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, or 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, if you were to ask yourself, how much money did I make last year? Do you know the answer like that? 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. Like, well, okay, that's a whole nother 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? And 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 costs 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 and the importance of know your numbers. That'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 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. 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 and 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 and discovered their material was at 40%. And all, 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, 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.

A 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 going to 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 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 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 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.

Well, and when you're by yourself, like, just like us. Personally, 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.

She 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. 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. 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 ten million dollar company and you hit six, that's bad. If you built your company to be a $10 million 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 want to work hard and we want to do a good job. We have no 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 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, in your market? How much of that can you capture in market share? Those are things that people don't really think about. They just think about, how can I do more? Right. Well, what if you're in a small market, you got 100,000 people in your, in your market? Well, there's only going to be so much market share that's available to you there maybe in whatever trade you do. There's, I don't know, $50 million worth of that work in a year and there's 25 other competitors. How much of that market share can you get based on this budget that you set aside? Those are the big things and those are the big numbers, the big concepts that I don't think enough contractors really delve into to determine what size does my company need to be with the market that's available to me?

The risk versus reward calculation doesn't work if you don't know your numbers. You're just taking a wild shot at whatever feels good to you and whatever you think might work. And if you don't have the numbers, you don't, you may not even know if your, if your risk worked, did it actually pay off? Because we did. If you don't know what this was, you don't know what this was after the move that you made. Those budgets are also critical because we did the idea that each department, and there's there's essentially a budget for each person's compensation. Because, because we had, we had spoken a little bit earlier before, or we've spoken about before, that there, we allot a certain amount of compensation to somebody for a certain amount of work. That's essentially a budget. And so we need to have those budgets set up for those departments so that we can understand how to pull what lever and when to pull it. I may need to reduce my, my, my sales manager might get a Certain percentage override on his people, on his people and his sales. But if the total volume of sales and the total volume of salespeople has become so much he can't handle all of it, his percentage may need to go down in order to make room for somebody to help him out. But if it increases the overall volume, he may be getting a smaller percentage, but on a much bigger number. And can you afford to do that? And have you left money in that budget? So, for example, you may have a budget for production, for your entire production management, but you're not actually spending that full budget right now. You are able to get people in positions without maxing out your budget for that department, which means you've got a little bit of margin. Do we reallocate that margin somewhere else or do we just leave it there? Because we're expecting that department to get blown up a little bit and we want to have some, we want to have some money to triage that department if our sales plans come to fruition.

Couldn't agree more. Hey, have you heard that there's a social network just for you? Well, if you haven't, you're going to. It's the Contractor Collective. It's a purpose driven social network that we built just for you. So you have a community that's just like you, sharing information to make us all better. No negativity, no distraction. If you're anything like me, you hate social media because of all the distraction and ads and all the other garbage algorithm telling you what you want. This allows you to create your own algorithm to follow the people you want to follow and get the feed that you want to have. There's also all kinds of other training, content groups to join. Fun stuff to do as a community of contractors without the distraction of traditional social media. If that sounds like a good thing for you, go to the Play Store, go to the App Store, download the app and join today or join right below. In the description there's a link. Invite all your friends and we'll see you inside. Contractor Collective. This idea of finance is one of those ones that's a little scary. I think for most people. It was one of the things I said, I got to know this better so that I can start to find those places in my budget where I can increase margin and not decrease lifestyle. And so looking at what we're doing, I'm always looking at the categories. So if you operate off of QuickBooks or any other accounting platform, they're usually going to categorize things. There's going to Be truck expenses, there's going to be office supplies, there's going to be market. There's going to be a variety of different things. And I would look through those once a month, sit down, look through my P and L. And I'm always looking for what's the thing that didn't look like that last month? Why did it spike? Or why did it fall? Why did it move? What's going on? Why does that not seem right? And then I would dig into it further, but as long as it seemed okay and my margins were where they were needing to be, I didn't micromanage it either. I trusted my people to do that. Well, if I was looking at it and talking to a contractor today, I would say the things that you probably really want to do is concentrate on that budget and think of it from a pretty high level. What do I want to budget for my sales team? So I'm going to pay out commissions to a sales team. I'm going to pay salaries. Possibility. All of those things can vary. We love to have those conversations with contractors about how to compensate people and incentivize them. But we have to set aside a budget of out of this total revenue that we're going to generate, we're going to. What are we going to allow for commissions and salaries to run our sales department? What are we going to allow for our production department? What are we going to allow for administration? Those are the three main buckets. And then the last one that you should strongly consider is marketing. So you've got those budgets that are all different percentages. And then finally you have overhead. What's the budget for that? And that leaves you with the budget that's most important, your net profit. What does that budget need to look like? Because I look at that as a budget too. I want to budget for 15% net profit, whatever that number may be for you. That tends to be my particular one that I try to aim for whenever I'm running a contracting business. Try to coach people to that or more. And the ways to do that is, like I said, cut cost, increase prices. One of the other ways I'm considering that conversation. There is another way automating things. Can I automate some things to take some of that overhead cost down? By creating those robots that do things for me, I'm not trying to eliminate jobs. I'm trying to get more capacity for the jobs that I already have. I don't think enough thought gets put into that strategically.

Well, people, a lot of guys that we've talked to and dealt with too though they want to build a company that's valuable because maybe they want to sell at some point or maybe they want to get an influx of cash or investment capital to help them grow their business. You know what those people are looking at? They're looking at your books. They want to see your books. They want to see them clean, they want to see them efficient. They want to see repeated and expected numbers that actually occur. Even if the numbers aren't great, even if the numbers aren't amazing, as long as they're repeatable, they're dependable and what is expected happens. That means that those numbers can be adjusted and moved. And we know how to make those numbers move versus not having any rhyme or reason to them. So 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 your books and you don't, 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, 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, those types of situations, is that when they dig into the books of a contractor's business, it's almost like it's his house. It's like his home books. It's his own personal bank. Right. Like you can just take money out whenever he wants to.

Well, it's the closet that everybody shoves everything that they don't want you to open in their house. So you walk into their house, you're like, oh, your house looks pretty good in here. Don't open that closet.

Right?

Just don't open that closet. And that's most guys books, they're like, I don't even know what's in there. But I. You know what I mean?

Well, one of the things, if you really need to determine if your business is valuable or not, you need to allocate a salary or compensation to you in your business because you play a role in that business. And if you're just looking at it as like this piggy bank that you can go and grab money out of every once in a while, that's not a consistent thing. That's not a salary for the position that you run. So whoever is looking at Your books saying, well if I replace that person, how much is he get paid? How much does he get for doing this? And a lot of times that's all your profitability. I see a lot of contractors like spend it all, which is devastating to their value.

I can speak to the finances side specifically from the marketing standpoint because I help people try to put their marketing budgets together. I'll ask them up front so we can set the budget. What's your gross profit margin? And I get that answer of around.

About fill in the blank.

And I'm like, that's not exactly what I'm looking for. Like what's your, what is it?

Especially when you're budgeting for marketing. Yes, that's a smaller percentage. It is the 3, 5, maybe 8%.

But if you, if you tell me that your gross margin is 40%, but it's actually 35, that is a drastic change in what we put into your marketing budget. Like that is a huge number. If, especially if you're a ten million dollar company and you say, oh we're at 40%. Well if you're at 40%, that means you gross profit margins of $4 million. But if it's really at 35, that's a five hundred thousand dollar difference down to 3.5. So because we base our marketing budget on 10% on gross, not revenue, that's how we budget those things out. So yeah, that's going to impact your marketing numbers and how much you can realistically spend. Which changes what your cost per lead acquired is. It changes what your cost per appointment acquired is. And your cost per close is like all those numbers trickle down if you don't know those numbers specifically. So just to drive home even more. So why those numbers are so important for you to understand.

Yeah.

Like what you're saying is essentially if you want to invest in growing your company and you need to invest in the marketing side of things, you might have just kneecapped your business. If your numbers aren't correct.

Exactly.

And you have to look at every marketing dollar that you spend, it brings back something. Right. And that can't be equal, it can't be less, and it can't be even just a little bit more. It needs to be significantly more for that investment that you make to justify.

Yeah. Because if we spend $10,000 in marketing for one month. Okay. And we have 40% margins, well, in order for us to break even, that means we need to sell somewhere around what, 25 grand from that $10,000 just to break even. That's the reality of it, because some marketing companies will be like, oh, well, we sold, you know, you spent 10 grand and you made 30. Well, no, you didn't actually make $30,000. We actually made like 12. Technically we made two.

See, that's the importance of numbers though, because the importance of that is I need to know my closing ratios on that. Because if I'm going to get a certain amount of leads from that, and let's say we get 10, right? You're trying to get to that break even point of $25,000. I get 10 leads. Well, if my closing ratio is 30%, I make a little more. But if my closing ratio is 40, I make. Okay, now it's starting to look a little better. But if my closing ratio is 20%, I'm falling short. And so those numbers are super important to be paying attention to.

And we'll talk about that more when we talk about marketing. Tomorrow is our job is to get you a higher qualified lead. So that closing percentage is higher than what it typically is if you're knocking on doors, because it should be. And we'll talk about that more at a later time. But that's.

Well, in some things affect. Some things have an effect you're not entirely aware of. So, for example, like closing percentages. Yeah, they do. You know, increasing your. So if you invest in your salespeople in your marketing to create more qualified leads and you invest in your salespeople to create higher skilled people who close at a better rate, it doesn't just increase the revenue that you bring in. It decreased how much money you, you spent on acquiring that revenue.

Right?

Yeah.

And so it's overall benefit that isn't just, oh, more jobs, it's oh, more jobs, lower expense per job, more profit.

And one more thing I'll throw in on this. When you hire a sales guy, I've heard owners say this. Well, it doesn't cost me anything to hire a sales guy. I come in, we train them, they go sell, and I'm looking. And of course, being the marketing coach, I look at it from the marketing coach perspective, right? I'm like, no, it does cost you something. Because if you want them to get five leads per week, for instance, and let's say you're a hundred dollars cost per lead acquired, which is under the national average, you're going to spend 500 extra dollars a week to get him those five leads. So it actually cost you $2,000 per month to bring that sales guy on.

And you might need to get him seven or eight Leads. Because his closing ratio is not going to be as high as a new guy.

Exactly.

As a more experienced guy, we've talked a lot about finance. We've talked a lot about budgeting. Let's talk a little bit more about numbers and the numbers that you should probably know. We talked a little bit about closing percentages. Right. Talked a little bit about cost per acquisition. How about things like activities? When somebody's working for you, what activities should they be doing? And how much of those activities is a really important number to know. If I hire a production manager, how many jobs should he be able to process in a day? Because if I don't know that number and I have a compensation associated with it, I'm just guessing. I'm like, I'm hoping he does enough to justify what I'm going to pay him. But if I understand my numbers and I'm able to tell him, hey, look, for this type of compensation, you need to be able to process 10 jobs a day. I can now tie his reward to the compensation that he's being paid because I know my numbers. I also know my process. My process told me what the numbers were going to be. So. And that applies to a lot of different things. That's just the example of a production. How about a salesperson? How many doors should they knock? If you want them to knock doors, how many leads should they run in a day? What's their closing percentage supposed to be? How many inspections should they be able to perform? What should their inspection to presentation ratio look like? What should their net sales per lead look like? I give you a lead, I give you 10 leads, and you sell three of them at $30,000. How much is that per lead? 3,000 bucks. Right. So is that a high enough number for me to give you another lead? It might not be, because this guy over here is at 4,000 or 5,000. Who would I rather give my lead to? The one that's bringing $4,000 per lead I give or the one bringing 3,000? And that's how I would prioritize how I disperse my leads by the person that is able to generate the most revenue off of each opportunity that's given to them. But when we don't dig into our numbers well enough and understand them well enough and really think about them deeply enough, we're leaving money on the table every day. Yeah.

And I would. I mean, again, I speak for marketing because it's what I know. If you spend X amount, how many leads or how many appointments should I get off of that Much money. Yeah, you need to. That's a vital number for you to know. Yeah, vital number because, well, I look.

At that as like investing in the stock market. If I can spend $10,000 to get 30 leads, let's just say that's the number. And I know my guys can close at 40%. So that would be what?

That'd be roughly 12ish.

$20,000 a piece would be $240,000. For $10,000 I spent, my margins are 40%, so I'm doing pretty good. Well, heck, let's spend 20,000. That's an easy risk to take. But if I don't know those numbers, I don't know whether I should take that risk or not.

And I hear that all the time in marketing. I spent $20,000 in the past two months and I got nothing from it. Nothing. You got nothing.

You got something.

There's no way. I mean, it's hard for me to believe that you can spend 20 grand and not get one lead.

I've seen, just from my perspective, I've seen it happen. That could have been a bad hire by a marketing agency, could be that it did work for the first couple of months, but that little system they were using wasn't producing quite as much. I spent 20,000 building SEO, and SEO doesn't work right away. It takes time. And so there's a lot of different factors that might go into that.

That's managing expectations with SEO.

Yeah, for sure, for sure. Managing expectations, for sure. But whenever you decide, hey, I'm going to put some money into SEO, you have to understand those numbers. You have to understand probably four to six months of really consistent investment is going to start to actually deliver a break even for you, and then a year of it is going to start to surpass it. But then you've got this steady flow that you can actually count on and predict and say, hey, this is what's going to happen. Which allows me then, based on that number to go, hey, I can hire another sales rep. And it's justifiable because I know the number or I don't know the number, I can see the result or I don't see the result. And I think most of us as contractors are in a guessing game. I hire a sales guy, that means I'm going to sell more. Is it. Do they have the opportunities?

So a few people to keep in mind. And I mean, we assume that there's all different levels of contractors listening to this. And some of you are probably thinking this is very elementary, while Some of you are thinking this is pretty advanced and very, very helpful Few people to try and get your hands on or get some conversations started with for your business that you will need eventually if you don't already have them. A bookkeeper who knows what they're doing for sure 100% a bookkeeper who can manage the day to day ins and outs of what your money coming in and your money going out and then the request for money that is an invoice from your clients and what it.

Means like what that the it's not just a piece of paper or an invoice or a dollar figure that the meaning of what that is so they can communicate to you hey, we're doing well or we're not doing well, right?

We need an accountant, somebody who can help you with the now oftentimes those two people are rolled into the same if you have a CFO type role, even a CFO will likely have a bookkeeper underneath them. But we need an accountant who understands the grander picture will probably also understand the tax ramifications at the same time, but simultaneously a tax strategist. These these are rarely the same person, but can sometimes be they're rarely the same person. Tax strategists are people who understand how how to to optimize your tax position versus just understanding the the micro and the macro concepts of your money coming in and going out. Tax strategists understand the ramifications of the way that you spend your money, when you spend it and how you spend it and how much you keep of it, where you put it and how you put it there and what that does tax wise to your and how.

To structure your business.

So that leads to the third one which is essentially typically some type of a lawyer or business strategist person. Once again, sometimes the same person, not always the same person who can explain to you the The Concepts of LLCs, C Corps Trust trusts, holding companies, shelters holding companies, places that help to reduce mitigate risk, mitigate taxes and keep you and your clients protected as well as your people. Those four people bookkeeper, accountant, a business tax strategist of some kind as well as what would you call the other one? A lawyer or a legal strategist, A structural strategist.

Most of the time that tax strategist is rolled into one being the legal side. They're able to help you create those entities that you need. That's what we use here at Contractor Coach Pro. I've used a tax strategist over the years in my contracting business. Brought One on here that was absolutely amazing in helping us restructure the business. Letting me know how to protect the business, too. That was another big piece of it is eliminating risk from. If something was to go wrong, what to do with the surplus money at the end of the year, to reduce tax liability, how to pay myself the right way. So to reduce tax liability. Those are.

All those things have different ramifications.

Oh, yeah.

On.

On your. Your books, how they look and your taxes.

So we talk a lot about the business side, the business owner. What about all these 1099 contractors?

Oh, man, that's so good.

Right.

I'm so glad you asked.

So we got these 1099 guys over here, and they're just like, oh, we're making all this. This money. Most of these guys, let's be honest, they're in their early 20s, right?

Early 20s.

Especially your newer guys. Right.

Or even the guys in the 30s.

Or some guys who are new to it that have always been a W2 employee. They never been a 1099 employee. They don't understand the tax ramifications that come with being a 1099 contractor.

Understand what you are.

Yeah.

So.

And that's why I wanted to bring that up, because I think that's going to be very helpful for some of these guys who are new to this and they're new to making the kind of money that they're making. Because, let's be honest, you can make a lot of money in roofing or just home service contractor sales positions in general.

Number one rule, you have to realize that you're a business within a business. You are an entity, a 1099 subcontractor, and you have some choices. You could be a sole proprietor. I would never suggest that for you. I just think that you're asking to give the government all of your money if you possibly can. Yes, I would set myself up as an entity, whether that be an llc, an S Corp, even an LP in some cases, just depending upon who you are. You can go get one of these tax strategists or a CPA can help you with this. An attorney can help you with those type of things. But you need to look at yourself as a business, not as an individual or a human being. I have an entity. It has a name. It's joblo Inc. Right? Like whatever you want to call it. And that entity is what's getting paid by this company that you work for. That gives you some protection and some strategy that you can do to do quite well as a 1099. I actually like the 1099 concept. Me personally, I know a lot of guys shy away from it because of the rules and everything. But because you're an entity, you also have to realize some of the risks that comes along with that. First off, you've got to pay for everything now. You got to pay for your truck, you got to pay for your shirts, you got to pay for your cars. Like that's the way a 1099 works. You're an entity that's a subcontractor, somebody else. So you must be self producing. And so many people fracture that or cross a bunch of gray lines, as I would call it. And so if you're one of those owners that has 1099 and you're not following the rules, you are running a danger, dangerous game. It's one of the reasons why we have a finance coach and an HR coach here. They help you navigate that to give you the clarity on those things that you should or should not do. Basic rule, you can't pay for anything and you can't make them do anything. Those are two basic rules. You can't pay for anything that they get. So you can't like give them shirts. Now you could say, hey, I'm going to charge you for these shirts and they're $10. You might have paid $50 for them, but you had to charge them something for it. And I am by no means legal counsel in any way, and I want to be really clear about that. You should talk to the right person about this. But if you don't know those rules, you are stepping into a very, very muddy area that could cost you hundreds of thousands of dollars. Cost you your business, cost your livelihood, cost you your relationship, cost you everything. So get it straight and know that side of your business. Now, you 1099s that are out there that we're talking about, understand that this is a business that you have. And so pay yourself a salary. Set money aside for taxes. Understand what kind of tax bracket that you're going to be in so you can set aside the right amount of money. Get the advice from your CPA of what you can pay yourself in a salary and what you can disperse to yourself in dividends or disbursements. Because if you don't understand what those things are, they're taxed at a different rate than your normal income. And everybody has what they're willing to risk because it is a risk. You know, if you get audited, they're going to come in and they're going to tear it apart. And did you follow the rules or not? So make sure that whatever CPA you get that's helping you with this, or tax strategist helping you with this, that they have experience with 1099s in the construction industry. That is key.

Yeah. I learned something today.

That's what we're here for.

Learn something today. Didn't know that.

Know your numbers.

Yeah.

Know your numbers.