3. The One Figure That Could Destroy Your Building Company with Russ, Sky & Andy

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Hello and welcome to the Professional Builder Secrets podcast, a podcast by the association of Professional Builders for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales, processes, financials, operations, and marketing. Today, I'm joined by co founders sky and Russ Stevens, as well as Andy Scarter, head coach for the association of Professional Builders. Welcome, everyone. Excited to be speaking to all of you today.

Thanks so much, Bosco.

Well, let's get into it, shall we? In today's episode, let's really talk about the most critical problem that builders face. And Russ, I know you're dying to answer this.

Yeah. Well, the biggest problem facing builders at any time is profitability, but more specifically, it's their accounts and understanding their financial position. Because when a builder looks at their accounts and they never make any sense, not at month end, not at year end, they look at the P and L, the balance sheet, nothing seems to add up. So what do they do? They look at the bank balance. This is the biggest issue I feel facing the industry.

This is an interesting topic. I mean, Andy, when you're coaching people as well, what are the builders telling you when they look at their bank balance? And what are they commonly struggling with when it comes to their financials?

Well, the biggest problem is they confuse the bank balance with profitability. So they kind of live in this world of if there's enough money to pay the bills, then I've got to be making profit. But unfortunately, because of the nature of the industry, there is no direct connection in most cases between the amount of money in the bank and the profitability that they're actually experiencing in their business. So it's getting them to understand that those two are not an indication of each other at all. And profitability is the one that they've got to be focusing on.

Right. So is there a secret to bring them to this sort of acceptance when it comes to, you know, really knowing that this is something that they have to pay attention to. Because I can see this becoming a cancer that ends up growing bigger and bigger if they're not paying attention to it.

Well, absolutely. And the big problem is, as we always point out to everybody, is that the busier they are the worse the problem gets. So, you know, the critical thing here, and Russ touched on it already, is knowing accurately what your profit position is every single month. And that's really where we focus on making sure that we've got accurate numbers every single month.

Sky, do you see this as being one of the big reasons why builders end up folding in the first few years as well? I mean, you know, from what I'm hearing from. From Andy and Russ here is that if we don't pay attention to this and it starts to escalate, I can see a lot of builders going out of business pretty quickly.

Oh, definitely. We have to be able to understand our exact financial position. And so exactly what Russ and Andy have been talking about, it's understanding profit is not cash, Cash is not profit. And so we need a way of actually understanding, well, what is this? What is this in my accounts? How can I understand this? That's exactly what Russ was talking about. Because there's a lack of understanding in financial reports. It gets like a blind eye because it goes into the too hard basket. And so it's actually leaning all the way in and understanding. There's actually one figure you need to calculate every single month to make these financial reports make sense.

We start to look at this from a different holistic view. Shouldn't this be the responsibility of the accountants? This seems to be the unspoken dialogue. Shouldn't the accountants be paying attention to this? Sky, why aren't accountants talking about this as a problem?

It's a really good question. And unfortunately, it's not necessarily anything malicious. It's mainly because the majority of accountants we've come into contact with just don't quite understand it. What figure we're alluding to this entire time is we're talking about the work in progress figure that a building company has to calculate and insert into their building company accounts for them to make sense. And unfortunately, most accountants will speak about work in progress in the form of manufacturing, and that's really where it all started.

So, Russ, where do we aid the businesses? Is it the builder's responsibility to be paying attention to this? Should we be re educating the accounting system moving forward? Is there a gap in between? How does this look like moving forward?

Yeah, it'd be nice to educate accountants on this, but really, builders have got to take full responsibility. This calculation is so important. You can't. You can't pass the buck. You can't rely on anyone else to get it right for you. You've got to understand it, and you've got to calculate it yourself, and you've got to insert it into your accounts. And the problem we've seen, like sky just mentioned, was that 95% in our research, 95% of accountants do not understand how to do this calculation correctly. And that's simply because they misunderstand what the calculation is in the first place. Because the term comes from manufacturing. It was a way of valuing raw materials as they went through the manufacturing process. And accountants think that's exactly the same with building, but it's not. Building is very different. Contracts are front loaded. Supplier invoices simply don't come in for weeks, or in the case of concreters, sometimes months. So jobs end up, especially on new homes, they end up cash flow positive. And while that's good in some respects, it's a real danger in others.

Andy, let's define the term a little bit more. This is a new world for me as well. Define the term. And what is the differences between the common misconceptions and why accountants don't get this right the first time?

Well, I think that we end up in most cases in this problem that words create worlds. And when an accountant is referring to what they believe is work in progress, they're actually referring to what we would define as. As workflow. So if we start, the workflow is the uninvoiced portion of all of the building contracts that are currently being built. So in other words, it's the remaining work that you still have to do on all of the contracts that you've signed. In our case, when we talk about work in progress, we're talking about the fact that because of the nature of the way the building industry works remotely, Russ has alluded to the fact that often subcontractors and suppliers are not as administratively adept as we'd like them to be. And what that means is that often we are being paid progress claims at different stages through the build ahead of being invoiced for the work that made up part of that particular process. And the net result is that a lot of the money that's in the bank is not actually hours to spend. It's already committed to work that's been done and completed but not yet invoiced.

Do builders know that this is money they can't spend?

That's where the problem comes in. Because at the end of the day, if they are not taking it into account, they will literally look at their bank balance and go, I've got a bunch of profit here. And it gets worse. Unfortunately, most accounting systems and Most accountants in, if you were to ask them to unpack the arithmetic formula that's used to calculate profit, they would tell you that it's income minus expenditure, which is correct arithmetically. But the problem in a builder's world is if he hasn't yet been invoiced for part of the income he's got, income minus zero equals profit. And the accountant is going to be totally comfortable that that profit is accurate, when in fact, 70 to 80% of that amount is actually owed to suppliers and subcontractors who've made up part of that invoice.

And if they're not aware of it, then they're misspending it. And that's where the shortfall is.

And to compound the problem more, this is why, exactly why I Builders accounts do not make sense, because their gross margin is going to be bouncing up and down. Like this is where you see you killing it. One month you got very high gross margin, and the next month your bills come, it's very low. And so that's when it's like, you know what? If your accounts don't make sense from that perspective, you stop looking. And that is how the problem just gets worse and worse and worse.

And to compound it, they're then paying tax on profits that they haven't made because the profits are being artificially inflated and submitted. Now there's even more cash going out of the building company paying tax that wasn't due. And we have a lot of builders scratching their heads saying, I can't afford to pay my tax bill. I'm still paying off the tax bill from last year. Where's the money gone?

So, Russ, when you bring them through your process and you educate them on this, what is the most common reaction you get on these calls? I mean, I would assume that builders are pretty shocked at this point when they start to realize that what they've been standing on is a false narrative.

Yeah, well, I'll tell you, if you've got your finger on the bleeper, fair enough. It's disbelief, to be honest. In most cases, it is disbelief. In some cases where they do have a good business and it's reasonably profitable, and they're just scratching their head with the cash situation, situation in terms of tax, it kind of starts to make sense. But in most cases, builders are not making any real profit in their business, so they cannot comprehend how far underwater their business really is. And they argue, they deny it. It takes a bit of time. And Andy can probably answer this a lot better than I can, because he's dealing with these guys firsthand. But it's a difficult challenge for us because, yeah, it's not easy to explain to a builder that his company is 2, $300,000 underwater.

It's a growing problem if it's not addressed. Andy, let's talk about the risks. I mean, it sounds like the residential construction space is the final frontier, but it comes with a lot of risks and challenges as well. Let's get into that a little bit.

Well, I mean, this one in particular is really the fact that we've got to get builders to a place where they are comfortable with critical numbers. So, you know, I don't want this to sound like we sort of pitting a builder against his accountant. That's not what we're doing here at all. What we're saying is, and sky made this point, I think very clearly that accountants aren't deliberately misleading builders. It's just that because of the way they are trained, they are not necessarily aware of the implication of what's happening in this particular industry. So the reality is, as Russell said, it starts with education. And to be honest, what generally follows the bleep filled conversation when we first show them what their company actually looks like is a very tense conversation with their accountant. And I've had a number of them where accountants have come onto the beginning of that call, very, very aggressive. And, you know, they're the ones wearing the tie in the conversation and therefore they need to be listened to. But the reality is, once I've actually watched the lights come on, I've watched those aha moments where as they start to understand the reality of the building industry, they start to see how this works. And to date, I think certainly in my experience, we've never ever ended up with an accountant who by the time it's been explained, didn't get it and was therefore prepared to get involved and, and make the necessary adjustments. So it's really an education situation more than anything else.

And as head coach, you've worked with clients around the world. Any secret stories or confessions that you want to share with us that, you know, really some experiences that you've encountered where, you know, you've had a client realize this problem either on their own or with the accountant, with them.

Well, I mean, regularly. And the really nice part, I mean, the negative part is that they hate me us. For 10 minutes they literally pull out an Andy doll and start sticking pins in it because it almost, in the stroke of one spreadsheet or one calculation, we've taken what they thought was a profitable business and showed them that in fact it isn't. But what is really fantastic is three, four, five months down the line where they are now aware of it and they are making the necessary adjustments in the business that they know actually where that business is. They're then able to bring into play the other activities that need to be done in order to turn the situation around. And now, of course, they get the double positive because now not only do they know that the business appears to be profitable, but it actually is because we now take the work in progress into account.

I think Andy's being super diplomatic here. I mean, we've got stories for days about I can even think of a handful of clients that immediately was a straight up argument. And this went on for a couple of months as well. No, this is wrong. This is not how it is. And it's because of exactly what Russ said. It's really hard to admit, you know, what you've been doing isn't the best thing possible. But you know, we did get there in the end and it's not always a very quick 10 minute conversation. It can really, really challenge quite a few people in not the best way. And unfortunately we do make it worse because we then go and thoroughly explain the problem. Like to paint a picture for everyone, Even if you really want to understand work in progress, we call this figure work in progress. Exactly what Andy just explained. But think of it like a pile of dirt that just gets bigger and bigger and bigger as the revenue of a building company grows. So as building companies scale, their revenue gets bigger and bigger, but so does this pile of dirt. So as you're growing and growing and growing, as your revenue grows, the pile of dirt grows. But you never get to see it because the mat is so big. And so especially when we're dealing with much bigger evolved building companies that haven't been calculating this figure, this figure becomes massive. We've had to tell building companies that they've got a million dollar liability on their hands. That's scary. But if they look at their bank account, they've got cash over here, they're paying everyone, things are fine. It doesn't resonate as a real problem. And that is what I would say is the biggest problem when we're coaching relatively successful building company owners. Because they're paying people, they've got a big team, they've scaled to be quite large. Unfortunately, that pile of dirt under the mat is pretty massive as well. And we are so passionate about this because when the new work stops and revenue Declines, that mat starts shrinking and it exposes the big pile of dirt. The big pile of dirt doesn't shrink as the revenue shrinks. That is still a massive pile of dirt, that liability. And we call that other people's money. It was never yours to begin with. It was always owed. And then that is why building companies go bust for millions of dollars. And in most cases, it's because they never made a cent of profit in years. And we're just trying to save as many building companies from experiencing that.

It happens so quickly that most of them cannot believe how quickly it turns.

The work in progress is the pile of dirt growing, and the mat is the revenue. And once that revenue, the reason it covers it is because a growing company, the revenue keeps growing as well. But once that company starts growing, and we see it all the time, we see so many large building companies that all of a sudden there's a hint of recession coming. They go under owing millions, and there's no way they lost millions of dollars. There was one just recently, the beginning of the year went down owing 1.7 million on a $5 million turnover. It wasn't even a particularly large company, but you cannot lose 1.7 million in 12 months. But that's exactly what the liquidators report alluded to. They alluded to the fact this company was going well until 12 months ago when they suddenly became unprofitable. It's absolute nonsense. And it just shows that these forensic accountants don't really understand construction financials at all.

And I think the owners of the building company as well, you're just drunk on cash at that point. Because it looks fine. It's looked fine this whole time. But unless you're calculating it, you just can't see.

And your accountant told you you were profitable? Yes, and he's the one with the tie. So come on, who's going to know? Of course he knows.

How many times have we been told, well, we're just going to have to agree to differ on this one.

Yeah. And I think, Bosco, the other thing that's important just to kind of get clear here, is this is a global problem. We work with clients all over the world. So this is not unique to a particular part of the world or a particular part of the industry. This is a genuinely global problem that affects every builder everywhere in the world.

That's really interesting to observe. I think someone very famous once said, more money, more problems, which really references to where we're going. Russ, how did you come about discovering this problem? Because this is a Problem that's probably been in the making for years by the sounds of it.

Yeah, well, I came from a background in an industry that was high revenue, tiny margins, even smaller margins than the building industry. So you had to be all across your numbers, you had to be right across everything, not just monthly, but literally weekly because it was just so fine. So when I came into the construction industry, straight away I could see that the accounts weren't right. You couldn't put in a claim for 100 or $200,000 into the accounts, not have the corresponding supplier invoices in there, and then go by what your accounts were telling you. It obviously wrong. But I couldn't find anyone that could give me the solution or how to fix it. So it kind of made no sense. And I found the solution buried in some construction accounting Software back in 2007. And it was the work in progress calculation. Yet still no one I spoke to in the industry could explain it to me. And when I talked about work in progress, they gave me the explanation for, for manufacturing. And I did more research. I found an article online. I then came across an accountant in Melbourne, Victoria, that had been talking about this problem as well. And I actually called him up to speak to him. And he was a broken man by this point. He'd given up. He'd given up trying to explain it to builders, to other accountants, to associations, because he said no one wanted to hear the truth. So in the end he'd pretty much just washed his hands of it and was just carrying on because no one really seemed to want to know what he had to say. But you can't unlearn this stuff. And once you, you know the truth, you have to try and share it with as many people as you possibly can. And, and that's really what we've been trying to do for these past seven years now.

So you discover this concept that's there that no one's really talking about. How do you bring it to the market? And did you fear bringing a foreign concept to builders? What was going through your thought process when you like, okay, we're going to adopt this and bring this to people that are not ready about this. I mean, that's a pretty bold move.

Yeah, and that's spot on. I mean, we've got this great solution. No one wants it, no one wants to hear about it. So I mean, the first thing we had to do was to make this really simple because it can sound a little complicated trying to work out what this figure is. So we developed a very simple Calculator that works it out for the builder, along with step by step instructions for their bookkeeper as to how to put two very simple journal entries into their accounts, which corrected their accounts at month end. But that was only half the battle because the real battle came down to education. Again, it was educating builders on why this was such a big problem and why it was critical that they adopted this calculator that no one else was using or even talking about. And that's really where we focused our energy is making builders problems.

Sky curriculums and content is something that I've always been impressed by. When it comes to the association of professional Builders, you really, really pride yourselves in what you put out there. How is it that builders don't know about these concepts? You know, I really want to dig into this problem a little bit more to know. You know, is this something that they don't teach in schools? Is this something that builders aren't equipped to learn? Where's the problem? Where does it lie?

Look, building construction. I mean, builders, owner of building companies, you guys are doing some of the most complex jobs on the planet. Let's be honest here. This is very detailed, very complex work that you guys are doing. And so the concept, like you say, of work in progress, you have some sense that this was the case. It's like that scene in the Matrix, how you're trying to explain the Matrix. Like, you know it's there, but you can't explain it. It's exactly the same with work in progress. When you first started building, you got one job running at a time. It's very, very easy to see exactly like what Russ said. You get a progress payment of $200,000 that month, but you only paid $30,000 in costs. Like, you know, you didn't just make $170,000. So you do the mental calculation. And the thing is that I think is where the problem lies, because it's a mental calculation and doing it all in your head. It becomes so much harder the second you do multiple projects at any one time. And that's where the complexity comes in. You get it, you understand it. When you're just doing one project at a time, add a few more, it adds another layer of complexity. It gets a little bit murky, it gets a little bit foggy, and then it slowly creeps into that too hard basket. You know that it's not 100% accurate. But you know what, your accounts are probably close enough. And then before you know it, your revenue's increasing. So that's that mat that we were talking about. And then also the dirt is getting bigger under that map because just like we said, you're drunk on cash. You can't truly see the bigger problem until, just like Andy said, it's too late, unfortunately. So you're aware it's there. You know it's there. You just can't quite describe it or put your finger on it and just.

Like give a bit of insight. A typical building company that's doing maybe 5 or 6 million a year will typically have a work in progress liability. So this is a liability that is not showing up in the creditors in their accounts within the region of half a million. This is how serious the problem is. Which means they got to be carrying well in excess of half a million just in cash in their building company to make sure they can cover that liability. And what happens there? Accountants, financial advisors, tell them that's a risk, let's get that money invested. And they pull it out the company. And of course they pay tax on it as well.

And that's the worst part, isn't it? Because it's not even their money that's the problem. You're holding a $500,000 liability. It's not exactly like it's your cash. You're literally looking after other people's money.

So this is a nightmare as well. When it comes to the end of the financial year, it sounds like you're carrying the liability over to the next year as well.

Yeah, 100%. And at best, this is when work in progress does get calculated, or purported to be calculated at least. But invariably, because it is misunderstood, it gets guessed and it goes in builders accounts as an asset when really it's a liability. And that just makes the situation even worse. So now we had a $500,000 liability in that typical building company. It get guests each year. It ends up as 253, 400,000 asset. Now we've got an 8, $900,000 swing going on in the accounts. And this is where building companies come unstuck big time. Because when that mat can no longer cover the dirt, which is work in progress, and the building company goes into liquidation, all of a sudden it's a big reveal how much money they're underwater for.

Might be actually really interesting to explain because we're talking about it being a liability so frequently, and it's most commonly going to be a liability. And it's because of the way a building company is actually set up. A work in progress figure, it can be an asset. So when you go through the calculator. Here's the most interesting thing as you go through the calculator that we've ended up producing to actually establish what is your work in progress figure. You can do the calculation and what will usually happen is it's going to spit out and actually equal a liability. And that's exactly what Russ was saying. You insert it into your accounts but sometimes it can actually come out as an asset. There are two reasons for that. It's usually because of how your building company set up. You're either doing new homes or renovations. Like remodelers typically have a work in progress figure that is an asset. And the reason for that, if we actually just describe the main difference between the two, it's basically because of the way the building companies set up. New home builders typically subcontract everything. So there's a naturally going to be a delay for when they invoice out their work and then they get their invoices from their subcontractors. Remodelers, again, typically these are generalized statements, employ most of their workers. So you're already like front loading and prepaying for all of that work before you get your progress payments. So you can sort of see how there's already an immediate difference. But we've actually come into instances and Andy will be able to talk about this a lot more when we're working with builders, even new home builders, and suddenly you see some positive WIPA figures. It's actually a bigger problem.

Yeah, and I think that's critical because if you go back to what we were saying at the beginning of this discussion, what we really striving for is accuracy. At the end of the day it could swing one way or the other way, but it doesn't matter which way it swings, it's wrong. So it's really getting to the place where we get it right first. That's the primary thing. And then once we know which way it's swung, we can then take the necessary steps to run the business differently or make provision for that. I find most builders, when we show them that asset side, when I explain it to them on the basis of they've just given their clients an interest free loan, their eyebrows go up. But essentially that's what they've done because they've effectively paid for materials or possibly a subcontractor prior to being paid by the client, which essentially means they just invested in their client's home.

I'm not sure, Andy, when you jump on a coaching call with a builder each month and you start Digging into their numbers, you might look at the work in progress calculator and those positive ones. We know we have them. They kind of highlight in red, don't they? Automatically, you can go straight to the job, or you can name one of those jobs and say, what's the problem with this job? And it's like, how did you know that job?

They think that we've got a camera installed in the office somewhere. You know, kind of watching that we've got this inside track. But exactly as Russ said, the beauty of that calculator is it highlights immediately there's a problem on the job. As soon as you mention that and those clients start to think about that job, they realize that there's a red flag waving. They need to do something to get that back in line.

It sounds like an accounting crime scene, too. It sounds like you're looking for the blood splatter to see whether it's a problem or a bigger problem as well. When you talk about looking at the numbers. Andy, talk me through the coaching concept when it comes to this whole WIPA figure as well. You hear about this discovery from Russ, who's taking a big risk and says, this is something we need to talk about. Sky and Russ have worked on this curriculum with you to take this to the market as well. What's your thought process as a head coach? How are you thinking that this is going to be something that people are going to have to start paying attention to? And what are some of the barriers that you have to break when you're doing these coaching calls?

Well, I think as Russ and Sky have both spoken about, there's this immediate disbelief when I've got the Amarok parked in the driveway next to my stainless steel boat trailer and my top tenny in the range sitting on. Doesn't feel like my business isn't profitable. What I've got to understand is I bought the Amarok with the money that I owe the painter. I bought the trailer with the money that I owe the Tyler, and I bought the boat with the money that I owe my carpentry crew. And all of a sudden, when people start to understand that that's the actual manifestation of what's going on in their business, that realization hits. To be totally honest, this is part of a slightly bigger problem in that, and I think Russ has alluded to this already, most builders don't realize that their businesses are not profitable to start with. So it's really. This is the first step in getting to the point of understanding what's actually going on so that we can then start to look at margins as a whole. And really what we find is. And obviously, I have a huge advantage coming into this because over the years, Russ and Sky have not only brought this concept out, but taught it so incredibly well that we've got a proven track record of the fact that we know we are correct and we know what the outcome is when this gets addressed. So our coaching team has an immense amount of confidence because of the runs we already have on the board in terms of helping businesses all over the world fix this problem on the way to becoming profitable businesses that you can then trust the numbers that you're looking at on a monthly basis.

Russ and sky, how did you both go about systemizing this? Obviously, you had to get some success stories to take this to the market and really test this, you know, when it was in its grassroots. But how did you both go about building a solution for builders?

Well, fundamentally, yeah, the calculation is reasonably straightforward. You've just got to put the data in there, you know, to get the numbers and then get the will, really. It's having the will and the discipline to put the numbers, in, which all comes from, you know, understanding the importance of it, really.

That's a good point. We talked about work in progress a lot, and suddenly some of us slowly slip in this word wipa. So if we just explain that there are two parts to this. So we're talking about work in progress. Work in progress. Work in progress. This is the liability, typically, if not an asset in a building company, but then you've got something that we've just alluded to constantly through this whole show, and it's wipa. And that's the work in progress accounting adjustment. So it's like step one is calculating your WIP using the calculator. Exactly like Russ just said. So you calculate your WIP, it's okay. Now I know I've got a $730,000 liability in my building company. Now what? Nothing changes. If nothing changes, your accounts still don't make sense. So they need to do part two, and that's doing the accounting adjustments. So I always talk about builders doing their WIPA every single month. And it's basically a very simple adjustment inside your accounts in two place, like journal entries like Russ just mentioned, so that you can insert it into your accounts so that your balance sheet and your profit and loss report makes sense.

And we had to create this term, really, so that builders kind of question what we were talking about. Because I think for years we were talking about work in Progress. And we might ask a builder, do you know what your work in progress is? And they'd say, yeah, yeah, mate, I've got plenty of work in progress or all good. I always wondered, what on earth did that mean? Then I realized, yeah, what they were talking about was workflow. That, yeah, in their mind, they just wanted to move on in the conversation. So, yeah, when you talk about work in progress, accounting, adjustment. So just remind me, what is that? And we have that conversation.

It's. Yeah, so true, so true. And I think going back to the proof, yeah, for years, because we were calling it work in progress, it wasn't as much traction because it was sort of a mission, communication between terms, but then to really roll it out and get the traction that's really happening lately. I think it's the proof, like you're saying, the runs on the board and the coaching team see this every single day. Knowing how many building companies we have saved because making them fully aware of that liability. And you can speak to that a lot more than me, I'm sure.

I mean, it is without doubt the single process that we do that illuminates where the problem is. And the beauty of it is that once it's working, it identifies. You spoke about forensic investigation earlier. It not only identifies where the problem is, but because the builder understands the concept now, he's able to get his head around its implication in the rest of his business. So it's almost. Yes, it solves the accuracy problem. It potentially solves the cash flow and the cash reserve problem. It definitely solves the taxable liability problem. But it also then puts him in a place where he can now start to work positively on making the business profitable as a whole because he's actually got accurate data that he can now work from. And that's probably the biggest single change that happens in the builder's life, is that he's now able to trust his numbers.

Yeah. And the builders that do this, well, they understand their margins down to a couple of decimal points and they don't move each month by more than a couple of decimal points. Really do understand not just their building company, but their individual projects at a very, very deep level that not many builders get to see.

Andy, are there any benchmarks or percentages that builders should be paying attention to? Are there any statistics that defines a healthy adjustment number? I'm just curious. We talk about the successful builders leave a blueprint. But I'm just curious if there's any industry benchmarks that builders should be paying attention to. Or does it vary?

Well, it's going to vary according to, as sky has pointed out, what kind of building business they have, number one and number two, where in every single build they are at any particular point in time. And I think that's the other thing that we've got to kind of mention here is that the accounting adjustment is a photograph. It's a moment in time, it's not a video. And literally what we're doing is we're saying at the time of the month when you are calculating your profitability, this needs to be taken into account. And in fact, the way that we process that journal entry is within 24 hours we reverse it. Because to go back to generally accepted accounting principles, it needs to go the other way for the business to keep running until the next time we take that snapshot. If we were going to try and give a builder a, a rule of thumb to work to, they need to think back to when they costed their job. And any job that's showing them significantly more profitability than they costed when they did the estimate, the flag should start to wave. And you know, the reality there is if I got paid $100,000 and I know that my markup on this job is only 15%, which is a 12% margin out of that $100,000. And when you say this to builders, you see the lights come on out of $100,000 with a 12% margin. $88,000 is not mine because when I costed the job, I knew out of every hundred I was only going to get 12. But where it gets complicated for them is income minus expenditure, 100 minus 0 equals 100. And then their accountant tells them they just made $100,000 profit and that's where the Amarok and the trailer and the boat come from.

It's a really good analogy. Speaking of analogies, sky, you talked about this mass pile of dirt that just keeps getting bigger and bigger. It sounds like this problem goes beyond a calculation. It sounds like this is more a business vision or mindset, however you want to call it problem outside of the calculator as well.

Oh, look, I think so. Mainly because you know, we talked about, you know, it's there exactly what Andy just said. You know how you costed that project. If you're running one job, you get a progress payment and your costs don't equal that. You know that it's not all your profit. You just maybe not sure how much. You know, if you haven't done any calculation and then multiple jobs get added, it's all a bit confusing, but, you know, maybe it is a mindset thing. We kind of kid ourselves, it can't be that bad. You know, I'm still making some money. I've got quite a bit of cash over here. Like, I know my accounts aren't 100% accurate, but I'm. I must be okay. And yeah, it's. Unfortunately, it's. What is it? It's burying your head in the sand, I suppose.

Yeah, it's that ostrich, that ostrich syndrome. We've spoken about this already today. Most of the people that we work with are fantastic at building homes or renovating or remodeling. I mean, we work with some of the most highly awarded builders in the industry worldwide. But the reality is for most builders, nobody teaches them this financial stuff. They can make a wall absolutely plumb. They can make a home environmentally sound and air proof and they can do all of those things. But nowhere in that process does somebody sit down with them and explain the implication of these kind of things on the profitability of the business. And that's really where we've stepped in in terms of being that additional education element that helps them to get their head around the bits of the business that until now either haven't been important because they were only building one job anyway and they could keep a track of it, or alternatively, they've grown to that level where they now do want to scale and they want to do that safely and securely.

100%. I think you can win all the awards in the world. You know, you could be the most amazing building company. We talk about this so passionately because we want you to keep winning all the awards in the world, keep going, keep being the best. And unfortunately, if you don't do this, you're not going to be around for much longer. It's. It's very solemn. It's quite sad, the topic, I suppose we're talking about, but there is a positive to it because when you know it and you really know it, it's exactly what Russ said. Like you're all over your margins and you know how much you're worth and you know your financials and you will last much longer. You will last a very long time.

But yeah, the sooner builders get onto this calculation though, the better. Because all the time they don't understand it and they're putting it off. They can't. Course. Correct. But the amount of building companies we've been able to save because at least even when they're not profitable, they still have cash Flow. And when a building company has cash flow, you can work with them to turn it around, but when they leave it too late and the cash flow is drying up and they're in arrears, there's really no hope at that point.

And that, as Sky's just said, that's when the conversation gets very sombre. It is. The difficult conversation for all of our coaches is when we realize it is too late. If they'd only got to us six months earlier, we would have been able to help them work their way through it. Yeah, that's when it gets dark.

I remember years ago now, Russ, you did an event. You got invited to speak about this at a big conference. And what a topic to be invited to talk about. And by the end of the presentation. Oh, the amount of people in the audience just head in their hands, like, I think you were doing a live exercise, trying to get people to calculate it on the spot. And it was. It was really quite somber at the end. I think a couple people ended up coming up to talk to you.

Yeah, this was a master builders conference that I was invited to speak at. And as I was going through this calculation and why it was a problem, I looked around the audience and there were builders with their heads in their hands. It was. It was quite unnerving. And then in the bar afterwards, there was a group of builders chatting and they invited me over and they said, mate, can you just give us the yellow pill? Because I used this example from the Matrix. Do you want the red pill or the blue pill? You can carry on. Ignorance is bliss. You can carry on or you can find out the truth. And they're saying, mate, have you just got a yellow pill? We can take the in between pill.

It sounds like it's a major blind spot that is impacting builders even today with everything that's going on in the world. I would say I'm just curious what everyone's thoughts are when it comes to blind spots. You know, what are some of the key blind spots that are impacting this problem and making it bigger today?

It really is that fundamental understanding of business is different to building. It's really getting to that place of understanding that no matter what an incredible home I can build, if I don't get the business side of what I'm doing correct, as sky has said, I'm.

Not going to be able to keep.

Doing this for very long. So really, the blind spot is thinking that purely because I win awards and unfortunately, even in some cases, purely because I've got a lot of work on my books. That doesn't necessarily mean that you are profitable, successful. It may just mean that you're busy. And that's one of the things that we've got to really deal with on.

A daily basis, 100%. We've done this with this calculation with smaller builders, for sure, husband and wife teams, but then some pretty big building companies as well. They're doing dozens and dozens of homes every single year. And if they weren't 100% calculating this, or they had a makeshift sort of way of calculating it, it's always a shock. It always is. So it's kind of like you got to. When you talk about blind spots, you got to train your weakest muscle. And if it is financials, you just got to be honest, like, what is your weakest muscle? We need to start training that. And. And often we found it. It's leaning all the way into it and really training it. And you know what, if you're very comfortable with your financials, you still have to train that muscle as well. And we talk about this quite a bit in our coaching and training programs. There are really like two main phases. You got implementation, but once it's implemented, it's optimization. So if you're quite comfortable that it's been implemented, let's just recap it and go back over it and focus on some optimization. At this point, there's always room to improve.

Yeah.

And invariably, what this always leads to is a revision of their pricing model, particularly margins. And in terms of blind spots, what I'd say is one of the biggest blind spots that we see in builders is the fundamental understanding that marketing is linked to margins, or margins are linked to marketing, putting your prices up, your margins up is a great start. But for most building companies, they need to put their margins up. But to get to the industry benchmarks, which are 25% margin for new homes, 35% for remodeling, which, by the way, is a 33.3% markup for new homes. Now, a lot of builders probably fell off their chair, like, just hearing that, saying, that's rubbish. But we've got the data to prove this, so we know these are the benchmarks. But in order to get there, you're not going to get there by simply putting your prices up. You've got to develop a marketing strategy that supports your business model and that is where you're going to reach the industry benchmarks.

Wow. This has been a really insightful interview and it's a really good way to start our series. I look forward to picking your brains a lot more in the future on different various hot seat topics. But before we close up, I just wanted to see if anyone had any final words for the listeners out there. For someone that might be in denial, putting their head in the sand, or for someone that needs to come to terms with the fact that this is a pile of dirt that's growing if they don't attend to it, what are some final sage words from all three of you today?

Take action. Don't delay. Take action. Every day, every week you put it off. The problem is only getting worse in the background. So yeah, just take that first step right now.

Totally. Nothing changes if nothing changes. Plain and simple.

Www.apbbuilders.com that would be my recommendation. We've got some incredible resources that speak specifically to this problem and that would be the start of a journey. As Russ says. You've got to do something about it. You literally cannot ignore this. It will eventually remove that boat and that trailer and that Amarok. You'll be back to driving it forward.

Sky Russ, Andy, thank you so much for your time. Really appreciate the insights and we look forward to having more future conversations with you all.

Thanks Oscar.

Great chatting with you.

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