Today we’re gonna talk about making money.
What’s the sense of working and running a business if you’re not making money right?
But most of us don’t like math or financial reports. And none of us want to become bookkeepers or accountants. The good news is you don’t have to.
But the bad news is a lot of you contractors out there are working for less than you should be and some of you are even working for free almost. So let’s fix that.
Contractors are notoriously famous for working for less than they should be. Most of you don’t even pay yourself regularly or factor your salary into the price of a job.
Not pricing your jobs right is the number one reason why so many contracting companies fail.
Not because you don’t have the talent, you do.
Not because you don’t do great work, most of you do incredible work.
And it’s not because you don’t treat customers well, most of you do.
The #1 reason contractors struggle, work too many hours, and are exhausted, is because you don’t know your numbers and you’re selling your services for far below what you should be.
If you’re taking money from one job to pay for another job, you have a problem.
If you have no money to pay yourself at the end of the week or month after paying everyone else and for everything else, then you have a problem.
If you have no money to pay for taxes at the end of the quarter or year, then you have a problem.
But the good news is all of these problems are fixable. They’re fixable by getting your numbers right, and going after the right kind of jobs and the right kind of customers.
In almost every case you’ll need to raise your prices. Now a lot of you are screaming at me right now saying, “Are you kidding me? I can’t raise my prices, my competition will kill me, I’ll get no jobs.” And to that, I’ll reply that you shouldn’t be doing all of those jobs anyway. You’re also probably getting the wrong kind of customers.
Part of the solution is to only focus on getting the jobs that have the best margins or the best chance to grow into a bigger job. Focus on the jobs you love doing.
Part of the solution is to find the right kind of clients. To pre-qualify those clients.
If you’re running Google ads then the words “cheap”, “low cost”, and “handyman” should be used as negative keywords to exclude those clients from calling you.
Stop going out on every job.
Stop chasing the cheap jobs that are losing you money.
What are the best jobs that you love doing and have room for great margins?
What jobs can you show off as case studies or part of a photo gallery on your website and social media that WOW people and get them to want to work with your company, at almost any price?
What are you doing about continuously growing great customer reviews so prospects are overwhelmed by how great your company is?
Find the right jobs to specialize in.
Find the right clients to work with.
Find the right messaging to attract those clients.
It doesn’t have to happen overnight, it’s a process.
But if you don’t start, you’ll have income and profit issues forever and work 2 or 3 times harder than you have to. And your business will always be flirting with failure.
Plumbers, for instance, can use messaging that talks about how hard water is the root cause of most plumbing issues and costs homeowners a fortune by destroying faucets, clogging pipes, and shortening the lifespan of all their appliances. That leads right into water softener or conditioner sales, which have great margins.
Or plumbers, you can specialize in drain cleaning and then send a camera down the drain to show deeper clogs or tree roots penetrating the sewer line. Some of those smaller jobs have turned into bigger jobs with great margins.
What jobs do you love doing?
What jobs have the best margins?
What jobs bring you the best kind of customers?
What neighborhoods bring you the best kind of jobs?
Now it’s not enough to just target high margins jobs and great customers if your math is still off and you don’t know your numbers. That’s only part 1 of the solution.
Part 2 is you have to get your numbers right.
Getting your numbers right is the most important factor in your business. If you don’t, then you’re pricing your jobs blindly or more commonly just based on what your competitors are charging. And since most contractors or any business don’t price their jobs right and go out of business at an alarming rate, using your competitor’s prices as your guide is a clear path to near-certain failure.
I highly recommend you go out and get 2 books, “Where did the money go?” and “How much should I charge?” by Helen Rohr (links below). She’s been the owner of a $40+ million plumbing services company and is a master at helping companies become profitable.
You don’t have to be a plumber, her book applies to all service companies.
Once you’ve got your markups and margins corrected so you can actually make a profit, then it’s time to set that profit aside, pay yourself a salary, and make sure you can pay your taxes.
And the best way to do that is to use The Profit First system from the book, “Profit First for Contractors,“ developed by Shawn Van Dyke (link below). That book will change your business and your life and make keeping your profits, paying yourself a salary, and paying your taxes super easy.
Shawn has 20 years in the construction business and adopted this book specifically for contractors from the best-selling book “Profit First” by Mike Michalowicz. I hope to get Shawn on a future podcast to talk to you all about the Profit First system and how it can make a gigantic impact on your business and your personal life.
A simplified explanation of this system is this:
Instead of using the general accounting methods that your profits are what’s after all of your COGS, expenses, and taxes, you do it the other way around and take profits out of sales FIRST and then slice the pie up for the rest.
Last year, I started using this system myself and it has already changed my business and my life. And I can see that I don’t need to worry about making money or paying my taxes anymore. The money is always there.
Let’s run through some basics of how it works:
First, you need to make sure the price of every job becomes 100% of your budget for that job.
No more borrowing from one job to pay for another.
No stealing from Peter to pay Paul as they say.
And that comes from choosing to do the right kind of jobs and pricing those jobs properly in the first place, which goes back to suggestions in the book “How much should I charge?” and “Where did the money go?” by Helen Rohr. Like I said, go get those books and they will change your life! There’s an affiliate link in the description below or just search for it on Amazon or elsewhere.
Second, you need to pay yourself a salary and include it as a percentage of every job price.
Stop working for free or for peanuts.
Start getting paid properly for the work you do.
Would anyone in your company work for free? Of course not. So why the heck are you doing? It’d be a lot easier to just go get a job.
Now the beauty of this system is that nearly guarantees profits, compensation, and taxes are taken care of by setting a bank account for each category. Your main bank account is where all of your top-line sales go. Then every two weeks you move money from that account into four other accounts:
- a profit account
- an income taxes acocunt
- an owner’s compensation account
- and your expenses account
Now as a disclaimer I’m not a tax accountant and I’m not giving any accounting or tax advice here. Get the book, read it, then meet with your accountant to discuss it all and find what’s right for you and your company. The numbers will vary greatly depending on your revenues, salary & profit goals, and tax situation.
Here’s how it works:
Profit comes first, so I put 15% of sales into my profit account.
Income Taxes are next and 15% of sales goes into the tax account every two weeks.
And what a relief it is to not be worried about where the money for taxes is going to come from every quarter.
Owner’s compensation is next and I tuck 10% in there.
And operating expenses are last and the remaining 60% goes in there.
And there is NO borrowing from one account to pay for expenses! Nada, zero, zilch.
It will vary by industry but ideally, most service companies should be making a net profit after all expenses, including your salary and taxes of about 20 to 25%.
Talk with your accountant to decide the best way for you to set this up.
Shawn’s book provides a quick and easy alternative way to start right away and make sure you’re earning a profit is to open at least the profit account, and every two weeks you transfer 1 percent of sales into this account and then do not touch it!
Every three months, add 1 percent more to this profit account. So in 3 months, you’ll place 2 percent in there every two weeks, then in six months, you place 3 percent, and so on until you reach 20 percent. You’re not allowed to dig into this account. Don’t touch it! Otherwise just got get a job working for someone else right?
That’s not a solution to your taxes and compensation, but it’s a quick and easy start to get profits tucked away.
Now that was a lot to digest and like I said it starts with properly pricing your services and then changing your money habits. It doesn’t end there however, there’s still other numbers you need to know as a business owner. There are some basic numbers your bookkeeper or you need to learn to review regularly to make sure you’re on the right track.
A profit and loss statement and your balance sheet should be reviewed in a couple of weeks.
Expense reports are tucked into your P and L profit and loss. And so you need to analyze that and see, where are you leaking? Are you leaking money anywhere? Where are you wasting money? Trimming the fat.
Other numbers you should probably know, or your minimum expenses per job, your cost to acquire a company.
Other numbers you need to know include:
- minimum expenses per job
- costs to acquire a customer
- return on ad spend for each ad campaign
- booking rates
- closing rates
- field upsells
- and more
If you don’t have a bookkeeper or accountant or someone internally who keeps your books and you don’t use QuickBooks or software like that then you need some help.
Find yourself a CPA or bookkeeper who works with contractors.
We can recommend Likes Accounting Services owned by Meaghan Likes, CPA.
They work with lots of contractors and offer both done-for-you bookkeeping services as well as a do-it-yourself training course to get you or your team up to speed with recording, tracking, and understanding these numbers.
I will be having Meaghan on an upcoming episode of this podcast so she can share more golden nuggets with you.
Okay, I hope that helped some of you but I’m also guessing your brain hurts a little because math sucks.
But always remember that numbers drive the success of your business.
Get them right and you’ll have the opportunity to flourish.
Get them wrong and no matter how many jobs you do or how hard your work, you’ll always be struggling and flirting with failure.
Good luck out there and create a great day!
BOOK: How Much Should I Charge? by Ellen Rohr
A simple book that uses a simple story that takes you through the process of figuring out the proper prices to charge for your services so you can pay taxes and make a salary and profit.
BOOK: Where Did The Money Go? by Ellen Rohr
Another simple book by Ellen Rohr, owner of a $40 million plumbing franchise.
This one should be read first, it too uses a simple story to teach that numbers ARE your business and how to learn them more easily and even come to like them.
BOOK: Profit First For Contractors by Shawn Van Dyke
Stop using money from one job to pay for another. Put an end to not having the money for taxes. And close the door on not paying yourself.
This book can change your business and your life and help you remove the money-stress of your business.