How Contractors Can Know And Grow Their Finances

If you're hearing all this talk of private equity and you're wondering, what does that look like and what does that mean? And maybe I want to build a company that gets bought. If you don't understand your numbers and your books are not clean, I can tell you right now, odds of them even looking at you are slim. Even if your company is of a pretty good size.

Yeah, it's. There's a lot of consolidation going on in the home services world. They know it's a profitable world. They see it. The problem that a lot of these consolidation type organizations, whether it be private equity going public.

When we think, when we say finances or accounting or knowing your numbers, let's be honest, there's a lot of opinions, I think we can agree on that, right. Of what it means to know your numbers. So when someone asks us that question of, hey, or says, I need to get my finances right, I need help with finances or something to that extent.

Where do we begin?

Like, where does that journey kind of start with getting to know your numbers or making sure that your business is profitable and so on and so forth.

It's a good question.

It is a good question. I mean, honestly, if you were to ask yourself, how much money did I make last year, do you know the answer? I mean, that's because at the end of the day, that's kind of where we're at. You know, like, this is how much money I have in the bank. I mean, right. Like, even when we're talking, it's close to the beginning of the year at this point, and many people are trying to figure that out right now, and they don't know the answer to that. So when we say, you know, well, can we afford to add a $75,000 a year marketing person to try and generate more leads, can we afford that? I don't know. You know, how much did you make last year? Don't know. Did you have a healthy profit margin?

Don't know.

And it's really critical because of the number of people I talk to who want to build a company that's worth something. Well, how do you know what it's worth if you don't even know if you're making any money? Now, the thing about most of the clients that we deal with, which are typically high ticket, high single ticket in home tradesmen, is that because they're high ticket, their margins are generally just so good, even by accident that they tend to be okay, which is, which is a crazy thing. So if you're in another industry, if you're if you do label printing or you're, you know, you do, gosh, I don't know, like, software development or something like that. And you find out that, like, contractors don't know what their gross and net margins are, you'd be like, are you crazy? But they. These guys literally, like, the work itself is such high risk, and the margins tend to be so high that even if they don't know their numbers, they still tend to make pretty decent money.

Well, the scary thing is most of them know and they use the same word. It's the same word all the time. About.

About.

I did about this number last year. Okay, what was the margin? That's usually where I start. Like, that's the key factor. What did you actually make after this revenue that you generated? And I hear the word about a lot. Instead of, oh, we did $7,125,686.15. Right. There's this about. And I get it because you're trying to have a conversation, too. But when I dig into it, I'm like, okay, what does your P and L say? I haven't looked at that. I'm like, well, okay, that's a whole other issue. Like, how often do you look at your P and L? Oh, my CPA does that. And that was one of the mistakes I made as a contractor early on, is I trusted my bookkeeper. Cpa, Like Nathan said, we can be pretty profitable in this. You kind of see what's in your bank account. You do a little bit of math in your head about how many jobs you have out there and commissions that are owed. And you're in this operating $0.50, a dollar, 1.50. So you're operating on educated guesses, hypothesis that I'm pretty good. And in most cases, like you said, they are in pretty good shape. The problem is, whenever you get overextended, you believe that you have more money than you really do. You're off on one of those hypotheses.

Or you want to take a risk.

You want to take a risk.

You're like, this would be a good idea. It's a little risky.

Yeah. So not knowing your numbers, and I don't think you have to know, like, every last granular detail, although I would highly encourage you to get that level in your business. But you need to understand what a P and L is telling you that it's telling you, at the end of the day, this is what was left over. And was that enough of a margin for the amount of effort that you put in. I've seen it over and over again where people will take those risks and make that investment and blow their revenue up. Like, it'll go way up. But their margin was the same, or maybe even less than the year before, with a lot more chaos, a lot more problems, a lot more issues, a lot more work, and a lot more time, which can be very disheartening. And so if you don't do those with educated guesses based off of real numbers and real data, you run the risk of, one, going out of business, two, laying people off, three, putting yourself in a position of even worse than going out of business, bankruptcy. Those types of things as well. So I strongly encourage that you get into this habit of looking at your P and L once a month. That's all you really need to. Looking at it weekly doesn't really do you any good. You start to see some trends over a month, and you start to see where you're really at. What are my material costs? That's one of the first things that we always look at. Material costs, labor costs, what are the actual job costs? And so you asked what are some of the first things we're looking at is, are they within acceptable ranges for me to be profitable? In the end, we start looking at numbers and budgets. And after looking at thousands and thousands of contractors, we see anywhere from 50 to 60% being usually material and labor, somewhere in that range. They vary of spend or profit, the cost, the cost, the cost to do it. So I have to buy material, I have to pay labor anywhere from 50 to 60% of my total revenue. So what that means is I got 50 to 40% left over for everything else. That's commissions, that's overhead, net profit, all of those type of things. So then you look at the commissions and you say, where do those fall? A lot of times we see this mistake that contractors make is they put commissions below the line. The line being where I decide those are my actual cost to the job versus my overhead cost as well. So everything above the line is cost to the job. Everything below the line, overhead. A lot of people will put some kind of fictitious number into the overhead up there, charging a job 10%, 15%, 20%, those type of numbers to account for their overhead. But it's not the real overhead. The real overhead has a very specific number to it. It's 17.5%. So you're not really charging. You could be too low, you could be too high, you could be overcharging your people, or you could be undercharging your company. So those types of things, accounting mistakes, that is very common in what we do. You really need to get somebody with some strong accounting skills, which, to be honest with you, Nathan and I are not those guys. We talk more from a strategic standpoint, the importance of know your numbers. It's why we brought on Jenny. She's our finance coach. She's absolutely amazing. She can tell you down to the penny what's your money and what isn't your money at any point in time, which is absolutely key to you making those risky decisions. Because we think we have a lot of money because there's a bunch of money in the bank. We do a little math in our head of our expenses and stuff. Oh, yeah, I can hire that marketing person. But we were off. We were off just a little bit. Doesn't even have to be much. We were off a little bit. And that risk affects our cash flow, which doesn't allow us to do that big project that comes along because we're now paying a marketing person that hasn't quite paid off yet. Knowing your numbers and understanding them from the financial side, that's one thing. Knowing your numbers from a margin and profitability side of things, that's a whole different equation. Like, am I charging what I'm worth? Because a small company with very little overhead can charge a lot less than. Than a larger company with a lot of overhead. You are balancing with the consumer which one they trust more to be there in case something goes wrong, who can stand up behind it, who delivers a better experience? Who delivers the expected outcome better, the small guy or the big guy? It can be either one. To be honest with you, I've seen small guys do very, very well at having great customer experience, being profitable, and all the good things that they're supposed to. Where they run into problems is when they try to start to scale and start to add those people into the equation, not accounting for that extra effort and overhead that goes into that. And they don't increase their prices to account for it, because you have to. There's only two ways to be more profitable. Increase prices or decrease costs. It's that simple. And so if I'm not making the margin I need to make, I either need to cut some budget, that could be staff, that could be cost materials or labor. It could be overhead. It could be any of those things where I could cut some costs, or if I can't cut anything there, that's the market telling you you need to charge more for what you're doing. You're worth more than what you're charging. And so many people I think undervalue what it is they do. You have a specialty, you're great at something. Putting a roof on, installing a fence, painting a house, installing a deck, whatever it is that you do. If you don't charge what you're worth, you're saying you're worthless. And that will come across to your homeowner. If you are going about it from a price low price leader perspective, that I can win. And it's part of the problem is we don't know how to create value. We think that we've got to be the lowest price to get the deal. But very few people buy the lowest priced item. I know I walk into wherever Costco, Best Buy. I'm going to go buy a tv, man, I'm not buying that cheapest one they got. That must be a piece of junk, right? And you think about you as a business owner. Do you buy things that way? Do you go buy the crappiest vehicle they have on the lot? No, you don't. You go and buy a nice vehicle so that you can show the customer that you're actually good at what you do. So if you think that's how the buyer buys, shouldn't you be somewhere in the range a little bit higher? Maybe not the highest price, but in the range where you go, hey, I'm going to charge a good healthy profit for what I do and I'm going to do a great job and I'm going to have the staff to do it well. And I think that's one of those big challenges for a lot of contractors out there.

The numbers are a big deal and there's numbers all over the place. I just had this conversation with one of my clients and we did a quick, did some quick math on a job costing, discovered their material was at 40%. And all of us looked at that and went, is that real?

Yeah. First off, is it right?

So we double check. It was for that job, one job. And I said, okay, I said, how about we take a look at five? Why don't you go randomly pull five files and we'll see what happens there. Five files later it's 40%. Seven files later, it's 40%. So that instantly triggered, instantly triggered some conversations on their part with their suppliers, with some of their sales reps to go, hey, what's going on here? That's pretty high. Okay, now if you've got, if you, that number should be closer to 30, that's 10% coming out of your pocket. If you think of the job that you sold up here and the money you get is what drips out at the bottom, that's 10, 10% is sitting up here, that should be further down.

Here or somewhere in dollar job that's a thousand bucks or somewhere in here.

Invested into something else. Okay. And so it's just one of those things where they probably hadn't looked at it in a while. And so just doing that alone allows them to afford me. I'm just kidding. So there we go, a return on investment.

It actually is one of the ways that we help contractors the fastest is like helping them buy better, helping them analyze their numbers. We can usually find a good at least 5, if not 10% extra in things that they're just missing because they haven't looked at it, haven't gone to the supplier and said, hey supplier, I'm buying a lot from you. What's your best price? And I'm gonna go ask a couple of other suppliers what their best price is.

Now that isn't to say that you should always be looking for the cheapest price with your provider either, right? That's not what we're after. But a reasonable, a reasonable margin is important. And honestly, here's the thing. If everybody thinks you're happy and if you're happy, nobody has any reason to take a look at those numbers.

You got no suppliers coming to you and saying, hey, can I charge you less?

Right. And so, and so it just requires you staying on top of those things and once again inspecting what you expect. If I expect to have an average gross margin on my jobs, then I need to be inspecting what that job cost looks like on a regular basis. And so that right there instantly saved them a whole bunch of money. That because now they're going to be able to go renegotiate some of that stuff and they may be building some other relationships with some other people to create a little, I mean we deal with competition all the time and so should our providers. That's what makes us all a little bit better. But knowing those numbers is so critical to being able to understand if you've made advancements. I mean, have you actually taken a step forward? So for example, if you doubled your revenue one year over another, but your net take home dollar wise is exactly the same.

Well, you waste a lot of time.

Did you? But did you? Or was it because you reinvested back into your business to grow additionally further?

Could be.

And so, and it could be because, because you might be sacrificing the amount of money that you pull out of your business as a business owner now, because you're trying to create that momentum and that build towards getting to your company, to the place that you're trying to get it.

Or you may have chosen to give.

Or you might have chosen to give it away, or we may have just been making mistakes and leaking money all over the place. But if you don't know what those numbers are, I mean, we had a client a number of years ago. They had three locations. They did 12 million. And I think their profit was somewhere in the 4% net profit range.

I thought you're going to say 4 million.

No, no, no.

4.

4%. And I remember specifically the brokenness that he felt because he was like, I killed myself last year, and I could have made more money as a sales rep for one of my competitors for this number right here, for all that.

Work and all that effort and not setting budgets to start with. And that's, I think, one of those big concepts that we, as solopreneurs growing into entrepreneurs miss, because we haven't been to business school or any of that kind. We kind of learn it, by the way.

Well, and when you're by yourself, like, just like us. Personally, when I. When I was, you know, a bachelor, I didn't really need to worry too much about budgets because I was the only one making my money, and I was also the only one spending it. I knew where all of it was. Okay? Now, as soon as I add a wife and I have a child and.

It just went up on the child.

There'S somebody else who has access to my finances than I do. Now, all of a sudden, she and I need to start having conversations about what our goals are and where we want to allocate our resources and for what reason. And so you got to do the same thing inside of your business, and your business might hit a point, and you're making the amount of money that you want to make, because that's the part that's key. So in this conversation, a lot of people talk about what's the ideal size of a company? Like, well, is 5 million is the right size? Is it 10 million? Is it 20 million? What's the right size of a company? I'll attribute this concept to Paul Reed from Northwest Roofing out of Colorado. And what he had, what he said that I thought was brilliant, was the perfect size of your company is producing the revenue that you budgeted your company to produce. If you built your company to be a $10 million company and you hit six, that's bad. If you built your company to be a 10 million dollar company and you hit 15, that might not be good either. And the reason is, is because what you'll find is there's this, there's this lifestyle to profit, there's a lifestyle to profit ratio and it varies for everyone. What I mean by that is, is that the fewer people we have, the lower our overhead, which means the higher our profitability, the more revenue you pump through your people, the more stress, their stress level is going to rise. We all want to, most of us want to work full time. We, we want to work hard and we want to do a good job. We have no problem with putting in a good day's work. You pump too much, too much volume through that business. People are now beginning to overclock themselves. You're getting, you're overclocking your business. People are working extra hours, they've got extra stressors. They're dealing with too many clients per person. They're just, everybody is just getting worn out. Like wearing a pair of jeans just way too often. Like, it's just getting too much stress. Okay? And something might break. That's a lifestyle problem.

Okay?

And here's what happens. Profitability is amazing. Profitability is amazing because we did 15 million with a company built for 10. But our people are toasted. They're burnt. They're leaving, they're toasted. Okay? Now you have a $10 million company and you do 6 million. Your overhead was designed for 10, which means your profitability is going to be pretty low. But, but everybody, but nobody had hardly any stress because there really wasn't that much work to do. So the answer to that question is, what exactly is that ratio? And you don't know how to find it unless you know your numbers. So what is my team capable? What is it like for my team to do 3 million? Was everybody stressed out? Do we need to add people if we want to grow? Or was 3 million a pretty comfortable move? And what was the profit margin that we saw on that and am I okay with that? So in order to build the kind of lifestyle that you and your people want, you have to understand those numbers so that you can equate, equate that stress level and lifestyle to the profitability or the reward that comes with it.

Yeah, we get too caught up with this idea of I want to be uber, uber profitable and squeezing every ounce out of our people that we can, which leads to a lot of turnover, retraining and stagnates.

Our growth, which ends up costing us.

More in the end and costs us a lot more in the end. Where, if we were to budget it correctly for that growth and saying, hey, I want to. One of the biggest problems I see is people growing too fast without having the budget for it. Now, companies can certainly double, triple, quadruple even 10x, as long as they budget for it, plan for it, and have the right opportunity for it. Like, you really need to measure that. And so when you get into numbers, there's a lot of things that you need to consider about market size, available work to be done, how much, what's the market cap of your particular trade that you do in your market, how much of that can you capture in market.