99. Accurate Financial Reporting With Peter Olejniczak & Chris Anderson

In one scenario, it looks like you're rich and you just made 200 grand and you're in your gross profit's 100%. And the other scenario, it looks like you have the worst business that's ever existed and all you do is lose money and your gross Profit is negative 100%. Well, neither of those are true. So we have to make adjustments to make the statement make sense.

Welcome to Professional Builder's Secrets podcast for building company owners wanting to grow safely and securely. I'm your host, Will Blunt, and today I'm joined by Chris and Peter from Month End, an accounting firm for construction pros in Minneapolis, Minnesota. Welcome to the show, Chris and Peter.

Hey, thanks for having us, Will.

Thanks, Will. We're happy to be here.

Yeah, I'm really excited to have you guys on. Obviously you're cyclists with which do a bit accounting on the side for a bit of fun.

Oh, yeah, Peter's a true cyclist.

Still.

I'm.

I'm a former cyclist and I don't spend my time doing that anymore. But maybe one day I'll get back. But Peter's. Peter's the guy with the big legs.

Very good, Very good. Did you meet cycling by any chance, or.

Yeah, yeah, we were on the team together.

Cool. Cool. So how did it all start? How did month end, get started, and what's brought you to where you are today?

Yeah, I'll take this one, Peter, and feel free to jump in and add the interesting stuff as we go. So I was in the home building business. Prior to being in home building, I did some boring Fortune 500 management consulting, and I had some buddies in real estate and land development, developing land and selling lots to builders, and they needed help with some financing projects and they thought that that was something that I could do. Wasn't really the case. I had a finance degree and I worked in finance, but I didn't know anything about real estate. So this was in 2008. So I helped them actually build a deck in finance terms and present the deck to some banks to get some financing for some real estate development projects. And through that, I got to know the business and then met, you know, builders we were selling lots to, and then some of the builders were like, hey, we need some help. So I started consulting with them and then eventually became partner at one of the builders and I grew the building business to be really big. So in 18, one of the big national homebuilders wanted to buy our homebuilding business along with our real estate development business. And I was happy to Sell, but the other partners didn't want to sell. So that was my cue. Time to exit, take what I've learned and turn it into something that can help builders and build a business around it. So that's how Month End came to be and that was in 2018. So we started Month End and it's an accounting firm and right from the, right from the gun, it was focused on helping builders. And we're really in the intersection of construction, accounting and technology, which was really underserved. So that's the story and that's what we've been doing since then.

Very cool. Peter, do you have a different take on or how did you come across Month End and how did you guys match up?

Yeah, you know, I. My professional background has served a number of different things. I mean my education is in aerospace science and air traffic control. And I think where that, where what the skills I learned and developed through my university education really, really pulled upon standardized operating procedures and workflows. And what that's done is that's allowed Chris and I to help communicate best practices to not only our team and our clients. And so there's a bit of a crossover between, you know, being able to manage a lot of moving parts, standardize them, attack, attack financial reporting, or attack, you know, the numbers, so to say, and put them in a logical order that makes sense, but is repeatable too, and consistent. And that's what people want. They want consistency, they want tangibility, they want structure. And so in a way, that's kind of where some of my aptitude comes into play. But also I very was much interested in finances and how they play a part of not only a business's life, but of course the day to day life. And it was kind of an untapped passion of mine and I've been loving accounting and finance ever since 2018.

So I stole Peter from a health insurance technology startup. And he was having fun there, but he was making fun of it a lot. So I thought maybe there was a chance here, steal them out of that and put them in something that might seem less interesting. But once you get into it, it's super dynamic. So I'm glad Peter started this journey with me five years ago, almost five years ago to the day actually.

What day did you kick things off?

Actually right around August 15th. And then October 1st actually was Peter's first day. That was our official go live date and our first month of revenue, it was $620 and it was August 2018. Six hundred and twenty bucks, enough to pay for like, maybe one tenth of one of our software subscriptions right now to run our business.

That's it. But you got to start somewhere.

Exactly. That's what we tell our builders, too. We get a lot of people who are just starting out, and they're a little hesitant to spend money on professional accounting. And, you know, it's the best thing they can do to get set up correctly from the beginning and have the right discipline. From the beginning.

Yeah. So what type of construction pros and builders are you primarily working with?

Yeah, I'd say predominantly, like, we're really leveraging the home builder and the remodeler that is typically, you know, building, you know, building, you know, anywhere between maybe 15 and 25 projects that seems to kind of be like the typical size of builder we're working with. But we have builders that do a very wide variety of projects and kind of portfolios, you could say, in terms of the products, the projects they're performing. You know, we've got builders on the west coast that are doing a healthy mix of new construction, custom builds, and remodeling projects. We've got the renovators who are doing, you know, the $50,000 to $250,000 kitchen renovations, bathroom, patio build outs, things like that. But then we have some really, really prominent, you know, three to $5 million projects. Builders on the east coast that are building, you know, maybe 20 homes that range, like I said, from 3 to 5 million that are very large and might take a couple of years worth. So big span of projects, big span of scope, but mostly commercial.

Yeah, commercial contractors. We have a few trade contractors. Some people are doing quick handyman jobs, so they're in and out in a couple days. They're $10,000 jobs or $2,000 jobs. So it's a variety of people, but there's a couple very consistent strains with all of them. And, you know, all of them need to run projects in a certain way. And really, it's some of the things we're going to be talking about later today. So Whether it's a $10 million or we've had builders build $25 million houses, whether it's a $25 million house or a $25,000 kitchen remodel, the accounting doesn't really differ. They're just bigger numbers.

Cool. So what's the number one priority do you feel like building companies are coming to you with?

Yeah, I'd say, you know, understanding. Understanding their financial health and profitability. You know, a lot of our clients that are our new Clients that come to us, they've never. They might have. They might be in business for 10 years, but for 10 years, they've never felt that they've had clarity on where they're at. All they know is that the. At the end of the year, their tax. CPA gives them a number and they. They squirm in it and, you know, call it a day. And as long as they can keep making payroll and keep new projects coming in the door, it is what it is. And so. And the two things go hand in hand, correct? You know, profit. You know, every. Every business owner would say, hey, I want to be as profitable as possible. I want to know how profitable I am. Is my money in, beating my money out. And a lot of times we quite simply attack it, first of all by optimizing their use of technology, because as Chris said, we're kind of at this intersection of technology and financial accounting where we're optimizing their use of technology and automation and standardizing and streamlining their workflows, where right away they're becoming a little more profitable because they're becoming a little more efficient, increasing their capacity to serve more and do a lot more with what they already have. And then from there, we're able to kind of organize their data, get those systems in place. As I like to say, get the train on the tracks. We got to get the train, this derailed train on the track so it can chug along forward in the direction.

Trains never been on the tracks in the first place.

Trains.

Yeah. Like, people aren't coming to, like, oddly enough, people don't come to us generally. And I think. I don't just mean us. I think a lot of times when they're approaching financial help, like a financial services company, a bookkeeper, an accountant, a consultant, they're not coming to us saying, hey, can you help me understand my financials? Can you help me do a better job with my financials? They're coming to us because they feel completely disorganized, and they feel like their processes and their workflows are broken. And they. They have a gut feeling that it. It's manifesting itself in the financials, but they don't really know because they don't understand the financials. They don't understand the financial statements at all. They don't understand any advice that they're given because they don't have any faith or trust in the numbers. So I think generally a lot of people are coming to us saying, hey, we just feel disorganized in our financial Workflows help us straighten all of that out. And so we usually start with, well, what do you want to know about your company? What are you interested in knowing about your company? And we can tell them what we think that they should want to know about their company, but we like to hear from them, what do you want to know? And then we start from there and we work backwards, back through the reporting, back through the technology, back through the workflows, and then all the way down to the individual things that each of the resources they have on their team, or possibly their outsourced team, which could be us or another firm, what they need to do, to execute, to get all that stuff in order to give them the reports that they need to make sense out of what's going on. And then give them a little education and training along the way. Here's a balance sheet. Here's what the balance sheet means. A lot of them, if you show them financial statements and say, which one's the balance sheet? Without the title on them, they wouldn't even know. And they don't know what the balance sheet is supposed to tell them. So it's really coming to us saying, helping get organized. And then the end result is, yeah, we're going to help you with your workflows, we're going to help you get organized, but at the end of this, you're going to understand what your numbers are and why you should care about them. And that's the great thing about APB and working with APB folks. The people that we work with from apb, the clients that we work with, they seem to care generally more than the rest of the people we talk to. It's really sad when we care more about someone's business than they care, but we get that a lot. And the APB people, that's certainly not the case. They're super engaged. They really want to understand what's going on. They're really great clients to work with because they care about their business. And it seems ridiculous to even consider. There's people who they, like, ghost us on monthly meetings because they're just. They just don't. Okay, are we conforming for tax preparation? Okay, we're good. It's hard to get people to care. But the APB folks and all the clients we're working with, they're really engaged. It's really nice to work with those folks.

Well, by joining the apb, I guess they've made a commitment to improve their business. Right? So you'd hope they've got that mindset yeah. So when you do ask these builders what they want to know or what they want to achieve in their building company, what kind of responses are you getting?

Yeah, I think a lot of the time it's interesting enough. And if I may, they feel this obligation to their clients to have their financials in order. Their. They're invoicing accurate and they're cost accurate because that's who's slapping them on the wrist if they don't have it together. Right. So, and so, like I said, this might be a bit of a tangent, but we've got clients that'll come to us and be like, hey, before we do anything, help me get these current projects I have going accurate because I'm about to lose my client, you know, because the financials aren't in order, the invoicing is off. Right. And so most of the time that keeps them up at night having projects go source. Right. And, and so that's just one thing that they're coming to us with. But cash, cash is another really big important one. They, they feel like they're kind of shooting, shooting blind from the hip on how they pay their bills, what bills they shouldn't pay, and you know, so it's cash, it's, it's their, their clients, their client relationships. But, but also.

That's the main one. Yeah, that's the main one. They want to know. The, the question is, I need to know where I'm at on my projects. And when we say, well, what do you mean where you're at? Do you mean, do you want to know how profitable your projects are? And there's generally like, yes, do you want to know what cash position your projects are in? And that's what really gets them going a little bit more. So after we get over this hurdle of, yeah, you want to get organized, and I appreciate that, and we're going to get you organized. Then we get into the real nuts and bolts of their financials, and we really like to focus on two separate pieces of their financials, Financial health and financial performance. So financial health is something that very few small builders have any sort of like, feeling about, and they're sort of out of touch with it. Financial performance, they kind of understand a P and L. So they're coming to us, asking us about those things indirectly, like, they don't know the terminology necessarily, to say, hey, I need to know how healthy I am, or I need to know how profitable I am. But that's what they're trying to get to. So when we're Trying to design these reports, which is, I think what you're getting to will to help them understand these things. When we're talking about financial health, we break that into a few things. So we're talking about cash and liquidity, the ability to meet obligations today, can they pay their bills? And then long term, financial health, what is your ability to take new projects? In the long term, what is your ability to grow and scale your business? And we can get a lot of that data, and we can get a lot of that information from their financial statements, if they're accurate. And really, we're talking about the balance sheet. So, you know, we have to educate the builders on what the balance sheet is, what are the metrics that are really important to them, and then how do we track them as they change and help them improve? It's fun.

It's fun. It sounds. I'm in marketing, so it doesn't sound that fun to me, But I'm sure it's. I'm sure it's fun for you guys. What's unique about financial health and profitability in the construction industry compared to other industries?

I think the thing that's most unique about it is the disparity in the timing of cash flows in construction. So, you know, gross profit is gross profit regardless of the industry. You take your projects which deliver gross profit, and then you subtract your operating costs. A lot of people call it overhead. You get to your net profit. That formula is the same regardless of what you're selling. The thing that's really interesting about construction is the timing of when money comes in and when money goes out. The timing is completely different than most industries. So you could have huge cash inflows that have nothing to do with profit and huge cash outflows a year later that are still related to the same project that are related to the cash inflows that came in a year before. So the unique thing about construction is really the timing of those cash flows and the size of them. They're big, right? And so marrying those things up to make sense out of a profitability statement is really, really unique about construction. The numbers, right? So we like 20% or better gross profit. We like 10% or better net profit. You can find a lot of industries with very similar structure where 80% of sales equals their cost of sales, and then, you know, their overhead takes about 10% to run it, and they have about 10% net profit at the end. Plenty of other industries like that, that's not unique. But the timing of when the money's coming in and out. Very unique in construction. It provides a lot of challenges for not only the contractor for understanding, but also their tax advisors. Because. Because I don't know what it's like in Australia, but in the US Tax advisors are general practitioners for the most part, and they don't really have the ability to specialize because there's just not enough business. Because tax businesses, for the most part have been local businesses. So if you're a local business, you have to take whatever you can get from whatever industry you can get. You can't really specialize because these businesses are small businesses. Right. If you're specializing in just construction, just in Minneapolis, there's just not enough business to go around. So they're general practitioners. Well, general practitioners don't have the background and experience and knowledge to deal with a construction specific business because they have very unique accounting challenges. And the way profits get represented is different than, you know, the retail business or the brewery or the restaurant that they might be doing tax prep for. So it's pretty challenging getting the builder and their tax preparer and their bookkeeper, which is us sometimes, but it's not always. If we're doing the consulting and not the bookkeeping, getting everybody on the same page, it's. It's quite a challenge. And it's pretty unique in construction, how.

Do you deal with those inconsistencies in cash coming in and out from the same project, as you said, because it could be months apart and you're juggling all sorts of different things. Is that where the work in progress stuff comes in? Understanding that?

Yeah, yeah, that's one of the. That's one of the most important and powerful tools we have to be able to normalize those adjustments. I mean, generally it's called accrual accounting, and not everybody knows what that means. But accrual accounting is essentially taking something that has a cash flow and recognizing it on the financial statements at a different time than when the cash happened. Right. So a lot of businesses, they don't have to deal with that. It's just cash. You know, you think about a lot of businesses, cash comes in, it's income, cash goes out, it's expense or it's cost of sales. Construction's not like that at all. So we have to have a bunch of tools to be able to normalize the cash in and the cash out to make sense out of the financial statements. So you can answer the question, am I profitable? Am I healthy? If you just rely on when the cash is coming in and going out, it's impossible to answer those questions. So, yeah, the work in progress adjustment and the work in progress method of accounting is important for that. Construction is also unique in that you can have a lot of different combinations of how. How projects are accounted for from a profit perspective. So, for instance, Will, let's say you're a builder, but you build houses speculatively. You build a house, and you hope someone buys it from you. And then one day someone does buy it from you. You account for that from a profit perspective, completely different than if you're selling a house to Peter and you're building alongside of Peter as the. The new future homeowner who's got a contract with you. That accounting is done differently. The way you recognize the revenue and the profit on that is done differently. And how it impacts your financial statements is different. Sometimes you have builders who have a combination of those things. So it can be quite complicated. So we have to use a lot of these tools to be able to adjust for that. So when you look at a financial statement and it says you lost 100,000, you actually did, or it says you made 100, you actually did. And it's not just, I can't rely on that. It's nonsense. You got to adjust for that to make that make sense.

So it's getting a more accurate, I guess, reflection of your actual financial position, essentially.

Yeah, exactly. I'll give you another analogy. Let's say, Will, you're a builder, and you're gonna build a house for Peter, and you're gonna start December 31st. Cause you're crazy, and you don't even like to party on New Year's Eve anyway. So you're gonna start on December 31st. Peter gives you $200,000 cash on December 31st. You haven't done a damn thing with the house yet.

Right?

Well, is that 200 grand Peter gave you, is that income and is that profit, and are you gonna report that on your taxes and pay taxes on that?

Well, no, it's sitting in my bank, but you. Yeah, it's sitting in my bank, but I'm gonna have to pay for materials, all sorts of other stuff, Right?

So, yeah. So of that 200 grand, how much of that is actually your profit? 40 grand? Maybe. Maybe 20 grand. It depends, right? It depends how good of a salesman you are. You're probably a damn good one. Well, but it really. It really depends. So. So that's what we're doing. With work in progress adjustments, we're making sure that $200,000 that's sitting in your bank account isn't taxed as 200,000. And we're making sure you don't think that that's your profit either, so you don't make stupid decisions. On the flip side. Well, let's say Peter didn't give you a dollar, but you signed a contract with him. And on December 31st, you spent $100,000 on his house. You dug a hole and you poured a concrete slab, right? So you got 100 out the door. Well, we also want you to know that you have income related to that $100,000. At some point, Peter's obligated to pay you. You have a contract and you've actually earned some profit even though you haven't received any money. So those adjustments are constantly being made in both directions to make sure when you see a financial statement for December 31, in one scenario, it looks like you're rich and you just made 200 grand and your gross profit's 100%. In the other scenario, it looks like you have the worst business that's ever existed and all you do is lose money and your gross profit is negative 100%. Well, neither of those are true. So we have to make adjustments to make the statement make sense so you can understand what's going on with your business.

And I assume that just gets more complicated the more projects you've got going on, the variance in the projects as well and all those different things. I mean, how do you, in practice, how do you actually manage all of that and shoot out a number which is just easy to understand through builder?

Yeah, I'd say that the biggest thing with managing that time to time is having an intimate connection with what other budgeting or construction management software they're using. And that's a key element in that, in making sure that the builder knows how to track things like estimated costs, estimated revenue. You know, how they can use the technology to help them calculate those things automatically. But then also, you know, kind of the accounting side of things, which is being able to properly record the costs against the project to the right estimate line and things like that. So without getting too detailed into like, you know, estimate versus actuals is there's those four key things which is what do you expect to make on the project? What do you expect to incurring costs on the project? Where are you actually at with your billings to your client and where are you at with your costs? And it's through the kind of.

Those are the only four numbers. Those are the only four numbers that go into the WIP Calculation using those four numbers. It spits out a bunch of other things that create the final over under bailing calculation that eventually hits the adjustment on your financial statements via journal entry. But that's it. So, and so the actuals are easy. The accounting system tells you the actuals. The estimate is hard. What are you estimating that you're going to collect in revenue through the course of this project until the end of it? And then what do you estimate that it's going to cost when all is said and done? And that's the challenging part for builders. And software can help. And Peter, Peter does a good job running all of that. So. So I kind of cut you off there, Peter. But I just wanted to drill that point home. That WIPA is based on four numbers. And two of them are very easy to come up with. The other two are tough.

Yeah. And we have, I mean, and just to make a point, you know, there's builders with very different experience levels. Right. Like some of our own partners that we work with are builders that you ask them, hey, what do you expect to incur? You know, what do you think your costs are going to be? Like, they don't even have an estimate. They don't have an Excel sheet anywhere. Because the whole, the phrase like flying by the sea or pants is literally it. But you know what? Sometimes that's the relationship they have with the client. You know, this sometimes, you know, like, their client might just be like, hey, here's my vision. Let's create it together. And there's no boundaries, right? Like, you get, you get 90% built. You get a house 90% built. Like, you know what? You know, I think I want an underground garage as well for my Ferrari and my Porsche. It's like, well, let's do it. Why not? You know, but like, so it kind of, you know, we have this range of. We do have clients where when we trying to do work in progress, accounting adjustments that we can't get those expected figures. So sometimes we have to triangulate it one way or the other. You know, we are basically Peter's fancy term for guess.

We have to guess.

Yeah, we have to guess. We have to triangulate it. So it's like, okay, like, give us a margin. You know, Give us what? You know, what are you actually going to mark each of these costs up or give us a margin so that based off the cost you've incurred to date, we can at least recognize the appropriate amount of profit. You know, so sometimes we have to work with the clients to get Creative because, you know, they haven't built an estimate, they haven't, they don't know what they're going to charge their client yet. And so sometimes we have to get crafty. And again, that comes into how well can we make the financial process easy? And sometimes a work in progress adjustment, just like, or a work in progress worksheet is the way, is the stepping stone in helping builders build better estimates and budgets because they can see and track the progress that's happening with their existing projects and be like, oh, well, I'm learning from this that lumber prices are going up. Therefore this next project I'm starting, I'm going to give a little more cushion there. Or I know, I know that I can get a lot. My guys are my, my, my team internally is pretty productive putting up drywall. I can save myself a little bit of money here on drywall. So it's getting them to kind of. This report doesn't just help with the finances, but helps them lean into the variables that go into building a house. And like Chris mentioned earlier, these long project timelines and these swings, you know, how are you managing the variability, the uncertainty and how are you improving operationally? And sometimes this, this type of reporting is a stepping stone to getting them thinking about what they need to be doing.

So how often are you reporting on, like, how often are you updating these reports? I mean, are you just doing it at the start of the project and then that's done? Or like, do you need to be doing it regularly?

Good question. We've been doing, we, we recommend doing it on a monthly basis and I think that's pretty consistent with, you know, with, with your guys with APB's recommendations as well as most accounting, accounting accountants and bookkeeping teams. And the reason is, is there's the month end close procedure. And yes, our, our, our firm name Monthend works well is a typical, you know, accounting jargon, which is month end. What is month end? Well, month end is the reconciliation of cash and credit accounts as well as the financial review process. So what that entails is because that's a monthly cadence, it makes sense that your work in progress adjustments or your work in progress reporting is done at the same cadence because you're using the absolute highest quality data you have available to you. And most current here an example. You know, sometimes clients that we start working with will be a little confused. Like, wait, you got, you mean I got to wait every month to figure out how my projects are doing? It's like, well, no, not exactly. You can Be managing your budgets and your construction management software. You can manage that day to day. But when we're looking at the financial health, we want to be using accurate data. We want to make sure that we don't have any fluff, any frills. You know, duplicates, duplicate bills is a very common thing. You know, project manager goes to Home Depot, enters it once, forgets he enters it, enters it a second time. You know, accidental cash records get exchanged. So there's, there's a lot of things that need to kind of have your ducks in a row before you can put such a sensitive report, like a work in progress report together. And that's why making sure the month end close process is completed will give you the most accurate WIP report.

Yeah, tactically, let's say, let's use one of Peter's examples, you get a bill from your H Vac, you do h vac rough in, that's like a $25,000 bill and somehow that bill gets entered twice. And this is more common with cash transactions, but it's the same, right? Our month end close transact our month end or any month end good month end close process will catch this, right? So now we have two $25,000 bills in when there should only be one. Well, if the whole project is only 250,000, you have an extra 10% on that project that you're further along. So your reports are going to show your 10% further along. You're going to, you're going to recognize 10% more profit, right? And without the reconciliation of going over with the client or having a bookkeeping team say, all right, here's your accounts payable aging. Do you recognize this bill? Yeah, I owe $50,000 to the H Vac contractor. That can't be right. I only got one bill from them. That's the point where you delete it, which affects your work in progress adjustment, which affects how much money you think you made, which affects how much tax you will pay or not pay, which affects your cash, which affects if you think you have enough money to take that next speculative project on, which affects how much profit you can make in the future. So if we're talking about how sensitive the WIP adjustment is and how sensitive inputs like actual costs are to the WIP adjustment, extremely sensitive. And it can have massive repercussions that can be negative, right? So the point is you got to do the adjustment, you got to do it right, but your inputs have to be right too. If you're, if your inputs are garbage, the Adjustments, garbage. In order to make sure your inputs are right, you have to have a really good sound month end close process and a good sound reconciliation process. And that comes back to just like high quality accounting. And some of that stuff is basic. Like it doesn't have to be a construction specific accounting firm to know how to do it, to have really good checklists. But some of the things WIP specifically and WIPA specifically are very construction specific.

Yeah, as you said, like the average accounting firm probably doesn't fully appreciate the importance of this, the work in progress. If they're not working with a lot of construction companies.

Right.

They've never heard of it.

They don't have no idea what you're talking about. I mean, you could have somebody who's been a CPA for 20 years who has a master's degree in business taxation and we're taking a look at the tax return and the tax return is done without a WIP adjustment. And then you have to educate them on what's going on here. And then eventually they'll come around because they have the foundational understanding of accrual accounting, but they realize they've, they've been doing it wrong. And so then they have a decision to make. Do you go back and amend prior year tax returns or do you just figure it out? So you know, this can work in your favor or it can work against you depending on if you're over or under billed. So if clients are dramatically overbilled, which we recommend they are, because then they're building with their client's money instead of building with their own money, well, if the tax preparer doesn't do the appropriate adjustments, the client's paying way more in taxes in that year than they should if they're under billed, which again, not a great business practice. And I think the app coaches do a really good job of helping builders with strategies to make sure they're not under billed, meaning for how far along the project is, make sure you've billed your client enough so you're paying for the project with your client's money. But if you're under billed and you prepare the taxes and you do it without a WIP adjustment, well, now you're flirting with tax fraud. You're going the other direction. So instead of overpaying your taxes, now you're flirting with underpaying it. And if you can prove it wasn't intentional, yeah, you're going to get away with a slap on the wrist. But you get audited and you're way under billed and you paid way less in taxes than you should have. That's not fun for anybody except for maybe the auditor, if they have, like, an axe to grind. And they're a real nasty person. So it's an important calculation.

Yeah. I mean, the implications are huge. On one end, you're saying you're paying too much tax or you're not paying enough, and then you're getting followed up by the auditors. Or on the other end, you're basically spending money that you don't have.

Right.

So unless you understand this calculation, you're pretty much in the dark.

Yeah. And then you're just hoping. And a lot of builders do that. They hope. And when times are good, like they've been for the last 10 years or longer, and the music is going, a lot of that stuff that doesn't get. It's. There's not transparency into it because, yeah, you're behind on your billings. That's okay. You got new projects, so you're sort of operating, and I hate to use this term, but a lot of builders are really operating as an unintentional Ponzi scheme because they're not profitable and they're not actually financially healthy. But they have all of these new projects that are constantly coming on so the cash can be used to support the project deficits from the other projects. And again, these are. I mean, all of the builders we work with and almost all the builders we talk to as prospects, they're great. They're great men and women. They're fantastic people. They're not trying to operate a Ponzi scheme, but they're great builders. They're not all necessarily great financial minds or great accountants or great business people. And a little education will go a long way. And they all appreciate it. Anytime we give somebody a quick education on what a balance sheet is, they love it. Where have you guys been my whole life? People want this education and they want to do better. They don't want to run a Ponzi scheme. Right. But you got to have the tools to be able to do it. It's challenging.

Well, it's not even the Ponzi scheme where you're going to make a lot of money, because in the long term, that. That bubble is going to burst eventually, right?

Oh, yeah. I mean, interest rates go up to 7% like they are right now. Mortgage rates. Now you're starting to see builders going, wait a second, what's going on? So we like to think that we're in a. The kind of business where when things are going Great. We see a lot of new clients because new businesses are starting, people are growing, but when things are doing poorly, people, we see a lot of new clients as for the first time they're questioning their financials. Like I've done all of this work, I have all of this profit on paper, but where's all my cash? Or the other way around, I have all this cash but no profits, which is much less common. But we see, we've seen that as well.

Peter, this might be for you. So we've spoken about the WIPA adjustment and how important it is for building companies, but you've mentioned how you integrate with technology to make all of it accurate and I guess in real time as well. Can you just go into more about that?

Yeah, yeah. So you know, there's a lot of, you know, technology in general does a number of things. There's a lot of construction management softwares out there from the likes of, you know, buildertrend, Co Construct Pro, Core Build Tours, Build Tools, Job Tread. And these are, these are places that try to make the budgeting experience user friendly, productive, effective. But then because there are so many financial inputs into these softwares, right? Budget versus actuals. The simple thing of like I built my estimate, how am I tracking against that? Built on that foundational principle, you've gonna have a lot of actual job related costs going in. And so by properly integrating those construction management softwares with your accounting, whether it's Xero or QuickBooks Online, you're going to have this mirrored approach where your production team in the field is going to have great visibility into managing their project on the day to day, the accounting team is going to have that mirrored, identical integrated financial view where they can manage paying the bills, the financial reporting. And so in a lot of, let's just say conventionally run building companies where they were dependent upon paper, you know, the paper transmission project manager comes in, unloads a pile of receipts from the week or maybe month and then accounts payable and accounting is trying to catch up. And then you know, the project managers are calling the bookkeeper to see if something's been paid or not because the subcontractor's at the door. It's like there's all these communication hiccups and delays that happen when you don't leverage technology, that happen when you are relying on paper, when you're relying on these disenfranchised systems and departments. But through the construction management, which think production and the accounting integrated, we have this seamless communication of not only financial data and Project data. But the teams between bookkeeping and production are better connected, better, better informed and ultimately are making more effective real time decisions because their decisions are data driven with real time data. And that's where the power really comes in. And I mean I just, you know, with any, with any business alone, integrating through technology, whatever, whether you, whether you sell T shirts and you use Shopify or any of these online web stores, the minute you integrate all your functions of business, you're going to instantly find more capacity and be more profitable.

Yeah.

And just have better visibility over where you're at, right?

Yeah. 100%. 100%. And eliminating human error too. I mean, that's the other thing that I keep coming back to with a lot of these technology fronts. Like, you know, we've been using a software called Live Flow to help pull QuickBooks data in real time to populate our work in progress, our work in progress reporting, as well as other other key dashboards for builders, whether it's monitoring their accounts payable, better understanding budget versus actuals for their overhead expenses. Right. You know, QuickBooks and Xero and some of these other accounting systems do an excellent job capturing the data and maybe packaging it, but maybe not packaging it in a digestible way that the average business owner can fully comprehend. And it's sometimes, quite frankly, through visual things like graphs and pivot tables and all these other capabilities within a software like Google Sheets or something that as long as you've got that real time data connection from something like Live Flow into Google Sheets, you can create really easy, digestible financial conclusions for business owners alike.

We try to as much as we can. We want software that creates really structured information and structured data. So we try to avoid spreadsheets whenever we can. But for some things you just still need them. There's no really good like work in progress adjustment accounting software. There's a couple construction management tools that have attempted it, but they've not been successful at it. So when we're building work in progress reports, we're still using spreadsheets. But what we're trying to do is automate the spreadsheet as much as possible, remove any typo or human error, have the stuff fed in through integrations as much as possible. So as much as a spreadsheet kind of seems like dinosaur technology. Um, we're going to use whatever's best and we're going to recommend to people whatever's best when we're doing consulting engagements or when we're operating, you know, our service model. So sometimes spreadsheet that's that's what it is. We do really like Google Sheets because it's live in real time and it's collaborative versus trying to send a, an Excel back and forth across all of these different organizations. So Google Sheets, fantastic. Integrates with just about everything. If it doesn't integrate with it, there's third party plugins like Zapier that you can, or Live Flow, which is actually a tool to help QuickBooks integrate with Google Sheets. So sometimes it's a spreadsheet, you know, sometimes, sometimes you have to use a hammer to get the nail into the wall.

Right.

We like air nailers and we like even, like, we even like things to come fully built and we just put the trusses up. But sometimes you gotta bust out the.

Old hammer until someone builds a good working progress software, I guess.

Well, we'll build it if, if somebody wants to, you know. Hey, if there are any software engineers listening here who are very familiar with Intuit developer environment, we'll build this baby. It'll be fun. We're not going to make any money doing it, but we're going to help a lot of people.

Yeah. So with Live Flow, just to close that one out. So it's basically connecting like QuickBooks with a spreadsheet. So you put all your numbers in QuickBooks, brings it straight across and updates the work in progress in real time. Is that right?

Yeah, yeah. So, you know, a lot of, a lot of times historically, in order to package QuickBooks data how you want, you'd have to run a report in QuickBooks, download it, copy and paste the bits and pieces of that report you want to utilize, and then tailor it in a way that, like I said, packages it in a digestible form. So like a pivot, I'm going to use a pivot table, for example, for those of you, if you got a whole list of transactions, you're like, hey, I want to know how much I've spent on marketing and Facebook ads or Google Ads, you know, like triangulating the data. QuickBooks doesn't do that for you, maybe automatically, but by having this connector where Live Flow will pull in real time QuickBooks data into your Google Sheets or your spreadsheet, you can have whatever dashboard you've created, whatever formulas, whatever pivot tables you have populated, ready to go and give you that real time data. And what it does is it eliminates the manual copying and pasting, you know, the downloading, the exporting, highlighting, dragging, dropping and like reformatting.

Yeah.

This whole recreation and formatting process and allows you Just to have that real time dashboard. So for a lot of builders it's kind of a big win because software companies like liveflow have pre built dashboards like Financial Health, you know, whether it's accounts payable, cash flow forecasting, a lot of these templates, these things that are mostly out of reach for people's spreadsheet skill level, they're pre built and you just connect your QuickBooks and it'll start populating that data for you.

You can use a connector like Live Flow that will constantly update all of the data points throughout all time with literally one click of one button. So you can basically build Live Flow into the already existing apb, KPI dashboards or APB report cards. And it sounds like a Live Flow advertisement, but it's not cool. This is the tool that we use that we love, but you can literally just have that data update automatically, instantly. And if you choose to, you can have it retro update prior quarters because sometimes they change, right? You do a tax return and you go back in time and make some sort of adjustment and it will adjust it back in time as well. And I know that's not always the best because sometimes you want to memorialize and lock in a certain period and quarter. So that's kind of a different conversation. But some of these tools give you the ability to give you good live data in any format that you want, whether it be the APB's format or the Live Flows pre created dashboards or some format that month end thinks is the best way for builders to analyze their business.

Yeah, it just makes everything a lot easier and also removes human error.

Yeah, the human error is the biggest thing. Like you said, human error is a big thing. The manual data entry and then being able to package the data how you want are really the big things there.

Well, I'm sure there's a builder listening to this that has a WIP report that has 60 jobs on it. And every time they want to update that, they have to update every single job individually, manually, or at best the best way they've done it is they found a way to copy and paste data in that disappears. So you take that exercise that maybe it could take you a half a day or it could take you for sure hours, depending on what you have going on. And it's zero. So you know, you're just that much more scalable. And if you're the person doing that, your life's a lot better because you're not doing that anymore. But also what could you be doing with that time? Well, maybe you have an accounts receivable that's 90 days old, you can go chase that down instead and get, you know, 20 grand into the company's bank account that wasn't there because you didn't have time to chase down this customer that owed you money or whatever. You know, you repurpose that time for anything else. So these tools create scalability and I.

Think there's anyone out there that wouldn't want half a day back.

Yeah, yeah. We find on average, we find on average it can save like for us right now, you know, it's saving us anywhere between 20 and 30 minutes a client a month. And we found a way to be.

Really good at it prior to that. So yeah, we're like, this is all we do all day, every day. So for saving us 30 minutes. And our clients range in size, by the way, so we have very small clients that are building one house that maybe have 6 or $700,000 in annual revenue all year. And we also have really large clients. So the stuff we do and the tools we recommend, they're really universal. Once you get to be really, really big. I actually think they're all still you. So my home building company, we're building 200 houses. We're $100 million. Like, this is a big, big organization. We're using all of the same tools. QuickBooks, online builder, trend spreadsheets, Live Flow, like, things like that. Now, liveflow didn't exist at the time when I was running the billing company, but similar tools. So they work for everybody.

Well, for any APB members out there. Luckily, Live Flow and Month End are both part of our preferred partners program. So you can go to the rewards page on our website and get cash rebates when you, when you sign up for either of your accounting services or the Live Flow service as well. We've also got a work in progress action plan for APB members on the, on the back end of our website. So check that out. I'll include all the links to that in, in the show notes. But other than that, is there anything else you guys wanted to add about? I guess just having a more financially healthy building company. Maybe we could recap the four numbers that go in the work in progress.

Yeah, that's a good place to start. So first of all, I don't know if we told you what we do month end. What do we do? We do bookkeeping for home builders. There's a couple other services we offer, but our primary service is bookkeeping. We also can help set up the Bookkeeping. Like, if you have a larger team and you're not sure they're doing it right, they're probably not doing it right. But we can help them and do it in a way that's going to make them feel, you know, better and more confident about what they're doing. So that's primarily what we do. We help people with their bookkeeping and sometimes strictly just with their processes and we teach them. So if it's the four numbers, there's job actuals. So what your subcontractors and your vendors have sent you for bills, whether they've been paid yet or not, it's not really relevant. And you put that up against the job expected costs, right? So you have your actuals against your expected costs. That's an important number. And on the other side, you have your job invoices. So what you've actually billed your customers, again, how much they've paid you isn't relevant to the calculation. It's super important. Right? We're going to look at it, we're.

Going to analyze it, we're going to.

Make it part of the report once we customize it with a couple extra columns. But really it's how much have you billed your client, how much money have you asked for against how much is the entire project expected to produce in revenue when it's done? Those are the four critical numbers. And, and there's a lot of ways to get them done to be able to report on the numbers and make sure they're accurate. Where were we going with that? Will, you asked a question.

I was just, I was about to wrap up. I was just wanting to do ask if there was any further advice you wanted to give the builders out there. And that was more of a recap of the most important points of the show.

Cut that out of it. You can edit this, right? Of course.

But it'd be more fun to leave it in.

Advice for builders. 1. Get a handle on your financial health. Before you do anything else, get a good understanding of your financial health. That's your balance sheet. That is irrelevant of your, your performance is very important. But before you can really understand your performance, you have to understand your health. Your health is going to be very evident in a well prepared, accurate balance sheet. Your balance sheet is your, is your assets and your liabilities and the difference. So your assets are things you own, cash, accounts receivable, assets, trucks, things you've spent on projects. Your liabilities are things you owe, right? Accounts payable money. You owe your vendors, credit card debt, long term debt. So get a really good handle on your health and make sure the numbers make sense. Right? You want your assets to be greater than your liabilities. If you're not, if they're not, you're in trouble. You want your short term assets to be greater than your short term liabilities. And there's certain magic numbers that you should pay attention to to see if your short term health is good. Right? There's certain numbers to pay attention to see if your long term health is good. So get a handle on your balance sheet. Balance sheet. In order for it to make sense, you got to have clean books. So get that all cleaned up. Get a good understanding of your financial health from there. Now we can start talking about performance. We can start talking about margins. We can start talking about making profits and actually making money and hitting the targets that you want to be able to support the lifestyle that you intend for yourself.

Yeah, I love that. I love that. Well, Peter, Chris, thanks so much for coming on Professional Builder Secrets today. I've learned a whole lot and I know all the builders out there have learned a lot as well. And you're probably getting a ton of inquiries after this goes live. But I really appreciate you coming on and sharing everything you have about, I guess, financial health in building companies.

Yeah. Thanks for having us.

Thanks for having us on. And thanks for letting month end be a part of the APB ecosystem. The clients are really great to work with. And I speak for. We have 25 people here at month end and their job is actually much more fulfilling and rewarding when they're working with people who are engaged and the APB people are really engaged. So our whole team appreciates you and it's fun working with such an organization who's giving so much back to the industry.

Well, thanks, Chris, but you're also singing to our tune as well with the work in progress adjustments. So it's a great partnership. But yeah, thanks for coming on the show and also a big thank you to all of our listeners as well, wherever you are in the world. If you like the show today, please subscribe to Professional Builders Secrets on your platform of choice and if you're feeling generous, leave a review. But until next time, have a great day.