The Cash Flow MRI: Diagnose & Cure Your Contractor Cash Problems

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ℹ ABOUT THIS EPISODE

Tired of big payments coming in only to worry about payroll two weeks later? Wade reveals his revolutionary Cash Flow MRI, a comprehensive diagnostic tool that uncovers hidden cash drains traditional accounting misses. 

Learn why your profitable P&L might be masking serious cash flow problems and discover the real breakeven numbers you need to bid profitably. Includes debt analysis, sustainable growth calculations, and a complete system for contractor financial health.

⌚️ Key moments in this episode:

• 00:00 Cash Flow Wakeup Call
• 00:32 Meet the Hosts
• 01:02 The MRI Story
• 02:59 X Ray vs MRI Money
• 04:07 Why Profit Isnt Cash
• 05:30 Inside the MRI Tool
• 07:43 Cash Reality Bridge
• 08:16 Break Even Reframed
• 09:46 Cash Conversion Cycle
• 10:50 Data Quality Matters
• 12:05 Debt and Bidding Fixes
• 13:46 Growth and Cash Gaps
• 15:35 Profit First Setup Plan
• 17:45 Owner Pay and Seasonality
• 18:51 Report and Coaching Offer
• 21:34 Wrap Up and Next Steps

The Contractor Profit Blueprint is a complete guide that breaks down exactly how to identify where your money's going and start keeping more of it. This isn't theory. It's the same framework I use with contractors I work with every single day.

Head to profitfirstconstruction.com/blueprint to download your free copy. 

Stop working for free. Let's get you keeping what you've earned.

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Find all episodes and related links at ContractorSuccessForum.com.

Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs
   
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] I wanna ask you something and I want you to be honest with yourself when you answer it. How many of you have had a week, maybe last month, maybe last year, where a big payment came in, your bank account looked great, and then within two weeks, you are right back worrying about payroll again?

If you're nodding your head right now, this episode is for you. Because what I'm going to do today is take you through something I call the Cash Flow MRI. And it is the most honest look at where a contractor's money actually goes that I've ever built.

Stick around. You're gonna wanna see this.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter & Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance.

And Stephen, I know I didn't give you a lot of context on this one, but what does a Contractor Cash Flow MRI sound like to you? 

Stephen Brown: It sounds like an advanced diagnostic machine from the hospital. Something that can look deep inside a human body and see things that you can't see with your own [00:01:00] eyes. Am I getting close, Wade? 

Wade Carpenter: Well, I wanna put it a little perspective, so if it's okay, let me tell you a little story and then maybe try to bring all this together. 

Stephen Brown: All right. 

Wade Carpenter: Alright. So young man I knew, he was in a minor fender bender one night. Nothing major, just got rear-ended, police came, exchanged information. He went home thinking he was just a little shaken up. He was tired. He was a little dazed, so he figured like, hey, I'll just sleep this off.

A few hours later he wakes up and something is just really not feeling, you know, it's feeling off. He's not walking quite right. He checks himself in the mirror, no bruises, nothing obvious. He takes a couple of aspirin and goes back to bed.

Morning comes and it's actually worse. He checks everything he can, temperature, blood pressure himself, all pretty much normal. And he still knows something isn't quite right.

So he calls into work, heads to this urgent care. They look him over no visible injuries. They even run [00:02:00] x-rays on him. Chest, legs, everything is coming back clean. And at this point they're thinking, this guy's either a hypochondriac or he's trying to milk something for insurance, which I'm sure you can relate to. But they give him some pain meds, send him home, and an hour later he's not quite right.

Pain meds aren't helping. So he goes to the ER. Same routine; vitals, basic checks, all normal. And after sitting there for several hours, they finally decide to run an MRI, and that's when they find it. He had a concussion, internal bleeding, and something the X-rays never would've caught.

They rushed him into surgery and thankfully he's okay, but let me stop the story right there. As an insurance agent, I'm sure you hear stories like that. I don't know if you can figure out where I'm going with this, but what are your thoughts here?

Stephen Brown: I don't know. I thought you were gonna say they found from the MRI machine that he had a cashflow problem, but no. Keep going. I'm interested in hearing where you're going with this. 

Wade Carpenter: That [00:03:00] story really stuck with me, because what he wasn't doing wasn't wrong. He checked all the right things. He was actually a healthy guy. He ate right and did all the right things. The problem was he was looking at the surface. And all these other people were just looking at the surface.

I see the exact same thing with these contractors all the time that you're bidding your jobs, watching your numbers, even if you're looking at your P&L and you got the greatest books, maybe your CPA tells you're profitable.

The question nobody's asking is: are you actually making money or are you bleeding cash and just don't see it yet?

Because traditional accounting, and again, that's my profession, and it tells you a lot. It's like an X-ray, but it'll tell you if something is obviously broken, but it won't show you the concussion. It won't show you this internal bleeding.

This is where I want to go with this Cash Flow MRI, because I want to show a tool that I've built that I'm really proud of. It's a culmination of a lot of these things that I've been putting together. I think [00:04:00] this might resonate with a lot of people that maybe you need to look at things at a different angle.

Stephen Brown: This is fantastic. Let's go!

Wade Carpenter: Well, I guess if everybody's still with me, this is my tool. And just to put this in more perspective, when I read the original Profit First by Mike Michalowicz, it resonated with me because contractors, we talk about it all this time on this podcast, we need some kind of measure and way of keeping up with things.

And I preach till I'm blue in the face that you need great accrual books, and you do. You need to know if you're winning. And that's what GAAP Financial Statements tell you is, are you profitable? But that profit doesn't always translate into cash.

I love the Instant Assessment, but that really doesn't work with a contractor because, when I was writing my book, I was like, okay, these are the steps, that-- 17 steps. And whether it's a contractor or a retail shop or whatever you are, a lot of people get stuck in all those 17 steps. They don't finish it, but there's also a [00:05:00] lot of nuances that are not in those 17 steps for contractors.

Number one, looking at your P&L and are our gross margins healthy and those kind of things? That's one level of it from traditional accounting.

This cashflow lens from the regular Profit First, it's more like, okay, we got the x-rays, but it's still not showing the internal bleeding that we're having. The concussion doesn't show up.

A lot of these things are happening to contractors every single day, they don't realize why it's happening. Does this resonate?

Stephen Brown: Yeah. 

Wade Carpenter: So if it's okay, let me jump into this tool because again, just a little perspective, I'm doing more and more with the book coming out, and I've finally decided that I'm going to do some group coaching on this kind of stuff.

I've got all these different calculators I've built in Excel and things like that that when I walk through these with client, I've built a tool where I can import the QuickBooks, and we go through your P&L and your balance sheet and your debt, actually, is one of the biggest drivers of some of this stuff with your cash flow.

And [00:06:00] so, what we're trying to get to is a reality check at what it's actually costing you.

The things that come out of the balance sheet and not just the P&L, as I say in the book, you can look at five year history and we've been draining our cash, buying a truck every year, never paying taxes, but over a five year period, some things are gonna start to pop out.

Same thing with the balance sheet. You can, see are they in growth mode? Are the receivables going up? The working capital-- I know you look at that balance sheet probably more than the P&L. 

Stephen Brown: Sure. 

Wade Carpenter: We go through the whole cash conversion cycle. Is our money tied up in receivables? Are we paying our payables faster than we're collecting our receivables? What's happening? The WIP schedule, that's another huge component that a lot of contractors are not seeing what happens to your cash flow, and that's part of what's draining your cash flow. It's sort of like a hidden thing, but that's not the point of today. Let's look at this from a different lens. 

Stephen Brown: Okay. 

Wade Carpenter: You've heard me talk about the [00:07:00] difference between traditional accounting. So back to the steps where I'm ingesting the P&L and the balance sheet.

Remember, in my book, I look at what job costs are differently. I look at what overhead really is differently. You know and I am breaking it down more from a lens of what is your cash break even point? And I'll get into more of that later, but what's driving that? We do sort of break out some of the labor and some of the components of it, but where is your cash going and how much is the owner taking home? How much is profit showing up?

When we look at this over time, and this particular one, their overhead, again, I'm not trying to get ahead of myself, but something I talk about all the time, overhead was growing at a faster rate than the revenue. And so start looking at this cash reality bridge.

This is an oversimplification of what we're doing, but your accounting profit showed $135,000. This was a little healthier contractor. By the time you add back your depreciation, that wasn't really cash out. But the money that [00:08:00] went out for the debt payments, they only made less than half of what they thought they were. A lot of times this number is negative.

We talk about it where the CPA like, okay, you got a bunch of money to pay taxes on, but the money went out because we're paying all these debt principle payments. Right?

Part of where I wanted to go with this was what is your break even point for traditional accounting? The way GAAP says we're supposed to look at it, the way you typically would look at :a contractor for bonding. We have a certain Cost of Goods Sold and we have an overhead.

And you see the way I look at that. When I say job expenses or JobEx, in my book it's actually lower. So your real revenue rate is actually higher as a percentage. Your gross margin in this case was 15.75%. Your real revenue rate is 18.1%. This is an example.

Then we look at the traditional accounting the way we look at that. What is your overhead? To come to that $135,000 we showed a minute ago, versus your operating expenses. Remember, we backed down [00:09:00] our depreciation from that number, right?

But we also had to add in this debt service. What does it really take to break even? This is the traditional calculation. What is your overhead number, dollars per year, divided by your gross margin? That's your breakeven point. Anything beyond that is profit.

I did another true breakeven because there's profitability or the owner took some money.

So when we back that out, before the owner makes anything from the traditional standpoint, that's 6.7 million. But as you see, for the owner to take something home, instead of 7.2 million, it is almost a million dollars higher for cash breakeven. Same thing with the owner breakeven.

You following this?

Stephen Brown: I am. 

Wade Carpenter: This is the reality check part of it because this is what I was talking about before. We're starting to look at the numbers.

The Days Sales Outstanding is basically, how long is it taking for your customers whoever they are, the owners, general contractors to pay you on average?

There's some benchmarks, but in this case, I wouldn't [00:10:00] pay attention to the benchmarks. I'd pay attention, like okay, collecting our receivables in 34 days.

In this case, this one actually had inventory. This was a roofing Contractor that actually had a bunch of money tied up in inventory. How fast you're paying your payables. But they couldn't understand why it was taking longer and longer, while their top line was going up, but the cash inversion cycle is basically receivables, days sales outstanding plus or days inventory or days WIP outstanding minus your payables.

Essentially it is 20 days to collect that stuff. You see, it was relatively stable, but then he had one year when it dropped, and I know this was adapted. What is the trend in liquidity? What happened on your balance sheet? Those kind of things.

I don't wanna dive into the scenario so much more than talk about how do we fix this? So, have you got any thoughts on this, what we've talked about so far?

Stephen Brown: I love the understanding of the Real Revenue and the factors in traditional accounting that need to be [00:11:00] taken into account to figure out what that is. I love the analysis over years. In the surety industry, we compare years as much financial information as we have just to look at the ratios and see how they're trending.

But in this situation we've shown before on your calculators what a day or two of not getting paid affects your bottom line.

I love it that you've got everything right here for a complete diagnosis of the information. My first reaction was that information that you're analyzing has to be correct, and so many times it's not.

You were talking about the WIP in the system, Work in Progress. That all depends on how accurately your field is getting your information and data inputted and if it's done accurately.

Please go ahead. 

Wade Carpenter: That's a great point and we may do some other episodes on that. This is sort of like the reality check, and so where the true aha moments, I think. [00:12:00] And I'm just gonna run through some of the tools that I've got in here.

This is really what I'm trying to get at.

If a lot of our cashflow is going out from our debt, how do we make a plan to do that? And I won't get into this, Dave Ramsey made The Debt Snowball, he was famous for that. He didn't come up with it. There's a couple of other ones like the avalanche, paying the highest balance off versus the snowballs, versus making your minimum payments.

I've got a calculator in here. We can do some custom things with it, but making a plan to knock that debt down is one of the things. We already talked about some of the break even, but I look at it a little differently here. What I walk through is what do you traditionally bid at?

I'll do 10 and 10 on the overhead and profit, or whatever. I make 30% margin. We talked through this and what you're bidding at. Then we start looking at the traditional accounting reality check, you've actually been coming in at 15.8%.

Your overhead was actually lower in this particular case, but how many jobs does it take to actually [00:13:00] turn that? That's not really the realization here. We look at it from a cash standpoint, as we said before, the margin's higher, but your overhead is much higher than you originally were thinking at 15%. If you kept the average job size the same, you need to do 166 jobs versus 129.

That's just a different way of looking at it but what I'm trying to get out of these contractors is, and I'll be honest, so many of these contractors are bidding with the wrong numbers.

Number one, the P&L whatever is one thing, if you take it to the next level, the idea is profit in cash. We don't need to have the discussion of, I'll never get another job, because we've talked about that kind of stuff and the pricing. This is just one tool in here that I want to talk about.

This is a different one where we can take a sample bid and we can do scenarios, like what if we were going to raise our revenue and how do we do it?

I may have talked about this years ago, but the Sustainable Growth [00:14:00] Rate. There is really a mathematical formula to how fast a contractor can grow. because if you are going to outgrow your cash it either has to come from operations or it is gonna have to come outta somebody's pocket or debt or whatever.

And so I built a Sustainable Growth Rate Calculator and I won't dive too deep into that. There's a lot of realizations that come from this whole thing.

I know I'm the bad guy when I say this, when you keep buying those trucks, you keep-- that's why I'd rather my contractors build long-term wealth and then you can go enjoy it.

Stephen Brown: No. Here we are talking about bad boring things like don't get your truck. To be honest, Wade, let's start bidding this work without any overhead factor in it, because we're gonna get more jobs. Okay. And that's fun. That's good stuff. We don't wanna be doom and gloom here on our podcast.

We got into this podcast because we were seeing contractors go under and it was driving us crazy. They were doing the same things over and over again. And we [00:15:00] didn't want you, our listeners to go through this. Sometimes it seems a little doom and gloomy, but look I'm embracing what's exciting about this calculator, Wade. 

Wade Carpenter: Well, it's a comprehensive thing that I've never really built together, but all the numbers carry through. We've done some other ones, this is more like modeling. If we're going to raise the revenue and the profitability, how do we do it?

Where is the cash gap and where is it sitting? Is it really sitting in our WIP that we don't realize how getting our bids out a little faster, chasing those receivables?

I've got a whole thing of tools that I haven't even walked through. The Target Allocation Percentages, getting started with these and how the tables work with contractors, the way I see it, because traditional Profit First says, okay, let's just take every job and then we'll figure every job profitability, stick in their job costs, then we work with what's left over. That doesn't work. It just doesn't, I'm [00:16:00] sorry. I've had a lot of discussions with people. But if you don't understand how that works and you don't see it from a top level or you don't segment your jobs, it's just almost next to impossible to do a profitability on every single job.

Some of the tools that I've got in here like how are we gonna set this up? We talk about some of these things like do you need a separate payroll account? Do we need a drip account to cover seasonality? Those kind of things. We create a whole rollout plan. Sometimes it'll take six quarters or whatever to get you where you want to go, but as we say, how do we end up getting you there? 

Stephen Brown: The rollout plan you're defining is the situation where you have funded the categories the way they need to be done, and you're looking how that all rolls out from a healthy standpoint? We have enough now for our needs? Explain the rollout plan. 

Wade Carpenter: When we start Profit First, you can't say I'm not profitable today, I don't have any cash. Well, the target percentages say I'm supposed to have 10% [00:17:00] profit. You can't just flip a switch. And say we're gonna change all these things and magically our overhead's gonna disappear and fall in line overnight. We have to do it over time and we have to make steps to get there. 

Stephen Brown: Okay. 

Wade Carpenter: I think that's where a lot of contractors-- okay, well we read the original book. We tried it, it didn't work for us. It's not a magic pill. I don't know of any magic pills out there.

You've got to work into it. I did talk about that in my book. When you start making some progress, it's like that flywheel, once that starts rolling, it gets easier and easier to build on that success. Right? 

Stephen Brown: Right. 

Wade Carpenter: There's a whole system to how we're paying bills and controlling the cash and the workflow of the cash. There's some other things I've got in here like if the owner wants to make sure that we cover some goals, whether they're covering college savings or make sure their kid can go to school, they can retire comfortably, We can target that [00:18:00] income.

I've got another one where we walk through what the owner really is making, because a lot of times they don't think, okay, well I'm paying for my own truck. I'm paying for my cell phone bill. I'm not naive. Their CPA is like, okay, well that's all deductible, but that's not the point of this. The point is, what are you taking home and what do you need to take home?

Some other things, if you need to set up like an equipment drip, if you need to--

I love this part of it too. If you start looking at seasonality, and this is where we get our butts kicked sometimes. We're hitting these slower winter months, or all of a sudden we get nailed with this worker's comp premium or an audit or whatever, if we put that money aside.

Job deposits is another thing. Tracking that, not getting beyond the cash and spending the cash for last job with this job you haven't even started yet. That's a problem.

So what I end up coming with is I can create a whole report from this. And it's a comprehensive report, and the ones I've tried it on so [00:19:00] far, we can't really usually get through all of this in one sitting.

What I really want to do is get people started with this. I want contractors to be successful and you know, when you can apply the system, I know it works.

And so this is why I have made the decision, I'm gonna go ahead and start doing group consulting with this. And we're gonna do it in different cohorts, but for the first one, we're offering for $2,500, you can go through this MRI as well as the eight week course where I teach you the profitability. Not to mention how you get access to the community with the 200 calculators we talked about last time.

$2,500, and it may not be this cheap again, but you know, this is where I think I can make some impact on the profession, I hope.

Stephen Brown: Well, I mean, the first thing pops into my head is just the amount of education that needs to come into understanding all the concepts, and also you explaining what all the [00:20:00] calculators mean and how they affect your bottom line and the goals that you want to achieve with your company and for yourself personally. What a powerful tool this is.

You think about going to a gym and you know, you need to get in shape and you need to work out, and then you go in and then they just start throwing you on the machines and next thing you know, you're too sore to go back again. And it's over.

What I like about your system and the way you teach, Wade, is that it is gradual. You can take it you can. Kinda learning at your own pace, but at the same time you've always been great explaining all these concepts to me. This is gonna be fabulous. I love the Cashflow MRI. It's great.

Wonderful, Wade. Thank you.

Wade Carpenter: After 35 plus years of doing this with contractors, tax returns and audits, people don't appreciate that. At this point in my life, it's a lot more rewarding to be able to see we made an impact [00:21:00] on these people. We turned these people's lives around.

I had one actually tell me that the other day, and that just, that meant so much to me. I don't personally have the bandwidth to do all the CFO, people that reach out to me, unless I build the team into it and I have numbers I can rely on, we can't do that. But I feel like I can do that with this.

So I'm doing the first 10 people in this cohort at $2,500. And then, you know, I don't know if we're gonna offer that again. So if you're listening to this we'll put some information. You can go to ProfitFirstConstruction.com and find out more information.

With all that said, I appreciate you indulging me with this. A lot of these tools I've built over the years, and I've got, you know, Excel spreadsheets. It's like, okay, let me put it all together. It makes my life a little easier, and I can visually show people where they're bleeding. So that's why I called it the MRI.

Stephen Brown: Yeah. And also they can use these tools to make so many decisions, thousands of [00:22:00] decisions that you make maybe from the seat of your pants and experience versus just backing it up and seeing truly how things are affected by the decisions that you make.

I can't imagine the incredible feeling of power and comfort of having a good system like this in place, and understanding it.

So, thank you, Wade. I'm like you. As both of us get older. We want our listeners to work smarter, not harder, and to have more peace and joy in their business. 

Wade Carpenter: Okay. Well, I appreciate you letting me go through my tool because I'm proud of it. But anyway, if nothing else for our listeners I hope you got something out of this, even if you don't reach out. There are different ways of looking at things that are not on your traditional P&L, and you know, you just have to look at it from a different lens. The X-rays didn't tell the internal bleeding.

If you got some thoughts, comments about [00:23:00] what I've went over today, I'd love to hear them in the comments below. If you like this, share it. Subscribe if you haven't already. We do this every single week and we will see you on the next show.