cross purposes. We butt heads a lot because I don’t bend and he’s not bending, but a little bit more of $300,000 loss and $750,000 in receivables. And he’s, he starting to feel the pain.
Stephen Brown: [00:18:40] Well, you triple your sales, you make those kinds of crazy numbers that you can brag about, who are you paying? I mean, who are you paying? You’re not paying yourself. You’re not making a profit. So, so who are you in business to pay? The banks? Banks love it when your account balances go up, when you might need to borrow more money. You’re making them, I guess that’s my point is, is, is who are you feeding when your sales get up like that?
Rob Williams: [00:19:10] The other aspect is we think if we get bigger, say if we can get to 15 million, well, let’s get there. And then even though we’re not profitable this year, then once we get there, then let’s figure out how to be a profitable $15 million company.
Well, one of the problems with that, that Profit First pointed out, is you may have the wrong kind of sales. You may have grown that to something that won’t be there. Get it figured out first when you’re small. And with the correct kind of sales, the wrong kind of business, you may be in the wrong business at 15 million that you just went from 3 million to 15 million in the wrong business and the wrong market.
Get the right target market when you’re small, then you can grow that business. And, and I, I did that myself in the wrong business and said, well, we’re just not efficient at it. We’ll do all our lean manufacturing and get the volume there and then we’ll buy the right saw and then we’ll do these other things and we’ll get the right equipment to be profitable next year.
But we got the sales now at 15 million, whether we’re losing a million or two or, you know, that’s okay, because next year we’re going to make four. And we’re going to be at that volume and it, and it just doesn’t work that way a lot of–
Stephen Brown: [00:20:28] It’s like the tail wagging the dog.
Martin Holland: [00:20:31] I just say it over and over. Sales is not the purpose of business. And if there are salesmen in the room, they always get mad at you, because they’re the rainmakers and all that kind of stuff. I go, no, you’re not the Rainmaker. I have a guy who does sales training for a large organization that you would know, and I’ve gone to some of his things and he always draws on the whiteboard a little train.
This is business. Sales is driving the train. It all starts with sales. Sales, we’re the rainmakers. And I’m just putting my head down. I said, well, before you have a sale, you have to have something to sell, right? And before you have something to sell, you have to have some financing so that you can buy the parts and components or whatever it is that it takes to sell that. And oh, by the way, you need to have bookkeeping and accounting and HR and IT, and tax, or you know, all the legal stuff. You gotta have all that. Or you got nothing to sell. It’s a chain. That’s such a beat up metaphor, but it’s a chain. And any of the links is weak, you’re going to go down, right? And sales is not it.
I have a client when you were talking Rob, it just made me think of it. It’s been one of my first clients, eight, nine years ago. But we started looking at what he did and started doing marginal analysis: this sells for this and our cost against that, our variable costs are this, and here’s what’s left over. And then we did other categories. He had a really poor performing sector of his business, which counted for 34% of his sales.
And I convinced him to quit doing that and he stopped doing it. And of course the low margin, high volume stuff. That’s what you sell the most of right? They’re 34% of my sales, just this one category, his profit. I wrote an article on it, why I have the numbers in my head. His profits went up 808%. So he reduced his sales by 34%, and his net profit all the way down to the bottom line, went up 808%. Now, if you’re not making very much money, it’s pretty easy to go up 800%, but that’s where you got to start, right?
Rob Williams: [00:22:34] That’s fascinating. You know, we’re starting to get down to the end, where we’re over our time as I always do, always let us go over. But, I love one of the points about Profit First and that was one of the things even talking to you, Martin, where you’re, you’re not a Profit First Professional at this point yet– we’re, we’re working on you.
But the part about, Profit First is not just the book. I thought that was a great thing that just came up in this meeting. And that, that Profit First is the scaffolding that gives you the infrastructure to make a lot of your business decisions. The scaffolding that goes up and down as well as your financing.
It’s a scaffolding around that for the business owner, because he’s not a controller, usually. So it’s that scaffolding that enabled you to do a lot of the advanced profit things. Like what we’re talking about now, this is all part of it. The sales analysis is one of the biggest parts of Profit First, but it’s not really in the book. And then there’s the break even analysis. And then there are so many different, the cash flow factors that, that generate that. But it’s all about getting cash flow. And I forget to say that on our program sometimes. I forget our definition of profit is cash. It’s not the book’s. Profit First’s definition, and like, Martin, and I know all four of us are really like-minded on that. It’s, it’s getting that cash flow so you can pay yourself as profit.
Martin Holland: [00:23:59] Right.
Rob Williams: [00:23:59] There’s so many different things that we can do in there.
Martin Holland: [00:24:02] So very few business owners actually get to see the fruits of their labor. I mean, at least not in proportion. It’s tied up somewhere. It’s gone somewhere. They spend it stupidly. I had a client one time between Christmas and new years bought $140,000 sign. And I was livid when I came back.
I said, what?! Well he saved $40,000 on taxes. I go, yeah, but you just sucked 140 grand out of your available cash that’s financing inventory, which was huge for him. Anyway, stuff like that
Stephen Brown: [00:24:34] Yeah.
Rob Williams: [00:24:34] That’s a huge that’s that’s I love that story. A sign, because I knew you were going to say pick up truck.
Martin Holland: [00:24:41] Well,
Rob Williams: [00:24:42] You actually said,
Martin Holland: [00:24:42] Yeah, I want to be a dealer in Oklahoma between Christmas and New Year’s that’s, but yeah, and a lot of trucks, but that was that was one that just stuck in my craw. I was so mad. He never even mentioned it. It’s his business. He can do what he wants. But as a coach, I’m supposed to be a confidant in a, uh,. I found out after the fact, well it’s too late now. You know..
Rob Williams: [00:25:08] Well it’s so interesting. I know sometimes when we’re talking to the contractors and stuff that might become a, a client, they’re like, oh, we’re going to start in three weeks. And I know what they’re doing, because they kept some money they want to spend before we start.
Martin Holland: [00:25:22] Right.
Rob Williams: [00:25:23] They’re, they’re doing it, trying to get it outside. So they won’t have the accountability. It’s like, okay, is it a swimming pool. Is it a truck? What is he going to do before we, before he starts becoming accountable? So, it’s, it’s, it’s a lot of fun. Anyway, this, this has been a, this has been a lot of fun today. So, yeah, today we have with us, we have Martin Holland, Anneal business coaching.
I always love talking to you Martin. It’s it’s great having you on here. So, hopefully we can get back together again soon. And Carpenter with Carpenter and Company, CPAs, contact him. And we have Stephen Brown with McDaniel-Whitley bonding insurance agency. Look in the show notes, share the show with your friends.
Because every time you don’t share this with somebody you’re depriving them of this great information. So everybody. Yeah, that’s right. And go listen to Martins Cashflow Contractors, listen to his–
Martin Holland: [00:26:18] Cashflow is one word in that.
Rob Williams: [00:26:20] It is. Yes, cashflow is, that is a big debate too.
So the next show we’ll talk about whether cashflow is one word or two words
Martin Holland: [00:26:28] I just mean in the title of our, the name of our podcast. It’s
Rob Williams: [00:26:33] In your title. Exactly.
Stephen Brown: [00:26:35] I know but that is a deeper meaning, you know, you uncovered.
Rob Williams: [00:26:38] Yeah. Well, we may have to put that in the show notes too. So, so anyway, if, if this part doesn’t get cut out, I hope you enjoyed it.
Martin Holland: [00:26:47] Yeah,
Rob Williams: [00:26:48] So anyway, have a great day. And we look forward to talking to you again soon. Martin. Thanks.
Martin Holland: [00:26:54] Thank you.