598: 3 Techniques To Improve Profits and Margins For Contractors

Every day you are waking up and chaos seems to reign. Material delays. Pricing volatility. Subcontractors and vendors not pulling their weight. The labor pool seems to be vanishing, and recession is on our doorstep. Those aren’t the greatest challenges though. We know what the greatest challenge is. All of these elements are leading you to question whether or not you are even in the right business because as much as you try to be present at your daughters softball game, or your son's soccer match, or simply focusing around the dinner table…you aren’t present because the chaos is consuming you. You wonder, “how can I keep going if all I am doing is robbing Peter to pay Paul?” “How can I have plenty of work, but not plenty of cash?” “Why do those other contractors seem like they’re crushing it while I’m wasting away, just trying to keep up.” Some of you, like TJ, have asked, “what happens to my business if something happens to me?” The professional chaos is taking a toll on your personal life.   That stops today. Most business owners are convinced they are not generating enough revenue. In reality, that is usually not true…the cause of their cause stems not from the volume of revenue generated, but instead from the amount of that revenue that is retained and kept…the proverbial back door of profit is WIDE OPEN! Most career contractors do not have a revenue problem, although growth in revenue can be valuable. Most career contractors have a numbers problem…in other words, you don’t know your numbers day to day so your expenses creep up and up while revenue fluctuates up and down…and profit drips out. We live from big receivable to big receivable, living life like a real life roller coaster complete all the while feeling sick and green. There are at least 3 techniques you can deploy to improve profits and margins. The first technique to controlling your costs and knowing your numbers is to subdivide your bank accounts. When we first met Steve, he was running an $7mm custom homebuilding company in a prestigious market in California. The first week of 2020, he had $64,889.85…$65k to run $7mm worth of projects during a year where his local municipality would eventually shut down construction for 6 weeks due to COVID protocol. That same year, his volume contracted from $8mm to $7mm. In other words, he would LOSE revenue in 2020, would LOSE six weeks worth of billing in 2020, and to make matters worse, of the $65k he had in his accounts…he only really had access to $32,720.14…the rest of it was already scheduled to be spent on subs, materials, and other payables. Steve was going into an already uphill year of 2020 armed with a water pistol and a kit kat bar for nourishment. Needless to say, Steve was freaked. But one thing Steve now knew, that many of you don’t, and it’s leading to the chaos you feel. Steve KNEW how much he had available to pay his taxes, to pay his subs, to pay his team, and to pay himself. Most of you are looking at the money…and you are missing the true story…STEVE KNEW because Steve had a system. Steve made one decision, and this decision is spelled out beautifully in Mike Michalowicz’s important book Profit First For Contractors. In short, when a dollar comes into your business, immediately subdivide it so you know exactly where that dollar has to go…starting with yourself. There are four barriers you must overcome before you make this shift, and yet the shift will be SO worth it. The barriers are… Your own mindset Your bank who wants to charge you for multiple accounts  Your bookkeeper who is scrunching their nose saying, “this is too many transactions!!” Your CPA who is constantly lecturing you as to you how you can just do this and track it on a spreadsheet Ok…let’s for a moment suspend our disbelief, and instead embrace the idea of subdividing bank accounts. Remember, not knowing your numbers is causing frustration and distance with those you love…so let’s do something different. The second technique to controlling your costs and knowing your numbers is to create a simple dashboard that tracks your cash each week. Steve said, “but my online bank statement tells me how much money I have in each account, and Quickbooks tells me how much I’m owed.” Yes, technically you are correct Steve…BUT… In order to understand your profit and your margins we need a means of tracking those numbers looooooong term. It’s nice to know your cash, or receivables, or payables, or Cost Of Goods on any given week…but it’s even BETTER to know those each week over months and years where you can watch trends. We feel the same about the weather, that is why forecasters constantly tell us where today’s weather compares with weather from the previous week, month, year, decade, and century…it gives context and helps us make decisions. The Level Two Dashboard is a tool we have built and installed in hundreds of businesses around the world from Architects to Remodelers, to Plumbers, to Lawyers. The truth is, a dollar is not a dollar…that dollar must be artificially subdivided so we know which part of that dollar is ours and which is not. Steve trains Mindy on how to take 5 minutes each week and update the Level Two Dashboard, and each week the entire team knows… How much cash is available, to the penny, for profit, owner’s compensation, quarterly tax liability, operating expenses, and all cost of goods sold. How much is needed to be paid out over the next 30 days. How much available cash the business has IF all payables were paid today. How much would be left if we grabbed our available cash (IN), grabbed our receivables (IN), paid our taxes (OUT), and paid our payables (OUT)...we call it an “All In/All Out” number. So far we’ve asked Steve to do two things; a) subdivide his bank accounts so that each dollar goes where it needs to and doesn’t leak out, and b) track all of his cash, and any cash you owe or are owed. After following this for about 6 months Steve comes back and says this, “this is voodoo…How is that I generated less money than last year, but have more money? Simple…he made each dollar accountable to its destination. The third technique is to KNOW your pricing and margin. Most of you are guessing when you are pricing because there is no repetitive process to your pricing…it is as if you are re-creating your pricing wheel everytime and it is usually dependent on the amount of desperation you feel in the moment. We must stop guessing, and start KNOWING. Remember this…pricing should always be based on VALUE. Here is the same question asked two different ways… How much is this project going to cost? (money based question) How much would you pay if this project were done for you? (VALUE based question) There are two primary filters to run EVERY price through. First is your own pricing calculator. Where is that tool in your estimating and bidding arsenal where you can plug consistent numbers in and get consistent numbers out based on PREDETERMINED percentages that are healthy and profitable? The second filter to run your pricing through is the filter of VALUE! Once you have a final number from your objective calculator, then take that number and run it through a subjective VALUE thought, “is it worth X to the client for this project to be completed in this amount of time?” One other thing Steve did when he put those money processes in place…he began predictably pricing jobs EVEN in the midst of price increases, and material delays. Three ways. He communicated the volatility to clients UP FRONT and throughout. Steve then RELENTLESSLY followed every dollar that funneled in and out of the job through a simple job costing spreadsheet. Finally, he understood the difference between markup and margin. Margin is what is leftover AFTER cost of goods and materials are removed from revenue.  That is NOT markup. When you markup is how much you increase a price to determine its final selling price so you can make a healthy margin. When it comes to pricing, understand your markup, and you will earn a healthy margin. When you have a healthy margin, NOW you have options. Three techniques that all require time and attention. First, subdivide your bank accounts. Second, create a simple, tracking dashboard. Third, price for value and not for time through predictable communication, giving a home to every dollar, and predetermining a healthy markup to provide a freedom-giving margin.