How to STOP Struggling with Cash Flow and Keep More of What You Earn [Profit First for Commercial Construction]

Struggling with cash flow in your construction biz? Learn how Profit First for Commercial Construction can help you keep more of what you earn! Get a sneak peek of the teachings in Wade Carpenter’s new book. 📘

Tune in now to discover a system that works for contractors.

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Topics Wade and Stephen cover on this episode:

• 00:44 - Importance of cash flow
• 01:45 - Contractor cash flow challenges
• 03:29 - Personal experience and motivation
• 05:05 - Profit First for contractors
• 06:32 - Contractor Profit Paradox
• 08:34 - Failure of traditional advice
• 10:27 - Great Recession lessons
• 12:07 - Implementing Profit First
• 13:51 - Major teachings overview
• 16:25 - Practical action steps

LINKS

🚨 Apply to beta test Wade's Profit First for Commercial Construction system (for FREE!)

Visit the episode page at https://carpentercpas.com/profitfirstbook for more details and a transcript of the show.

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Find all episodes and related links at ContractorSuccessForum.com.

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

[00:00:00] Wade Carpenter: Are you tired of working harder than ever and still wondering where all your profits went?. If you ever felt that frustration, this episode is for you. Today, we're talking about Profit First for Commercial Construction, the book I wrote to help contractors control their finances and finally keep more of what they earn.

We'll explore the teachings, how it's different from the original Profit First and the derivative book, and why it's tailored specifically for the unique challenges of the construction industry. This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs and author of Profit First for Commercial Construction, and joined by, as always, Stephen Brown with McDaniel Whitley Bonding Insurance.

Stephen, you've seen so many contractors struggle with cash flow and profitability, a common theme here. What do you think holds them back from making the financial progress in their business? 

[00:00:43] Stephen Brown: I think it's just getting started, understanding its importance. Really Wade, how important is it? We talk about cash flow way too much. It's like we're obsessed with it, right? 

But the flow of your cash and your management of your cash is the management of your profit. And the management of your profit is the health of your company.

[00:01:01] Wade Carpenter: And it's one of the major reasons contractors go out of business, honestly.

Today what I was hoping to do was just talk about why I wrote the book, talk about some of , the problems contractors face, as well as maybe some of the major teachings that are in the book, and hopefully, if nothing else, make you think about your own situation with cash flow. 

[00:01:16] Stephen Brown: I think that's a great, Wade.

And just to remind our listeners, especially our new listeners, that Wade and I started this podcast with a friend of ours, Rob Williams, who's a construction business coach. But we started this because we were all talking about how important it was for everyone to not learn the hard way, lessons that have affected someone else.

From each one of our perspectives, from what we do every day, what we see every day. So we're passionate about it. This is the only reason we podcast, really. We have business elsewhere. We would love to do business with you, but we're fine. We've been around for a long time.

What we want is we want our listeners to understand about why cashflow for contractors is so important. And Wade, your book that you have written about this, and you were trying to get contractors to beta test with you. And you already have a number of them signed up.

Where are you now in this process?

[00:02:07] Wade Carpenter: So the book was written back in July, the first draft. It's being polished. In the process of working with contractors over five or six years with Profit First, that kind of goes back to the whole issue of what inspired me to write this book. 

The idea is contractors struggle with cashflow, and it is the number one reason that contractors go out of business. 

What I'm calling The Contractor Profit Paradox, where when you're growing and you're more profitable, that's when you're very vulnerable. think revenue's growing and you're getting to a next level, but you end up growing yourself right out of business.

A lot of this, again, is what Stephen was saying. It's observation from our experience. And contractors often manage their business based on what's in their bank account, rather than, a solid financial system.

And they don't have any kind of clarity on their cash flow, as well as, knowing whether they're spending wisely and can afford to grow. 

[00:02:55] Stephen Brown: Yeah, just to show you how old I am, Wade, back in the mid 80s, I was talking to one of my contractors. I had been training , as a bond underwriter with a surety company. I was talking to one of our contractors, and he was probably pushing 80 years old. And he had been successful, hardworking man, most of his life.

And I asked him, I said, hey, how are you doing this year? Wanting to know financially, what kind of profits you make, what kind of profit projections you're having. And he just pulled out a big wad of cash from his pants. He goes, how do you think I'm doing? 

all I could do was just laugh and say fantastic.

It was working for him. But again, he was a one man show and he always paid everybody immediately ahead of time. Is that practical for most listeners? I don't think so. 

This cash flow situation, Wade, absolutely does not need to haunt you. It doesn't need to be a plague. It needs to be a blessing to you. A good system that emphasizes cash flow, that pushes money into your business, that allows you to pay bills and then allows you to track profit is everything.

[00:03:56] Wade Carpenter: And have some profit left over when all's said and done. 

[00:03:59] Stephen Brown: Yeah. Nobody operates a business to break even unless you want to lose money. Even if you're the most charitable contractor in the world, you need to plan on making a profit, right? And most people aren't in business to be a charity. They're in business to better themselves. 

[00:04:12] Wade Carpenter: Yeah, we did this podcast, and obviously we couldn't work with every contractor in the United States. We'd love to, but that's obviously not practical. And this is my legacy to try to help the industry that's been so good to me. 

From my perspective, why I wrote this book goes back to one of the major reasons of the failure of traditional advice.

Because, for years as a CPA, I taught them you should not be running your business by what's in your bank account. Get good books and great job costing. I could preach that till I'm blue in the face, but people did not change. They didn't change their approaches. They are still consumed by what's in their bank account.

What I finally came to the realization is. If you're going to go by what's in your bank account, you've got to change the game so that you can have some clarity around your cash. And not to say, what's fascinating for me is even the bigger clients, a lot of people come to the assumption that Profit First is just for the small guys, but it's great for the big guys too. And I've got some great case studies on that.

But the idea is we are controlling our cash based on what's in a specific carved out bank account for that. And whether you've got no job cost records or perfect job cost records, it's never exactly real time, and you are still going to be influenced by what is in that bank account.

The idea is let's set up a system so that we can see that clarity. The traditional advice, as sound as it is for running long term, it's not practical in the day to day operations. 

[00:05:34] Stephen Brown: It's fundamental to success that it's almost hard for me to talk about. We've talked about it so much. It's so important, but Wade, I think your concept of how to move that mindset from the bank account mentality, to running your business based on analyzing your profit, tracking expenses in real time, whether you've paid an invoice or not, that money is allocated. And you know how much is left over. 

I remember once you told me an analogy, or maybe it was Mike Michalowicz, about how much extra you can get out of a tube of toothpaste. And you know, I'm, obsessed with it. I get every minute, little bit out of a tube of toothpaste and I might have 10 tubes sitting by as a backup, but it is absolutely amazing to me that if your mindset is to squeeze a little bit more toothpaste out, you can always do it. It's absolutely unbelievable to me how that works. 

[00:06:23] Wade Carpenter: But it's not all about, how tight can we cut our expenses? It's more about knowing exactly what we have to spend for contractor that I think is so powerful. And, the Profit First system, basically provides a way to hack the problem.

Let's leverage what we're doing, you know, as far as, contractors, this habit of managing by their bank account. If they're going to do that anyway, let's put some system around it. And yes, yes squeezing that tube of toothpaste, that is part of it, but it just becomes natural. 

I hate to get ahead of myself, but one of the major teachings is understanding cash flow out on your jobs. We all think we're bidding our jobs correctly, but then there's the overhead piece of it.

And most people do not understand their overhead factor that are putting on a job anyway, but even if they do, that overhead factor is typically approached from a profit and loss standpoint as opposed to a cash flow standpoint.

[00:07:11] Stephen Brown: It's real, Wade. Overhead's real. Get used to it. You can call it anything you want, but it's costs that are not directly associated with your job, but are associated with your business. And I can't tell you, in my business for surety bonding, how many contractors don't even recognize overhead. They just don't. Why not?

[00:07:29] Wade Carpenter: Well again, the overhead piece there's such a disconnect on what it really costs a firm. And one of the biggest lessons-- me and you have been in this business for a long time. We had a boom time in construction here in Atlanta for a long time.

But then the 2008 Great Recession, we've seen some other recessions, but the 2008 recession was some major hits, and a lot of contractors did not survive. The idea is if Mike McCalowicz had written this before then, and contractors had this mentality in place and the system in place to control their cash, would several of those still be around? That is one of my major motivations and things I have thought about time and time again. And the regret and reflection I have, it's like I often thought about, when contractors, the bottom fell out of it. And they were looking to me like, how can I manage this? How would I have known this was coming?

And now I can tell them I have a system. I can show you how you can see something, maybe the economy is starting to, decline or, you've got problems like COVID and supply chain issues. Because we're seeing either the cash flow starts getting tighter. 

Again, there's a lot of lessons, but any thoughts on that with the great recession and?

[00:08:34] Stephen Brown: Oh, sure. I remember when Profit First book came out with Mike Michalowicz and you and Rob introduced me to it, and I thought this is great, but logistically and specifically, how do you tie this into a construction company? And I really feel like you had to do it from your perspective as a construction accountant. Because here we are managing cash flow and absolutely building all our systems on profit to go backwards from that mindset.

That system had to be developed. And I'm just so glad you're helping develop that in a way that contractors can understand it, embrace it, and implement it. Because you have to start somewhere, right? 

[00:09:11] Wade Carpenter: Right. My personal experience as a CPA running my business, I'll be honest, most people assume that a CPA is making tons of money. And before implemented Profit First in my own business, it was always like, okay the employee's got to eat first, and, we've got to make sure everybody's paid, and I was always the last to eat. I didn't take a consistent paycheck, and, we struggled with our own bills, and the minute that I implemented Profit First, I have not missed a paycheck in seven years since I've been doing it. 

And that was a big wake up call for me, and it was actually motivational for me. And that's when I said well, contractors absolutely need this. this was a big turning point for me in my own business, but for contractors, it's even more critical because, again, going back to the Contractor Profit Paradox, more profit does not mean more cash in your bank. And that's one of the assumptions that people make that gets them in trouble.

[00:10:03] Stephen Brown: Explain that a little bit more. 

[00:10:05] Wade Carpenter: The paradox is basically you're at a point where in your business, maybe you're growing, but the cashflow is not. And there's several reasons for that. And, we take a little deeper dive on it. If you double your revenue, your receivables are going to double.

And you got like retainage, it compounds even-- so it's more money that you need to run the business, but it's sitting here tied up in your Work in Progress. It's sitting tied up in your retainage and you're growing receivables. 

Meanwhile, you've still got to continue paying your employees. You've got to continue paying your suppliers. And they grow themselves right out of business. So the paradox is that, hey, yeah, we may be more profitable, we may have more top line, but we're not taking any more home and we're actually digging a deeper hole. Do you ever see that? 

[00:10:44] Stephen Brown: I do and I can't help think to myself, Wade, exactly what will your book and your system do? What could a contractor envision, reading it, studying it and implementing the plan?

[00:10:56] Wade Carpenter: I think what it comes back to is it's a system that actually works for contractors. The original Profit First book was groundbreaking, but it was written for all audiences. And there are several things that are not explained very well. 

And then it came along the derivative book by Sean Van Dyke. And essentially, he taught a couple of things like markup versus margin that contractors need to know, but if you're talking about that standpoint, he didn't address it from cash flow standpoint.

As well as he didn't really go into, they talk about real revenue and the one step or two step approach to allocating funds, which trips people up all the time. 

So the book is all about let's create a hands on practical approach that is doable. It's written as a story, but the ends of the chapter give you specific exercises that are designed to be doable.

Even if you have zero books whatsoever, I give you a way to be able to come up with these starting factors. And I completely approached it, that we need to understand the job expenses, the cash out, as well as our overhead. And those are the two key foundations that leaves what I refer to as residual revenue, as opposed to real revenue.

[00:11:56] Stephen Brown: Do you have to have an MBA or a major in accounting to understand this system, Wade?

[00:12:01] Wade Carpenter: No, absolutely not. And that's exactly where I was going with this. We love to work with people, but, what I hope people are able to do, even if they're not working with me, is to be able to implement it themselves. And the confusion, I think, is why people don't implement it.

A lot of people try it, and they have their own spin on it, it never works because they don't really fully implement it properly. My desire is to see others succeed and give you the tools to do it. Just so contractors don't go through this unnecessary stress and making bad decisions that are preventable if you've got the right system in place. 

[00:12:33] Stephen Brown: That's huge. You could just say look, Wade, you just handle my taxes and whatever the bonding company wants. And Stephen, you just get my bonds. And keep insurance costs down. Wade, that's not where we're going here. One thing that we both have always done is we always just wanted to educate folks.

Sure, we'll do our jobs for you, but you need to understand how it works, and the better you understand how it works, the better we can do our jobs for you. And the better you can do your job for everyone else. It just takes a lot of stress out of your life, and we've seen that over and over again. 

[00:13:02] Wade Carpenter: If we've got time, maybe I can do a quick overview of some of the major teachings that are not really in the other books. 

Number one, I've already mentioned cash flow mastery through what I call job expenses or JobEx for short, as opposed to Mike Michalowicz's Materials and Subs. And there's some nuances to just Materials and Subs, but there's some other factors, such as bonds, things like that, that are cash out on your job, that contractors need to know.

Number two is OPEX, or Operating Expenses. That is your surrogate for overhead, and knowing factor gives you, what you need to cover in cash at the end of the day, so that, you actually do have some kind of solid basis for knowing how to bid. 

Just high level too, we're talking about developing profit. The assumption is profit is the same thing as cash in the bank. What we're trying to develop here is cash in bank, so that you can grow your healthy business and so that you can take some proper amount home. So it's a cash based profit focus. 

Just also going back to some of the things we've already said, it's more about proactive planning for things like seasonality, for growth in a construction company. That's that construction paradox where you're growing yourself out of business. As well as the economy expands and contracts and, working with contractors all over the country, I see, you know, one area of the country is doing well in construction and the other, the exact same thing, they might not be doing quite as well just because of the local market. 

There are some nuances to construction. The story is taught from a general contractor building a school and we're dealing with all the subs that go with that. And so I'm able to teach the story from different perspectives. 

So one of the big ones is say a heavy equipment guy that has a ton of money tied up in heavy yellow iron, the excavators, bulldozers, things like that. They've got a lot more concerns about equipment, and buying equipment and what the cash flow, as well as , they've got more thoughts about debt and getting out of debt.

We talk about job deposits, retainage, and those kinds of things that are not addressed in the other books, as well as how to deal with unexpected curveballs. Something comes out of the blue which shouldn't come out of the blue, but say a worker's comp audit comes up , or a major unexpected repair. How do we deal with those curveballs without it wrecking the system? 

We talk about other ways of adding accounts, to have a purpose. Maybe you want to buy a building. Maybe it's to deal with seasonality. None of the other books I've seen really go into a lot of this.

But to pull this together, the idea is let me give you immediate practical action steps to achieve that. And how do we deal with, say, we got an unexpected windfall. Because a lot of money can come in, and you could feel like you're on top of the world, and then that money goes out just as fast, and that world is then all of a sudden coming to an end. 

With that said, I feel like I've maybe hit some of the biggest parts of it. Any thoughts or questions on that?

[00:15:36] Stephen Brown: No, I have a better feel of the program and the book that's coming out. . I'm looking forward to it. I'm looking forward to not only reading it, but discussing it with my customers to see what they think about it. What are they concerned about? What is it that they want to get accomplished?

Because, you have to start somewhere. I kept seeing over and over again the importance of at least planning ahead, thinking of the things. I think if I'm going to buy versus rent or lease a piece of equipment and call my accountant and I ask a simple question.

Okay, first of all your CPA is going to be the perfect one to ask that question to. Not your insurance agent, your CPA. What if you don't have a good CPA? What if you get bad advice? How do you know the difference? There's all these moving parts in running a construction company. And, Wade, I love it, is that you've been involved with every part of it.

Thank you for that.

[00:16:23] Wade Carpenter: Well, I've got to comment on that too. The debt and knowing when to buy versus lease, there's a whole chapter developed on that as far as, some of the lessons from 2008. 

As well as, buy versus lease, and everybody thinks okay, my payment is lower, I'm going to own it, , you can go ask that CPA, most CPAs are going to say we're going to avoid taxes, let's just buy this thing and expense it up front to avoid the taxes. But then you've got the cash flow effects of it for years, because you've got to six or seven year note on that. Well, it creates this ticking time bomb. 

With that said, if anybody has any thoughts or feedback on what we're talking about here, also if you're interested still, right now, as this is coming out, we do still have some slots left open for the beta testers. It's profitfirstconstruction. com slash beta where you can sign up. We're looking at cross section of contractors to test out my approaches and hone this for the book. Again, it's coming out in May.

But other thoughts or feedback on what we said today, love to hear it. Or topics you'd love to see us talk about in the future. So just want to say thanks for listening. If you enjoyed this episode, please share and subscribe and follow us every week as we will post a new episode. We will look forward to seeing you on the next show.