Why Your Home Service Business Isn't Making Money (Even at $5M+)

Welcome back to the show. I'm your host, Phil Risher, and on today's episode, we're talking with Diane Gardner about how to go from a 2 to 5% profit margin to 15 to 20% plus profit margin. And I'm very excited about this topic. It's something that, I mean, we're in business to make money, so come on. Diane, thanks so much for joining us today.

Phil, thanks for having me on the program. This is exciting stuff.

Yeah, for sure. So I had Mike Michalowicz on the podcast talking about Profit First, And he helps with Profit First across all different kinds of businesses, but you specifically do Profit First for home service businesses. Is that correct?

I do. I love helping. I love watching their eyes light up when they get it and they get this aha moment that we can take our profit first. How? Show me how to do this. And I always say, no more settling for the scraps. Let's start taking your profit first. Let's start. Turning you into a profitable company.

Yeah, I love it. So before we get into actually helping these business owners create profit in their business, can you tell— take me like 2, 3 minutes, like how did you even learn this stuff and figure out that this was a big issue for home service businesses in particular?

Well, I'm going to back up a little bit because I first learned this concept many, many, many, many years ago. I had gone through a divorce and cash was like non-existent. And I picked up the old-fashioned envelope system. And this is pre-Dave Ramsey when he started talking about it. So this has been around for a long time. And I lived off of that envelope system during those tough, tough years when cash was not available. And that's what kept my daughter and I from starving, basically, was that envelope system. So when 2000, I think it was '15, when Mike came out with his book, I was one of those very early adopters to it. That said, yes, now we can put it in a business environment and go, well, why didn't I think of that? But I didn't. You did. And, um, immediately jumped on this and started learning it, implemented it myself. In fact, a couple years ago, my husband and I built a brand new home debt-free, and a lot of it was due to Profit First and being able to just put that money away. Um, never thought that could happen, never in my wildest dreams. I think you could build a house for cash. It doesn't happen in America, but we did. Anyhow, as I got deeper and deeper into Profit First, I started thinking about who's my favorite clients, and it was my blue-collar guys. And so then we started maneuvering our way into that niche and started customizing Profit First for that niche because what's in the book is completely, totally generic. And I don't do some of the things that are in the book because they just don't, they don't land easily in this world. And so we've customized it now for home services. And the guys that I work with, guys and gals, not just guys, guys and gals that I work with, they love it because we've simplified the system now where it's easy for them to follow and they're getting some amazing results with it.

Yeah, awesome. I love it. I was a big Dave, I am a big Dave Ramsey guy and I did all the Baby Steps and then I started my business and I'm like, well, I have a budget and everything over here for my personal life. And then I read Profit First. I'm like, ah, this is exactly what I wanted for my business. And now it makes complete sense. It's a little different, but it's similar.

It's similar. Yeah.

All right. So someone's listening to this, they heard me say 2 to 5% profit and they're like, I'm way more profitable than that. Like, what are we talking about? But they don't know their numbers. Well, what do you do when you first start working with a client to figure out what their profit number actually is? And also, can you give a global— like, if someone doesn't know what Profit First even is, like, how do you—

You bet.

Yeah, tell them.

Let me, let me do that part first.

Okay.

So in Profit First, we set up bank accounts, various bank accounts, and they're usually savings accounts. So we'll have a main operating account, which is your checking account. And then we'll have anywhere from 3 to 10 savings accounts. And don't freak out, it's, it's okay, um, it's because it's very simple. And then once a week we make allocations and transfers into those savings accounts based off of top-line revenue. What that does, if you walk into a restaurant and they give you a big platter with heaping food Most times you'll sit there and gorge yourself, and then you're uncomfortable and you don't feel good. Or that same restaurant could serve you a smaller plate, you eat it and you're comfortable, and you now feel like you can get up and go do something, you know, that type of thing. You didn't gorge yourself. Well, we're doing that with your business. We're serving you a smaller plate, and so we're having you work out of your operating account and ignoring the money that we've put into the other accounts. And the other accounts are things like income tax, If we put away that tax money up front, you can always make your estimated tax payments and there's no panic at April 15th. What am I going to do? I don't have the money. And then the IRS becomes your best friend and they're not a good friend to have. Yeah. Another account we might set up is for your material vendors so that you can always pay your vendors. You have— you need— they're so important to the lifeblood of your business. If you can't pay for those job materials, you can't do the next job. So we'll protect that money. Other monies we'll protect is an emergency fund. Give you an example. Back in late 1980s, I was in California at the time, and the Loma Prieta earthquake took out our town. There was no money for over a year, and I almost lost my business because I didn't know about Profit First back then. I had no savings backing me up. Versus going through COVID where I had Profit First working, I had a savings account, no big deal. We skated through, through the COVID part. But on the other, um, on the earthquake, I ended up selling my business to a very unscrupulous CPA who cheated me out of my money. And so I— but I got forced into making a decision like I had to make. I didn't have a choice. I was losing my business because there was no cash. It had just totally dried up. Everybody was trying to survive. Forget about growing a business during that time period. So, Profit First, it's a complete mindset shift and making sure that you are thinking ahead and we teach you to plan ahead so that you're getting the most value out of every dollar of your money 'cause every dollar has a job. And we wanna make sure that those jobs are being fulfilled correctly and timely and to the best of our ability. So that's that piece of the question. And then the other part is when I come across home service businesses, unfortunately, so often their profit margins are that 2 to 5% rate. And that just breaks my heart 'cause they work so, so hard for their money. I love it when I come across somebody who's at even 10 to 12, maybe 15%. Excuse me, I'm getting over a cold.

Okay.

Um, either set, if it's the lower end or the higher end, we can always add many points to their profit just by implementing Profit First, getting them to make better decisions, different decisions, watching the timing of how they're using their money and things like that.

Yeah. So let's say someone comes to you and they don't know their profit percentage, what's the first thing that you would do with them?

I would sit down with them. A lot of times we actually— I get an invite into their QuickBooks account and we open it up and we start taking a look at what's sitting there. Sometimes they have decent books, they just don't know how to read the numbers. Other times we hop on a call with their bookkeeper and we start making some corrections as to how things are getting recorded. Because I am an accountant in my prior life. So it's, it's, that's a section that we can fix. I won't say easily, but sometimes it takes a little bit of work, but we get that part fixed. And so now they have real numbers that they can dig into and we can start monitoring them and tracking them.

Yeah. Awesome. So let's say someone's listening to this. Our audience is usually like $1 million to $10 million home service businesses. So relatively established. They have team members, that kind of stuff. What are some of the common leak points of profit? Like, people do not think about this, or they— yeah, they have holes. And I know this is like your specialty and expertise, so I want to hear what your thoughts are.

Probably one of the biggest ones I see is in their cost of goods sold section. Now let me give an explanation for cost of goods sold in case somebody's not clear. Cost of goods sold is the section on your profit and loss, or your P&L, that is supposed to contain all the costs related to doing that job. These are costs you would not incur if you weren't doing that particular job. So it's things like your job materials, your production-related labor. It can be, um, if you have to pull permits or things like that, you know, to be able to do your jobs. All of those kinds of costs sit up in cost of goods sold. So many times I see a lot of extra items sitting up there, or I see cost of goods sold down in the overhead section. And so we get that fixed first, and then we start digging into cost of goods. And sometimes they're not getting good pricing for what they're buying because they're having— they're doing it last minute. Oh, we forgot. And then they just go pay whatever you pay to get it because of a lack of planning. Other times I see huge inefficiencies in their team running back and forth across a city or a county, especially in the more rural areas where there's more driving involved, running around and wasting a lot of that windshield time and not coordinating their schedules well enough. I see other team losses in the cost of goods area where we've got team players that maybe aren't those A, A+ guys. And so they get the job done, but then the customer is not happy with it, and then you get to go back and do it again, and you've paid for that job twice now, plus you've lost another job that you could have done during that time period you were going back and fixing the job. So we see a lot of leakage there. And then I see also, I see leakage taking that cost of goods sold section and actually costing out some jobs so you know what it really costs you to do that job. And then realizing we need to raise our prices. Did that recently with a gutter company, and he realized he was making 2% profit. He thought he was making 35, but we actually costed it out, it was 2% profit. So he had a big decision: am I going to disqualify or discontinue this service, or am I going to do a dramatic price increase? Because he couldn't understand why he couldn't get profitable. He was working, they were like working like crazy. Well, if 2% gross profit, you will never be profitable.

Yeah, the job costing one is so hard for a lot of businesses. And as you scale, you start doing more stuff and then the job costing is different for all the different services and products. And then you might have one thing that's 2%, one thing that's 30%, but you don't know and everything— you don't know together like what you're saying.

No. And so that's why when you're working with a Profit Planning Coach, we dig into the different kinds of jobs and we'll cost out. 2 or 3 jobs within different categories so we can see, was that just a fluke on that one job, or has this been happening repeatedly? And then you just kind of go, oh no, I've allowed this to happen for the last however much time. And so I see that either we have to just continue the service, come up with a better way of doing it, raise the prices. I mean, they do have choices. Yeah, but that one's huge.

Yes. Okay, I want to throw a scenario out there because I, I have an idea of how to solve it, but I'm very curious of how you solve it for people because I think it's a very relevant one. So Let's say people do normal like service jobs, you know, $1,000, $2,000 type average ticket. Then they get a job for like $20,000 or $30,000, like a big thing. And maybe they take half upfront, half after or something like that. I've seen where these people get in these death spirals of like the money comes in, but then they're chasing the next job to pay for the last job. And it's like this whole thing. Remodeling, HVAC, they all have that type of situation where they sell these things. Um, how do you coach someone on fixing that in their business so that way they don't run into that chasing the jobs and it's all clean?

Well, first thing we do is we set up that account for their job materials.

Okay.

And we start going from this day forward, we will put this money away, and the, the— from, from this current job going forward, those vendors get paid out of this account.

Okay.

Then if we can eke out a couple more percentage somewhere else will have an account for catching that past up because generally that they got in trouble that way because they didn't have enough profit on a previous job. Yes, a lot of times you get that big job and you'll sacrifice a couple percentage points on your profit to take on that big job, and then that's where the spiral starts and then they can't get caught back up.

Yeah, so it's pretty much like you got to have the buckets to make sure that the money goes in and then I've heard some people say like, okay, I have this bucket over here, but I only take the money out when I start this job. If it's like, you know, 3 months out, I got to order materials and stuff.

We get very— we protect that money. Pretty much got my arms out here at all costs so that you're not tempted to pay something else out of that money. That money has the job of making this job work. Yeah.

Okay. That makes sense. All right. I want to talk about another big one, which is taxes, because when people go from 2% to 5% to 15% to 20%, that the tax bill gets a lot more and they start freaking out like, how do I pay my taxes? Wow, wow. And now I'm paying $30,000 in quarterly taxes or $50,000 or whatever it is.

Right.

One, how do you make sure that the taxes are there and what percentages should you be using for home service businesses? And then two, how do you coach people through like, it's okay to pay taxes? Yes, those two things.

Okay. So we set up a tax account. And we transfer money. Everybody in my coaching group transfers money first thing Monday morning. So we add up what came in last week and we make our transfers Monday morning before we have the ability to start spending it everywhere.

I love it.

So it's gone. And then now we make our decisions. So our tax account gets funded. Generally it gets funded at 15%. Now when somebody is just getting started with Profit First, for them to go from 0 to 15 is really hard. So we'll have to baby step our way up. Knowing that they're going to have a painful piece at the end. Those taxes still have to get paid.

Yes.

So the faster we can get up to 15% for that tax account, the better it is. But then there's this little thing called tax planning that can be done, and a lot of times there's tax strategies you can put into your business that allows you to not pay tax out at that top rate that you would normally pay it. And so Um, you know, we do tax and profit coaching together so that as those bottom line profits start growing, we try not to give it all to the government. Yeah, we do pay our fair share, but we don't want to give them a tip, don't want to reward them for the excellent service.

I love that. Yeah, I think so. So my home service business, I started there at $3 million. I was director of business development. They were doing $3 million and then $300,000 in profit. And then they went to $4,900,000 in profit.

And so that was a big tax bill jump.

Yes. And the owner was not using Profit First and he was basically just running it through his, his stuff. And so it's like he had to get the, the tax extension and then figure— and luckily he had the revenue and the profit coming in on top of it so he could, he could figure it out. But a lot of people that do not have the profit, but they have a big revenue jump or something, it's like turn into a big mess. Um, so yeah, any thoughts on that?

And the same type of process applies on taxes as it does with your vendors. We want to protect that tax money because once you get behind with the IRS, it's so hard to get caught up and be— and to stay caught up going forward because they're putting intense pressure on you on the other side. So that tax account is super important— funding it, paying those estimated payments But then doing some tax planning strategies along the way can reduce that tax liability so that you're not having to pay out quite as much. Because to go from $300,000 or $400,000 up to $9 million, that's a huge jump. That's not just double the amount of tax. Sometimes it's 2.5 or 3 times the amount of tax because you just jumped tax brackets, probably.

Yeah, absolutely. Um, okay, I want to throw some more stuff at you. So, uh, Diane, I I'm just throwing hypothetical things. I have a line of credit and I use that as my emergency fund to fund my business through shoulder season. You said that I need to have an emergency fund. How much do I need to have in there? Because that's a lot of money and that's money that I could be spending to grow my business.

I know, I hear this all the time. I know, but Diane, but Diane. Exactly. So ideally you use your line of credit and you pay it off very quickly. We try to get them paid off within 30 to 60 days if we can. Sometimes it's 90, because that shows that you're a great credit risk for your bank if you can pay it off periodically and keep it rolling. The emergency fund is for those things like the earthquake, the fire, the COVID the things that come out of the blue at you. If you've got money in your emergency fund, your business has a much better chance of getting through that time period. And so depending on the business, we try to have 3 to 6 months worth of operating capital in an emergency fund. Now that doesn't happen overnight. That can take 2 or 3 years to get there, you know. So don't be, you know, thinking, ah, I don't have all this money. We do this everything in baby steps, just 1 or 2% at a time. We work our way up. Yeah. The line of credit is more for— I've got, um, I didn't get enough up front and I've got to cover the materials. We'll cover them with the line of credit. Payment comes in, we pay off the line of credit, and so we just keep that line of credit revolving. If we've done our planning correctly, we've buffered out our shoulder season and we're running off of our own money. We may have to supplement a little bit of that line of credit, especially up front, But eventually we get to the point where we are our own bank and we're able to cover shoulder season.

Yeah, I love it. All those things, I was hoping that you would say it like that, so that's perfect. I've been running Profit First like 7 years in my business and like it's taken so long, but you can get this stuff set up if you do 2, 3 percentage points and then you look up after 5 years like, okay, like my My actual buckets are filled. I think another thing that I wanted to ask you about and to point out this is a guy comes in like a business owner and he's like, hey, Diane, I just met this rockstar technician. I need to hire him. You know, can I afford him? Like, how do I do it?

Right?

Yeah. Okay. So how does that work?

So I have another account, another bucket.

Yeah.

And I usually call it future expansion or future growth, something along those lines. And when one of my guys comes to me, I want to hire this rock star. Yeah. Then I say, well, why don't we practice paying that person into this future growth account? If you can do this for 3 to 6 months consistently, every payroll you pop that money in there as if you're paying him, then we know you're ready to take this on. If you can't do it consistently, then how are you going to pay an employee? Because that employee not only gets his paycheck, but you got to pay unemployment, you got to pay workers' comp, you got to pay out vacation and holiday pay, you've got to give them a truck or a van, you've got to do all this stuff. So that's just the minimum is the payroll. And so when we do that, it slows down the emotional decision and it turns it into a structured financial decision.

Yes.

And then they don't regret hiring somebody. They don't have to let somebody else go because they hired this person. And life's a lot better in their team.

Yeah. One of the things that I love about running with the buckets is that at the end of the month you can look up and say, oh, my payroll bucket is over $10,000. So I actually have the room where I have $10,000 if I want to bring someone on, or I can move percentages to another place. It almost gives you permission to hire people or to not.

It does.

And it lets you know, like, okay, I'm good to scale now or not.

Right. Or even adding in a truck or a van. I mean, they can spend $80,000 to $100,000 on a truck or a van by the time you outfit it and wrap it and all that stuff. Stuff. And it slows down those decisions enough that you're actually not doing it emotionally. You're looking at, okay, how much in sales do I have to increase to be able to take on this truck or van and this person? Because, you know, you have to calculate all that stuff before we just jump out there and, oh, I want a new truck, you just go buy it, or a new van. Yeah.

Um, all right, I also want to hit you up about one of the favorite topics that we both have, which is marketing. And the abysmal marketing spends and does this make sense and the foo-foo and the da-da-da. Diane had me on her podcast and I think we hit it off because I'm cut from the same cloth where I like, I don't like, you know, all this fluffy stuff that marketing companies give people. But let's say you're working with one of your home service business guys and they're like, hey, I'm thinking about doing this marketing thing or I've been spending money on marketing. How do you like coach them or get them to make this all make sense to them?

So from the financial side of things, since I, I'm not a marketer— yes, I do my own marketing, but I'm not a marketer by any stretch of the imagination— from the financial side, I try to get them to show me the various marketing channels that they're using and show me the results that you're getting from each of them. Because too often they throw the spaghetti against the wall and they see what sticks.

Yes.

And I see, you know, 10, 15, 20 different marketing pieces and vendors and stuff in their books. It's like, okay, not all of these are working. Let's figure out the ones that are, cancel the rest, and then throw that money into the ones that are working. Because until you know what's working, you're just throwing your money out there and hope it lands somewhere. And that's a really poor financial planning way to run your business. My goal is to set these guys up to be a CEO of a successful business. And that's a— it takes a lot of learning. It's a challenging ladder to climb because they all come at it from more the technician side of things. I worked for Joe So-and-so and I didn't like the way he ran his company, so I started my own company. And they come in from the production side generally, and then they have to work their way up and gain all these skills so that they can be a successful CEO of their own companies and turn them into profit machines.

Yeah, for sure. At my— when I was at the home service, I was director of business development. And the way that it worked was, uh, the guy, his name's Tom, he would find a new channel and, you know, get sold on it from these people. And then he'd say, let's just try for a couple months. And I'm like, how are you gonna evaluate if this even works? Like what, like what ended up happening was 2, 3 months he would look at his revenue and say, oh, we're growing. That must have been the thing that was working. Or like that must, and it's like, this happens all the time and it's like, right. Okay, I spent more on marketing, so now my revenue goes up, so everything must be good. Or my revenue's going down, that marketing's terrible. When there's so many pieces in between that's like, okay, well which marketing is working and what's not? And It's something that I had to build clarity on in my home service business. And it's like, we need to have this clarity as business owners so that way we can run successful businesses, not just throw it at the wall.

And I'll tell you, doing an exercise like getting clarity on that, it's not fun. It's painful.

Yeah, we do it every month.

I'll be the first one to say it's painful. But we dig into it and we find ways that they can measure which marketing pieces are working. Some of them are easier to measure than others. Like billboards are really hard to measure. You just hope somebody saw it when they drove by. Yes. And so I have a lot of guys that love billboards, but you can't measure the results very easily coming back from that. Some of the others, you can measure them from the reports that you get and from your codes and things like that. You can see what's coming in. Those are much easier to justify. So pretty much, if you can't measure results coming back in, then maybe you don't need it.

Yeah, I love that. That's true. Um, all right, so let's say we have someone who's like more sophisticated. Maybe they've run Profit First before or, you know, they're running an $8 million business and they have some profit and they know their numbers, is there like a hidden, uh, account that you're like, oh, this is a good one for them that they should set up? Or any other like pro, pro tips for, for people?

Oh, on the bigger ones, the dues and subscriptions account balloons, especially as you get some management levels in there. And this person wants this subscription, and this person wants this one, and this person wants that, and they've got all these subscriptions going. And when we sit down and we dig into that dues and subscriptions account, uh, generally we find that less than half of them are actually being used. And so then we want to kill the others because more than likely they're just going to continually to auto renew.

Exactly.

And they don't tell you that they're going to auto renew. You just see it hit your credit card or your bank account. So if we can get some of those stopped, we can put generally, you know, a decent size amount of money back in the bottom line profit.

Yeah, this is exactly how it is. Like with the personal things, it's like, okay, it's $20 and it's just kind of running and like you have these— yeah. Then in the business side, you have 20 people and they all have $20 things and it's like running and then it's like, that's $400 or that's $600 and there's 3 of those things and it's like, okay, that's a waste.

Yep. Yep. And we have what we call just in time or just in case, because sometimes we get— we're all guilty of buying stuff. Ooh, that'll be really good for We buy it and then we never use it. Just-in-time is something I need today and I'm using it today. So I find a lot of just-in-case stuff in people's QuickBooks.

Yeah, yeah, I bet. Oh, that's funny. Um, all right, so thank you so much. This has been great. If people are listening to this and they're like, I wish I had a profit coach to like tell me my profit and actually help me fight for profit every single week and month, it sounds like, um, where should people go to learn more about you?

The best place to go is our website, which is profitcoach4you.com or taxcoach4you.com. They both go to the same website. And on there we have our profit planning, we have our tax planning, because in my mind they go hand in hand. As soon as we fix that profit problem, now you have a tax problem. Let's fix that too. Yes. Keep the IRS from being a profit leak in your business. So that you get to keep more of that profit you work so hard for. You also, you can find us on Facebook, LinkedIn, YouTube. We have our podcast, our Profitable Home Services Podcast, which is where I met Phil. And there's all kinds of resources out there.

Yeah, I love it. Robert Kiyosaki, Rich Dad Poor Dad, he said the number one expense in your life is taxes. So you got to figure that out. And most people do not think of it that way. And no, Yeah.

And it's the thing that'll put you out of business so fast. Yeah. You're not watching it.

I know. Oh, cool. Diane, thanks so much. We're going to be doing a webinar with Diane actually in August, so be on the lookout for that. She's going to be coming on. It's going to be a live event. We're going to do a workshop and work through a lot of these numbers with people. So I'm excited for that conversation as well. Thanks so much, Diane, for coming on and look forward to continue the conversation.

Thanks for having me, Phil Risher. This was great.

Yeah, you're welcome. See ya.