Dispelling Profit Myths: A Contractor's Guide

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ℹ ABOUT THIS EPISODE

In this episode of The Contractor Success Forum, Wade and Stephen tackle the misconceptions surrounding the Profit First system in the construction industry. They discuss how this straightforward approach can streamline cash flow management and prevent financial troubles. 

The hosts address common objections, such as the system being too simplistic, and highlight how adopting it can lead to significant improvements in business financial health. Listen in to hear real-life examples, analogies, and expert insights that demonstrate why simple may indeed be better when it comes to managing construction finances.

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⌚️ In this episode:

• 00:35 Debunking the Myths of Profit First
• 02:04 Real-Life Feedback and CPA Skepticism
• 03:52 The Simplicity and Effectiveness of Profit First
• 07:44 Addressing Common Objections and Misconceptions
• 10:53 The Importance of Cash Flow Management
• 15:05 Real-World Success Stories and Practical Advice

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

Transcript

Wade Carpenter: Ever notice how the simplest solutions often get the most resistance? "That'll never work." That's the battle cry of contractors stuck in the same money problems year after year. Today we're busting the myths about Profit First in construction, proving this straightforward system works especially well for complex businesses like yours. Like installing proper drainage before building the foundation, getting your cash flow right prevents bigger problems down the road.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, is Profit First financial hocus pocus?

Stephen Brown: I don't know. At first I thought the name kind of sounded a little bit hokey because it could be like a get rich quick scheme and it's not a get rich quick scheme. It's a business system. I mean, it's common sense. It's, I think, relatively easy to understand. I think a little bit of study of it goes a long way. And just like anything that's [00:01:00] good, you can study it till the cows come home. We talked about it. I thought, okay, just the name itself makes it sound like it's a get rich quick or it's about someone who's greedy and selfish, needs this for the construction company, but realizing, Wade, that profit is the reason why you should be in business unless you're a nonprofit construction company, right? So, profit is why you should be in business. The reason you strive for profit, because it's a measuring post that allows you to do what you want to do, what you need to do.

So, however you look at it, profit is something that needs to be measured and so many contractors just don't think of putting that profit first. Paying themselves first out of their company. We've done so many podcasts on all the reasons why Profit First works. What are you hearing main complaints when people are giving you honest feedback about your book right now and what you've [00:02:00] done for them?

Wade Carpenter: Yeah, so actually this episode was born out of a friend of mine, CPA friend in St. Louis. His name's Tim Fitzgerald. I may send him this episode, but we were on a call together. He read my book. He actually introduced me to one of the books that inspired me to write in this business fable style.

It's called The Goal. It's an older book. But anyway, as a traditional CPA, he was basically saying, this is hocus pocus, you drank the Kool-Aid. All these people saying what you originally probably thought was some kind of get rich thing.

And it's not just drinking the Kool-Aid. I can't think of another industry that needs cash flow advice and some kind of simplistic system to be able to handle it than construction. Because cashflow is one of the biggest drivers of business failure in this industry. So that's where this episode was born and I think especially, [00:03:00] CPAs like me, first time I heard it, I thought that this is a bunch of crap. I want you to learn job costing and manage your business. And no matter what I said, they still were managing by what was happening in their bank account. And as much as I preached till I was blue in the face, they kept doing it. And so when you put parameters around that, if it's a natural way you're gonna handle your cash, then we just need to adapt the system.

So again, today is about maybe dispelling some of those myths and giving you my thoughts on drinking the Kool-Aid, I suppose, as he called it.

Stephen Brown: Okay let's go back to the Profit First business model system. It's too simplistic. it doesn't adapt to reality. Why in the world do all accounting business systems have to be so complicated and have so many moving parts? And to me, you can have someone else [00:04:00] tell you how to put together all your accounting system and your spreadsheets in your reports.

You can have that information driven by requests from other people, like the bonding company and the bank. Or you can say, I need these reports to make certain decisions. But either way, it seems to me that you're gonna find along your journey running the construction company that things change. They always change.

What do you say to people that are saying we're a large, sophisticated insurance company with everything in place that you're talking about and more?

Wade Carpenter: I know I've heard it all since I've been working with Profit First. It's more like, oh, is this kindergarten finance? Real businesses don't run themselves this way. And as a trained CPA, I felt the same way. But basically the simplicity is more of a feature.

Let me use an analogy here. This is one that was in the original Profit First, but I think it's relevant here. You know. The story of Rick Berry, who was [00:05:00] a basketball player in the seventies? 

Stephen Brown: I remember the name. I remember him. I don't remember the story behind him.

Wade Carpenter: He was famous for shooting free throws granny shot style. And for a long time, he had the highest percentage of free throws. Just a few people have, surpassed his percentage over time.

But he's proven that when you take the ball and control the spin as opposed to an overhand shot-- everybody thinks, okay, this. Is stupid. This is, silly. I'm not a granny, I'm a man and I can shoot a ball. But he's proven over and over again that the system is actually a lot more favorable, but everybody doesn't use it and they say it's too simplistic and I'll look silly.

Will Chamberlain was a high scorer, but he was famous for missing free throw shots. He had some hundred points scoring games, but there was one season that he was convinced to shoot his free throws [00:06:00] underhanded, and his percentage went way up from what it used to be.

Then he thought that everybody else said it was silly, so he didn't do it from there on, but, went down in history as one of the worst free throw shooting. But he proved that sometimes simple is better. And if it works, why do you fight it?

Stephen Brown: It is a true fundamental process of understanding, at all times, what you're in business to do and how you measure that. I don't know how many episodes we've talked about cash flow. Because it's everything to a contractor, especially the seasonal contractor that is always desperate off season to keep revenue coming in to pay bills. What do you want to talk about next, Wade?

Wade Carpenter: Some people are like, okay, we can just do this on spreadsheets or forecasts. A forecast is only as good as the assumptions you put in it. A lot of people, especially in construction, we do all these forecasts.

But they're related to [00:07:00] the finance portion of it. And even if we're trying to do some kind of cash flow forecast, it doesn't take into account what actually happens with cash flow. And what I mean by that, when you say run a break even calculation on your business , if you're using the accounting assumptions, one of the big lessons in my book is, thinking about your operating expenses, basically your overhead and what goes into that. The cash that's sitting on your profit and loss is not all your cash going out the door.

What I would say is part of that cash going out the door is covering your notes payable and those kind of things that don't hit your P&L. And essentially what a lot of the forecasts are based around, are we got the expenses to cover, but you're forgetting what the cash flow effect of that money coming in. So again, I hate to say it this way, but a lot of people do a lot of forecasting [00:08:00] and playing with spreadsheets and create a dashboard, whatever it is. But if it's not telling you how to run your business, I think that's fooling yourself. And some of them I would label maybe we should put a disclaimer on those dashboards that say, for entertainment purposes only, I don't know. 

Stephen Brown: You're right, yeah, just like a dashboard on a really expensive car that can do everything. It's only as good as where you're gonna steer the car right? Where are you going?

Wade Carpenter: Right. Maybe just some other thoughts here. I know you, you said it sounds greedy. I remember when we were talking about this recently, or it's some kind of gimmick. some kind of get rich, it's a fad, whatever you wanna call it.

Some kind of financial tricks, and I wanna remind everybody, this is probably what your grandmother did with putting her mortgage money in an envelope or the food money or the tithe money got stuck in the Bible, you know, she put her 10% aside and it made it until Sunday when they went to church.

It's basically a simple, repeatable system [00:09:00] with steps to keep you from being so reactive to money that the money comes in and goes out so quickly that you have no control over it. What we're trying to do is get you to a proactive state.

So if you understand the flow of it and you have, the money put aside to cover your job expenses, you're not gonna be borrowing from the next job to cover. The last job.

Stephen Brown: Yeah, that makes perfect sense. it seems to me Wade that people might get hung up on traditional accounting methods conflicting with this system, and I don't get that. I know you run into it a lot more than I would. But helping a contractor understand where they wanna go and putting the systems in place to do that, that's what construction accounting's all about. That's what any accounting is all about.

You were telling me about your friend who thought it was too simplistic. But then again, is your friend fighting this because they think this is [00:10:00] gonna keep them from having a job? Or are they fighting it because they think it's fundamentally unsound?

Wade Carpenter: I think it goes against everything we're taught as accountants. And if you look at the original Profit First book, there's tons of reviews out there, and the people that trash it are people like me, accountants that don't know how it works, or they don't treat the system right, they don't do the bookkeeping right?

And quite frankly, if you don't understand the system and you are relying on QuickBooks bank feeds, you can make a mess of things. But when you treat it right and you understand the system, you get clarity on your cash, and it's not really any harder than any other system it does not replace your accounting system.

It's plugged into your existing accounting system. I'm not telling you to trash your job cost system. You absolutely need that. You need these other financial measures, but you also need to have some [00:11:00] control over your cash, and that's what the system does.

I'm not telling you to throw everything out,. We're gonna look at job costs differently from the way we would do it for tax or accounting, doing an audit for bonding purposes or something like that. But, we're looking at it from the lens of what actually happens in our job costs. Getting clarity on what our overhead factor really is in cash.

And the final thing that I would say on that is the profitability. When you're looking at profit, we're solving for profit in cash to show up on your balance sheet. So that's a long way to get there. But again, I'm not advocating you throw out your accounting system, you absolutely need your accounting system. But this will put some guardrails around it.

Stephen Brown: It makes a lot of sense Wade and if I can just say as a construction accounting, CPA, such as yourself, having a lifetime of analyzing [00:12:00] reports and trying to figure out how contractors stand financially and help them with their problems. Because if I can't help them with their problems, I can't help them get bonding, and if I can't help them get bonding, then I don't get paid.

But also, as I get older in the business, I just hate seeing people make the same mistakes over and over again. And it just, it drives me crazy. And what I like so much about Profit First is that it literally is a basis point.

It's almost like saying if you want to go somewhere, you gotta figure out whether you're heading North, Southeast, or West, and you need compass first. You are gonna start your construction company or you're already operating one. No matter where you are in this book, you use so many examples of folks that have been in business for many years, and that's not how you measure success.

First of all, it's great that you're able to keep your company going for many years, [00:13:00] but your way to measure success is for you to measure it. So you may have been in business many years, but you're not measuring the definition of what success is for you, for your company, for your employees, for your clients.

This is a good way to think about this. Because first of all, I think it allows you to more professionally manage your company. Just because it sounds simple and you can understand it. I think that's a misnomer I would argue with anyone that says that.

Wade Carpenter: To your point, I actually just had this week a conversation with a contractor. They've been around for 20 years. But the owner is in a place of, I can't stop because, my whole world's gonna come crashing down. She built up a pretty big, sizable debt and she's trying to work through it, and we're making small steps right now.

She put aside one or 2% for [00:14:00] tax and profit and she ended up short, but otherwise she would've jumped into one of these pay by the week loans that costs so much money and basically send her spiraling.

We're slowly building out of it, and it doesn't happen overnight. But there's so many people that say construction is so unpredictable, the cash flow is unpredictable. And if I don't have the profit, how can I allocate what I don't have?

Number one, I think the system helps put those guardrails around it. It says, okay, this is what we've allocated for our overhead. You don't have enough money in that account, that's kind of telling you maybe your overhead's a little bit too high.

If you're putting money aside for your job expenses and you're consistently going over it, then maybe you're not bidding right?

Or maybe you're mix of jobs have changed, or maybe, you're losing it in the field, or the jobs are stretching on and things are gonna happen in construction. It's unpredictable, but. A lot of people don't realize that they start [00:15:00] growing and they start chasing cash flow, and they start dropping that margin, thinking they're gonna make it up on the volume.

I keep calling it guardrails, you know, these are the bumpers in the bowling alley for the little kid so the bowling ball doesn't go in the gutter. 

Stephen Brown: Yeah. Now that's a good analogy. I think one thing people get confused about, the simplicity of the idea, is that there's no power in doing something small. You don't understand. I'm big time, I'm doing millions of dollars a year in sales, and I am dying here. I gotta make up for it. I gotta work harder. I gotta work faster.

And the smallest things are everything. For example, you couldn't be a construction attorney unless you really paid attention to details. That's how you get paid. You pay attention to details. That's what you do for a living.

And as a contractor, that's what you do for a living. And I'm not talking about details, but I'm talking about the small [00:16:00] things. I'm talking about debt that's just blowing your mind and how to deal with it. And then it's the most basic, take a deep breath. Let's start. Let's start doing it in the right way.

Taking your smallest debt, paying it off, paying off the higher debt. that's a methodology. We've talked about Dave Ramsey and popularizing that, but that's the simplicity that makes sense. You gotta start somewhere and you can't think that you or your problems are too big that you can't work through them.

Wade Carpenter: When you mentioned that, I was thinking of another conversation I was having with somebody last week. They're doing about 8 or 9 million a year and they have nothing saved to their name they're approaching retirement. And I'm like, okay, 1% of eight or $9 million that's 80, $90,000.

So would, you really miss 1 or 2% if you started carving it out? This particular contractor likes to buy things and likes [00:17:00] to spend lavishly, but he's gonna go into retirement, if he can't work or whatever, he's gonna lose his house. He has nothing, he can't live off the social security that he's, generated at the lifestyle he is at.

So, again, I realize construction can be unpredictable, but if you can't learn to run your business profitably, should you go work for somebody else? And I don't mean that in a bad way because construction can be very lucrative, but you have to stop being the bank for your owner, your GC, or whoever you're working for.

Stephen Brown: Yeah, that's an absolute fact. And also the book, I think it's a gracious book, and I read it and I read some of the situations they're going in and I wince from the pain that I feel. But I can tell you the book does have a happy ending. I'm convinced the system works.

I think no matter how dark it is outside, there's light somewhere. And [00:18:00] I feel like this book is Light even if you decide not to implement Profit First and you read it, you'll get something out of it because again I want our listeners to know that this book you've written is a calling.

It's not a get rich quick scheme for you. And that's one thing I appreciate about it so much, Wade. it's more than that, and I hope people can embrace it that way. Because you can be critical of anything that you don't try.

 Or you can consider yourself an expert, and when someone comes against the grain with a good idea. Like your free throw analogy. I'm gonna fight it because that's what I do. I'm the expert. This might be a threat to me or what I teach or do. And I don't see that in any way, shape or form, and I can't wait for us to start getting feedback from our listeners so we can talk some more about this.

Wade Carpenter: I know there's [00:19:00] a lot of other objections: my banker's gonna think I'm crazy. They're gonna think I'm nuts when I go in there and ask for five or six accounts. 

Stephen Brown: First of all, it's not true. And since when do you care? How much does your banker care about you? He is your best friend when you've got lots of collateral and there's absolutely no risk to lending you money that you need. But you turn it back on the other hand, they're a good source of information and I think you explain to your banker and they don't understand it then you need to change bankers.

It makes a lot of sense. I can't think of any banker that would have a problem with it. I'm sorry it was your job to debunk that, but I think that's kind of a crazy thought.

Wade Carpenter: I tend to agree with you. I've heard that from people and then I've had people take the book with them to the bank and say, this is what I'm trying to do . I've also had people say, okay, well the CSR, you just got me a bonus for opening all these accounts. But from your banker, you're trying to [00:20:00] get a line of credit.

I mean, one thing in particular, if you're putting money aside for your tax, that's saying to your banker, hey, yeah, we're thinking about this. That's just one way of doing that. And the more you can keep in there building some equity, that's what it's all about.

Stephen Brown: And if you can read the book first and think about it, you can explain it to your banker and anyone else. To me, that's just it. You buy into something and you go over it with one of your professional advisors and they're against it, then they gotta give you good reasons.

And I know that we wanna hear about it. But what are those reasons? And I think this is a great topic for a podcast, debunking these reasons. What other things do you think come up, Wade? 

Wade Carpenter: I know I've heard the criticism about, okay, Profit First says you're supposed to take all your profit at the end of the quarter. It doesn't say that. It says we're gonna make a decision about what to do with profit. And [00:21:00] so, it's like, okay, well we're gonna just draw the earnings out when we need to grow.

That's not the point. You know, If you're deep in debt, you do need some profit to pay off that debt. If you never thought about that, hey, maybe give that a little bit of thought next time you're December 27th and buying that F250 just to get a tax deduction.

But what I do find in the ones that are actually in growth mode. They are starting to understand, I need this cash to be able to grow to this next level. My revenue doubles, my receivables are gonna double. I'm gonna have more working capital out there. And whether you say, my banker, my bonding company is not gonna understand this, the ones I've talked to love the fact that you're building some retained earnings and some liquidity in your business. Again, we're trying to build profit in cash.

Another issue I see is, we get this cash in there, but then I'm going to reinvest it in that truck. And if we're constantly reinvesting and we're not taking anything home, I mean, [00:22:00] just using that example I just gave you, you bought that truck on December 27th by, September 5th you've got 80,000 miles on it. How is that investment looking to you?

I think that depreciation on that truck is probably far worse than you having that money in, even in a simple savings account . 

Stephen Brown: Mm-hmm.

No, it's a good point. You still gotta get around in a truck, but how are you gonna do it in the future? And how are you gonna be a good steward of the money that's allocated to you to run your construction company? I totally get that.

From a bonding company standpoint, if I had a contractor that had this system in place and could show it was working, all the reports and everything, a bond underwriter needs to know are there. But here's the main thing. You are not one of those customers, the bond underwriter's saying I'll approve this bond, but things are heading in the wrong direction. And if they don't stop, I'm cutting it off.

See, that's one thing they generally [00:23:00] don't say to the contractor or the agent. The writing's on the wall. You're gonna have a problem. We see it and we don't wanna be a part of that problem.

So this is something that's gonna be, I think, greatly embraced by the surety industry. And their job is to measure whether you're gonna be able to finish a job or you're gonna have trouble with the job. And they wanna latch themselves to contractors that know what they're doing and get the jobs finished. And then you'd be absolutely amazed what they can do for you, what they're able to do to help you in different situations. Everything from networking to legal advice, to all sorts of scenarios. Your bonding company can be one of your best assets.

Wade Carpenter: Absolutely. I had a whole list of things I don't think we got to, but any burning questions that we didn't hit today before we wrap up? 

Stephen Brown: I don't think so. I think we should do this again with specific questions or concerns that people have either approached you [00:24:00] about, or they're telling us when they're reading the book or when they first start implementing the book. I think this is gonna be a process, Wade.

Wade Carpenter: Again, over, six or seven years of teaching this to contractors, A lot of these I've already heard in different forms, and they may say it in different ways. To those out there saying that it doesn't work well, have you tried it? And again, my first impression of this was, this is crap too.

And I read the first version of it and I've seen contractors stick money aside. And, the next thing they know they just, go, I got an extra $5,000. I'm gonna put it in a savings account. That's not the same thing.

So, I guess what I would say is, if you're listening to this, give it a shot. It does work. I can show you on countless contractors that we've worked with, that it does work. So Stephen, I appreciate you exploring this with us

Stephen Brown: Yeah, I mean the book's $20 on Amazon. I've ordered it and had it sent directly to some customers [00:25:00] of mine that I've been talking to about. You know what's it cost to explore Profit First and consider whether it might be what you need to do for your construction company? 20 bucks.

I think your book does a great job of explaining everything. It's no bait and switch It's the system. It's not something designed to draw you in to something that makes you more money.

I hope folks give it a shot that are having these problems. Because I know that it's a solution that'll work for them.

Wade Carpenter: I appreciate you saying all that and I did write the book so that you can implement it without getting somebody with an MBA to build this kind of stuff. That's one of the problems I saw in the original Profit First: it's not real straightforward for the contractor.

And this 17 step instant assessment can be very confusing. So we have built a community around that that's growing now with profitfirstconstruction.com, or we're also spinning up [00:26:00] some group coaching around this so that we can do it a little cheaper. But I do believe in the system. I've implemented it in my own business and it's been a game changer for me as well.

I appreciate you exploring this with me today. If you have any questions or comments, drop them in the comments below. We always appreciate any thoughts, good or bad, we'd love to hear it. We do this every single week and. We appreciate you listening.

This has been The Contractor Success Forum. Please like share, subscribe always helps us out. But we appreciate you listening and we'll see you on the next show.