How To Build and Grow a Hugely Profitable Construction Business: Part I

Speaker 1 00:14 Hey, good morning. Good morning and welcome to another show of business legal talk with Leah and all fired up today. Good morning. Good morning man.
Speaker 2 00:23 I just, just when the Kofi Wars, just the way you supposed to, it’s magic. So I am wide awake. That’s awesome. So happy Saturday morning everybody. How is the commute? Well and there’s no commute because it’s Saturday, so you’re probably are driving to and from is probably doing the honey do list. I’m like all of us. I have my own honey do list too. Do you give
Speaker 1 00:45 no, no, I do not give them a honey do lists. Oh that’s funny. No, no I don’t. I’m good man. And he would do everything. He would know. He, he would, he has his own list. He’s a very motivated person so he, he creates his own list and I just try to stay out of the way cause I am happy with progress at, on any friends. I am easily, easily pleased.
Speaker 2 01:06 That’s good. Well happy Saturday. So there is, um, we’re sort of up like we get a great show for you today and uh, this show, um, actually I, I guess I should give you the title today. Show how to build and grow a huge leap profitable construction business,
Speaker 1 01:24 construction boy. And this is it. This is probably one of the most challenging industries right next to shoulder to shoulder with the restaurant business. Yes, very, very different. A lot of moving parts,
Speaker 2 01:38 a lot of moving parts in this comms. Um, on the heels of me really going after it’s become a passion. Um, I absolutely love working with certain verticals and um, the construction industry is just one eye, half falling in love with it just because you’ve got really one of the heart, the hardest war. Some of the hardest working people I know are in construction. No question. No doubt. I mean they, they, they have a dream. They whatever trays, you know, cause cause you guys, you got the genital contractors and you got all the subs in all the trades, right? Whether you’re a roofer or you are a finisher, whether you are a concrete personal or an electrician, I’m up. You know, no matter what you do, if you’re in a construction, this is gonna be a show for you and there’s a lotta potential for profit. But there’s a lot of risk and you’re going to help me today. But some of the things that you do on the legal side
Speaker 1 02:37 I have to, yeah, I’m, I’m, it’s interesting that you’ve kind of developed a passion for the construction industry because this is these, this is my, my bucket of baby’s hair. Well, well just, we’ve been in the business for so long. My husband’s been a general for, you know, going on 25 years at this point. And, and the, the industry is set up to put the contractors at a disadvantage and it’s something that just is, is been a pet peeve of mine, you know, our contractors or builders out there. And, and folks, if you’re listening and you have a contractor that’s coming out maybe to do a bathroom remodel or a kitchen or a roof or landscaping crew, just have some empathy for what they go through. They pay for your entire job before they ever get paid. Correct. And this is something that I’m sure you’re going to want to dive into today because managing that is such a challenge. Um, it is such an incredible challenge.
Speaker 2 03:35 And, and we put in this pilot into construction industry, you know, as is the engine that drives the economy. It is, you know, back back in the recession days in the 30s, it seems like, uh, uh, uh, uh, you know, centuries ago. But it was really only in the 30s, so 80 or so years ago that it was construction and building that really pulled the country out of recession. You know, the, the whole Uber dam, we came, all this construction projects, all of dance came out of the, there’s basically this recession. So construction is a CIC key industry that drives growth. It’s a growth engine. So a lot of economic indicators point to the construction industry. So we’re going to be getting deep into that. We’re going to be talking about things like working capital. What does that mean? What is work in progress as we known as the whip reporting, current ratios and a regular accounts receivable versus retention, AR or regular AR versus retention, AR, the bonding capacity. And I’m going to talk about a conversation that I have with an underwriter, assurity company that is going to help you. And um, and how does the all play together, you know, how, how do you grow in, you know, the different key performance indicators and in the construction industry in why should you care. Right. And, uh, so before we get into that, so when I catch up on things, um, any, any, any legal updates? I know we like to do our updates.
Speaker 1 05:01 Yeah. You know, we did have something. Okay. So I’m actually my associate night, we’re talking today. Um, you know, there’s been, we’ve, and we’ve talked about it on the show a number of times about the whole 10 99 independent contractor versus employee and how the state of California has really moving away from allowing us to, um, even use or be a 10 99 independent contractor. So that’s been in the works for quite some time. It’s based on a, um, a ruling that came down last year, which was, um, it was just a really, it, it really kind of taught, turned everything on its head. Um, and so that has been progressing through our legislative process and, and it’s now sitting at, at our state Senate, um, and it’s probably gonna end up becoming law, just knowing the climate of California and how California, um, with the kind of public policy that’s developing here in the state.
Speaker 1 05:54 But with that being said, um, we should be kind of keeping our eye on that. It’s going to come, it’s coming. Um, it’s not there yet. But one of the things that we did get a ruling on was, um, whether or not this shift to making everybody, um, an employee or, or, or a 10 99, if you’re trying to remain a 10 99, um, does being a 10 99 violate the national labor relations act, which is really, um, a federal, um, a federal act that gives guidance for people in unions. Um, labor relations acts is really has a lot to do with the unions and they have come down and said, no being a 10, 99 and misclassified as, um, a 10 99, as opposed to being classified as an employee is not a violation of the national labor relations act. And because being a 10, 99, being an independent contractor does not affect your ability ability to unionize.
Speaker 1 06:55 Interesting. So that’s not just for us. We find that very interesting because we knew, you know, once we start to really see big swings or big shifts in how we, um, view or categorize something, it’s a reverberation. Um, so what other things does that effect? So it’s not just affecting, um, business owners who have used 10, 99 for a lot of years. And how are people who have been 10 99. There’s a lot of people who really appreciate being an independent contractor and don’t necessarily want to be an employee. Um, but this huge shift is, um, is, is really in, in swing and again, it’s sitting with the, the state Senate and we will probably see a ruling on that
Speaker 2 07:39 really when this year you think, I think it’s possible this year. Okay. So that’s your legal update though. That was a nice and immediate update. Thank you so much on our side. I mean on the accounting and finance. Yeah. What’s going on there? Well, if you got extensions, uh, whether it is, um, corporate or personal, you know, you should be wrapping things up. You know, you’ve got your, um, your nine 15 and your 10, 15, um, you know, is just around the corner. So for those of you already filed, you know, your, you know, so if you actually filed an extension, whether your corporate personal tax returns, they’re becoming due now. So you don’t want to get into this habit of just being chronically late because once you laid it almost always stay late and you don’t, you want to reverse that trend. So, so that, that’s one thing.
Speaker 2 08:24 And also on the finance side, um, you know, as, as you know, I get um, involved, uh, and we’ve got a minute left. Wow. We haven’t really started any way on the finance side. Interest rates are good. So if you are in the construction business and you know, financing is good and, and again, uh, interest rate is that as a driver of growth. You know, as interest rates go down, his stimulates, uh, borrow in and a stimulated spending. So that’s actually going very well, is going in the right direction. So, so to stay tuned, we’re going to be talking about construction and how to, as a business owner, how do you build a grow and grow it? A hugely profitable construction business. So you are listening to business illegal talk with Leah. Claudine, stay tuned. We’ll be right back.
Speaker 0 09:10
Speaker 3 09:21
Speaker 2 09:46 within way that I misfire on a sec, can I go in? My Mike was not on, so sorry about that. It will come back. Hey, this is part of having a show, right? Um, so, um, before we get too far down the road and talking about construction and how are we going to help you be very profitable and sustainable, I think it’s best that you know who you are. If we were to just turn it in for the first time to our show and you want to know what we do well, I’m going to talk about me in a liquor, Dennis explaining what she does, but we really come together because we care about being profitable and sustainable. I handle the profitability part and Claudine handles the sustainability part, which she’ll talk about. But for me, I care. We’re not like your average accounting firm.
Speaker 2 10:23 While most of CPA or enrolled agent, EA firms are driven by taxation. We’re driven by revenue growth. We’re driven by managerial accounting. We care about your business being profitable from day one or from month over month in variance over V various. We, we create key performance indicators. We are all about growth and profitable growth. Um, and we do that through a myriad of things. We work with, um, all multiple accounting softwares and some of them are specific to the construction industry, like pro Procor co-construct and the like. And, um, and why? Because we have all that, we have a bag of tools available to help you look at the things that matter as when driving. You’re looking at a dashboard, want to make sure all your systems are go so you know when to execute on your plan. So that’s what we do. So Claudine, tell us how you help us with risk management.
Speaker 1 11:18 Well, we do it all completely on the other side. We were, we’re looking out the window from the other side of the building. But what we’re doing is we’re working with clients on a daily basis to help them set up, um, systems that are functional, that are compliant, helping them to protect themselves, going into the, into the contract to helping them ensure that they have put systems in place that allow them to get paid on time and that they’re compliant with their regulations in each one of the industries. Um, you know, has its own set set of regulations and compliance concerns with the construction industry. It’s really, really difficult that, as I was saying in the last segment, you know, the construction industry is just set up for failure for our contractors. It’s, um, you know, we’ve got the contractors license board that oversees us, but really, you know, they don’t do a whole lot for us on the general basis.
Speaker 1 12:12 Um, they’re more for the consumer and, and to assist the consumer, which is good. Um, you know, we do have to pay attention to the consumer and we do have to have our contractors, you know, being compliant and the couple of rotten apples in the bunch, you know, make it bad for everybody. But by and large, our, our tradesmen and women are out there trying to do the right thing. Um, they are passionate about what they do. They like what they do. Um, they enjoy seeing the transformation of a building or, or just a lot from, from a lot to a building. Um, and so they’re, it’s a calling. They’re in it because they’re passionate and we work with them to, um, just help them get through each and every job safe and protected. So from everything from, uh, indemnity agreements to subcontractor agreements to working with the contractors license board and they do get a complaint, we jump right in. We oversee the licensed contractors boards, um, process to
Speaker 2 13:12 really, absolutely. Listeners pay attention to that. Yeah.
Speaker 1 13:15 To ensure that, um, the contractor is, is being treated fairly. Um, and we’ve had some really good results recently. Um, we also work with contractors, bonding companies, uh, when a client complaints against the bond, um, we jump in and, and oversee that, that the process is done correctly. So, um,
Speaker 2 13:35 let’s go one stop shop for the, for the construction industry. Where do we find you?
Speaker 1 13:40 Well we are at, um, www sharon-law.com or 1101 Stanford Avenue, suite a one. So we’re up here in Modesto. We also have service entire state. Yes, we service the entire state. Um, this, these days with technology being what it is, we can do a lot. Um, and, and really a lot of our clients are so super busy. It’s hard for them to schedule time to actually come into the office and meet. Uh, so we do a lot of our consultations and a lot of our work, uh, with conference calling. Um, uh, we can do video appointments and we can do, you know, everything over email and
Speaker 2 14:15 that’s, that’s great. I mean, you know, in our goal is to eventually syndicate the show so we can be across the country. So we technically can serve clients anywhere because of technology. So, um, us, you know, you can find us a www dot Greenland as in the country have we almost bought of Greenland HQ. Yeah, that’s fun. A funny joke. So green and hq.com if you have any questions, just go to the website. You can find our contact information there or you can call us a (559) 207-3148 (559) 207-3148. So back to the show. So I think the best to start this unpacking all this knowledge is talking about the unique of revenue recognition for the construction industry. Right? So when we’re, you know, there are basically some generally accepted accounting rules according to gap as to how to, how do you typically recognize revenue? So it’s not somebody gives you a $100,000 check and if you put it in the bank and if you have an earn it is that revenue?
Speaker 2 15:18 No. So no, it’s not her. So there’s no that answer. Well you know that one, but what you buy but you don’t count because you’re already married into the construction industry. Literally married to somebody who does that and but, but most people don’t know. They don’t know how to quite recognize the revenue. There’s two, uh, generally accepted methods and one is the percentage of completion, which is the widely known. Then the other one is completed contract. Uh, by large, most companies will go percentage of completion. So, so you got several items of several buckets, uh, that you deal with to, to, to, to recognize the revenue and you’ve got the contract value, whatever it is, you know, the original amount that was signed once you went through the RFI and RFP process. And if you actually got the contract value so that we started there and then you got the cost incurred to date, you know, month over month, week over week or over quarter, and then you get the total estimated cost that you started out with when you actually were bidding for the country.
Speaker 2 16:16 You figure, Hey, you know, um, it’s going to be $1 million contract and it’s gonna be $750,000 worth of costs delivered it, so we’re gonna make 250,000 at 25%. Hey, sounds good, right? Sounds good until you actually start doing the work. And if you didn’t do a good job estimating the cost, then you can you, if you’re not watching this thing, what we talking about, work in progress. He can get you in trouble. This is how, this is one of those industries, Claudine, that you can have $100,000 in the bank and be paid and be broke because if you don’t account for all this things that to deliver the contracts to completion, you may be wiping up your entire bank account in order. You don’t even know it.
Speaker 1 16:56 Well, I’ll tell you, um, the contractors, the trades men and women out there, you live and die by your estimates. Um, and I’ve worked with my clients on, on how, how to structure your estimates. Um, one of the things I’ve, I’ve watched my husband do for years now, he, this is just an example from the residential application. Um, he will literally, um, go through room by room. Um, let’s just say we’re doing a, a residential remodel. He will literally go through room by room and he outlines his estimates and does, is estimating room by room because it allows him to mentally walk into a room and say, okay, there’s X amount of wall space. I need to put X amount of gallons on the wall. Um, it’s gonna take to code. So you know, X amount of here, I mean, how many switch plates are in this room and you eat all those common denominators. Yeah. And you kind of think about it as I’m eating the elephant one bite at a time. And I’ll tell you, there are folks in this industry that are very, very good at what they do, um, largely because of experience and they’ve lived and died by their estimates. Um,
Speaker 2 18:02 so okay, so we talked about contract value, the, the costs that, the total estimated cost. And then you’ve got the cost in Kurt today. This is cost driven and by and large, and then you’ve got the project billings so that you’ve got this four components. So, um, the way I like to visualize this process and see, because, so you are creating an, so the thing about the construction company is you’re dealing with, you know, super. If you’re big enough, you can have a superintendent who is in the field, right? Overseeing the contracts. You’ve got to have the project manager that may be overseeing multiple projects. And, uh, if you can be in two places at once, how can you be okay really looking at two sites at once. So as companies get bigger, they need to invest in having people on the ground, boots on the ground, and you have the ones that are actually on the office.
Speaker 2 18:51 And every job is, it’s critically important. So then we have this call thing called whip, right? So you got your, your revenue and you got, you got an adjustment. If, if, if you’re, if you’re a construction guy who actually looks at your accounting, your bookkeeping, I don’t recommend that you do the bookkeeping, but that you need to have an idea of what your whip adjustment is from month over month. Now, um, as a rule of thumb, if you are a hundred, if you build 100% of what you’re supposed to be billing, so you have your costs and you are exactly where you should be and you percentage of completion, you’re ideally your various zero meaning that you have no over and under billing. So let me define that. So
Speaker 4 19:39 yeah,
Speaker 2 19:42 so there’s two types of variances. You got your, when you over bill for something in accounting, it’s you, if you have an earn it, that’s not an asset. It’s a liability cap. Right? So when you have done the work and you earn their revenue, but you haven’t built it, that’s an asset. But is that good? That’s not a good thing if you’re, if it can hurt your cash. So I know you’re looking at me like we should have a flow chart or something. Yes. A whiteboard. Yeah. So I live in the world of liabilities, equity and assets. Okay. So, so if you follow me over, billing is good in principle. So if you’re ahead of budget by 10%, which missing, you’d been a very shrewd operator and you want the clients to fund the work and you’re just head of it, right? You follow me?
Speaker 1 20:35 No. When, when you say over-billing is good. Okay. So in my world that says, my brain’s screaming right now. What do you mean over billing is good.
Speaker 2 20:43 Let’s, let’s keep a simple, you’re a 10 million, so you’re a $10 million. Okay. Right. And your, um, so you’re doing about, you know, 800,000 in change, 130, $3,000 a month, right? You can be up to $83,000 amount ahead of billing and be okay according to assurity company,
Speaker 1 21:05 meaning you’re completing the project sooner than you thought you were.
Speaker 2 21:08 No, you’re just a little ahead of it. Okay. Remember what I said? Zero is better if you had a choice, let me put it to this way. Zero is perfect. If you had a choice between being overbilled and underbuilt, which would you rather be? Underbilled well, but w
Speaker 1 21:29 seeing these two, we’re using these terms and completely different definitions. I can see that over billing means that you’re billing me more than you should be.
Speaker 2 21:36 Yes. And that’s okay, but that’s not okay ethically. I know, but that are Akia. So, so the way, so somebody is financing the job, either you’re financing the gr, you know, if you’re doing your job right, of course you’re going to make enough profit to, to actually finish the project. Right. What I see happening is, and reality, forget about the textbooks. Okay? You got construction companies in two categories, the, the, they’re severely under billing for work. That is a bit and being completed, which means it’s hurting their cash or they’re grossly over billing, which you right, right. How much can you ask for stuff you haven’t done yet, but then you’re asking the client to prepay for stuff that you haven’t done yet. You are in danger or running out of cash that those are triggers for me. The clients don’t prepay for stuff. Sometimes they will, they will just think, you know, so think about it from is I got, I got guys in the construction business that I know so typically is the project manager that will look at, they will look at the paperwork and say, Hey, you know what, I’m dry wall and how are we doing with that?
Speaker 2 22:46 So if you’re not on site, you’re going to rely on somebody from your team to tell you, Hey, drywall in is about 70% done. Right, right. But then they sub since you an invoice up to 80%
Speaker 1 22:56 I see. So you okay. So just to clarify for people who are listening, w your reference is really on the larger commercial type projects. Yes. This, this is not what the residential contracts,
Speaker 2 23:10 there’s the dry, no, no, no, no. This is 10 million, you know, five to $10 million, you know. Okay. Most average construction sized companies probably be around somewhere between five and 15 million. So that’s and lower. Yeah, lower
Speaker 1 23:26 I think. I think your average contractor is significantly lower than that.
Speaker 2 23:29 Well not the ones that I’m dealing with as much.
Speaker 1 23:31 Okay. Yeah, yeah, absolutely. I mean, you know, big commercial, big commercial outfits, certainly like that.
Speaker 2 23:37 So, so, so, so there is that. So I was going to be kind enough to break pretty soon, but this is a very important concept that I want us to live with. You want be managing your project, so you’re building where you’re supposed to be billing every month. Right. Fair enough. Right. So, Hey, you listed it to business illegal talk with Leon. Claudine, stay tuned. We’ll be right back. Okay, very good.
Speaker 3 23:57
Speaker 0 24:09
Speaker 2 24:26 Hey, welcome back everybody. This is a, you’re listening to Leo and Claudia and business legal talk when Leo, Claudia and I am Leo and we had a vigorous discussion in the last segment. This is a topic that I guess we can make two or three shows out of it and we haven’t even started talking about anything else other than work in progress. So I want on page one, we’re still on page one Oh seven pages. So clearly there’s going to be another show but let, let’s stop right now and move on to sort of, I’m kind of a larger plane if you will. So the construction business is like any other business. It has this nuances, which those are the details but it’s still a business and he must be profitable. So the construction business driven by the work that is done, the cost of goods, you said if you’re a prime, you have all this sub work and all the, all the direct or the indirect costs associated direct and indirect cost associated with a job.
Speaker 2 25:20 You’ve got your gross profit and you’ve got your general and administrative expenses, your GNA. And at the bottom you have net profit. What makes the construction business so unique is retention. So once you in the construction business that you have 10% of your billings retained till the end of the project, right? Correct. Once you go through the punch lists the standard, right? So this is, is this pretty well, is it just common knowledge? If you’re in a construction business, so if you have $1 million job, you’re going to bill up to 900,000 and then you’re going to wait for the, the, you know, the, the, the, the project owner, the client to sign off and pay you the rest right now, lean release time, right? And all of that. And all the legalities that come with it that you do on my side is eat the pants, you where you are in the process.
Speaker 2 26:12 So you could be a prime and be dealing with 20 subs in each sub, you know, that has the, you got the roofing, you know, you got the, um, the electrical, you’ve got the concrete, like list the stick forX , and it comes to mind a concrete, um, subcontractor, right? Worse in a subcontractor in most of the jobs, right? And dealing with primes and the concrete works I had done at the beginning or at the end, mostly at the beginning, right? You’ve got to let the foundation, that’s foundational work. So you may be doing 20, you know, 30 and then you do, you know, 40. So you’re up, you know, within three months you exhausted 90% of your billing and your work is then you have to wait for everybody else to do their work. And then depending on how long the job is, how big the job is, you can be waiting six months to a year for the job to finish.
Speaker 2 27:03 And that go applies for everybody that is doing work. So think about it this way. If you, if I recommend that you have gross profit of at least 20% now why? Because 10% of that it will be retained. Now, can you imagine? So, so if you’ve got 20% and you got 10% of general general administrative costs and you have 10% net profit, well if all that profit is held back and retention, how much money do you have in the bank enough to pay your bills, apparently. Right? So that’s the thing that you have to know as a construction company. You need to know all the moving parts and you have to be involved. You cannot be an absentee owner on a construction business because his spells trouble. Now remember I was saying a couple of segment of the last segment that you could have $100,000 worth of money sitting in the bank.
Speaker 2 27:59 And if you’re not careful, and if you’re not managing the business, ideally you done the work at the end of the month or whenever you do that during the month, create the invoicing. So you are exactly where you should be as a percentage of completion, right? So if you’re in a one year job and you do one 12th every month, by six months, you should be a 50%. We know completion of the project, which means that you have, we would have had incur 50% costs and you have the markup and you should have build that and you should have zero work in progress. Variants are whipped various but mostly on talking about hypothetical as I what happens in real life. What do you think?
Speaker 1 28:40 No, no. Um, and, and again, similar to the restaurant industry, the construction industry is play by play. It really, you know, you have a set of goals when you go into it, you have a, a set time frame, you have a budget, you have, um, you know, an idea of what you’re doing. But as sure as you get started, things change. And the thing I think everybody needs to understand, particularly as part of the conversation that we’re having right now is the construction industry is as diverse as say, the medical industry where there are small doctor’s offices. Um, there are clinics, there are enormous hospitals and they’re all part of the medical industry, but they’re incredibly diverse on how they each function in, you know, and the construction industry is the same as we have big contractors, uh, construction companies that are doing, you know, very, very large projects in there or they’re civil projects where they’re, we’re working for the government were working for the city, the state, you know, whatever.
Speaker 1 29:41 And those come with their own set of rules and prevailing wages and, and so forth. And then there’s other people who are independent and then there’s the middle of the road, um, people who maybe have a crew of, you know, 40 or 50, and they’re in a single trade. Um, and so, you know, maybe you have an electrical company or HVAC company and they’re, they’re a single trade, um, but they do a certain volume of work. And so their work is, um, a lot of doing the same thing over and over again. Whereas if you are a general contractor, you are not doing the same thing over and over again. You are overseeing multiple traits. So it’s a vastly different set of circumstances that you’re working with. So just to kind of lay the foundation for the conversation that we’re having, um, is that we probably identify, um, there are overall practices that are good regardless of where you, where you are in the industry, but there are also, um, some things that are going to be more particular to a particular type of industry. So I th I, I think, um, that’s important to kind of note as we’re having this conversation.
Speaker 2 30:50 Yeah. I mean it’s, I’m very passionate about certain industry and I love the restaurant industry. I love the software industry. I am falling in love with the construction industry because I see that what we do well, it’s a challenge for you. Yes. Because there’s so many moving parts, right? I love it. And I love solving, you’re right. I know. Bloody nose, B R I for the record, she knows how I think I like the Valley. I love challenges. And I think what I love about the construction industry there, it has a lot of moving parts in you, right? Platoon, but the potential for you and me and any advisor to do good is great. Why? Because it’s impossible to become an expert at any one thing. It takes a lifetime. Like, um, if you know the things that you have to do on your side to make sure that your a clients who happens to be construction companies you have to be in the up and up with everything.
Speaker 2 31:44 We just talk about lean releases and things like what happens when a job goes wrong. What happens with the bonding capacity, which we haven’t talked about. Um, the, the, you know, what is unique to the construction industry is that, uh, it is, you know, you shake hands on a deal and then you have a contract. I mean, death, the, you know, the, the, the end result is that in exchange for money, you’re gonna finish a project, right? Right. Uh, would it, regardless of the amount is going to be released, it’s going to be operational. It’s going to be a construction project that is when it be very successful and is going to empower many lives. But what if, what if, what if you get ill or something happens to you or you become insolvent? Who’s gonna finish the project? You know, don’t, don’t you love driving down the freeway.
Speaker 2 32:26 You see that building that has been sitting there in construction for years. It’s an eyesore, right? So what’s unique to the industry is also this whole thing about ensuring that the jobs are and signed off on and delivered, right? And that’s where you have this bonding capacity. So you right there, there’s a lot of things. So what I like to do right now is just talk about certain things that key performance indicators as, as I like to call them, that are things that you want to be looking at every week and every month when you have your financials. Uh, number one is net income, right? Either you’re running a profitable business or you have a very expensive hobby, and who has time for that? Right? So are you profitable? Are you profitable? Not just in, in the, all over all of your company, which is the aggregate of all the jobs that you have.
Speaker 2 33:21 So you have to, in jobs, you want to know that all 10 jobs are profitable is a meeting you, are they making enough profit to cover your overheads and then some and to have you for you to have a profitable business. So net income number two is cashflow. Now we it. We don’t, I don’t live in the cash world. I must much like to talk about cash because we like to run the business on a cruel. So you know, we had this conversation before, right? Accrued accrual, accounting and accrual and on accrual basis means that you’d recognize the income when it happens. Hence you have the earned revenue and you recognize the expense when it happens regardless, Oh, when he gets paid on a cash basis, you recognize it when you pay it and you recognize the revenue when you put deposit the check. But cashflow in an accrual world, it’s a lot more complicated than that. So, um, it’s what happens if you make, you know, what happens if you pay, don’t pay everything or if you paid everything, what happens to the net income in knee? Do you make all your AP payments, do you, do you collect all of your AR? And so, so that’s, that’s a very critical thing. Um, your, and then, and that’s one. So the number one is net income. Number two is cashflow. Number three is the borrowing capacity, which is are you bankable? Yeah. As a construction company.
Speaker 1 34:46 and that’s very, very difficult. And I, I would, I kind of want wanna go back to net income. One of the things that we see, particularly the smaller independent contractors not doing, um, is, is really doing effective job costing. And I know that you, um, your company as a service provides job costs for, for contractors and they, and I highly, highly recommend if you are out there in the world and you’re, you know, you’re busy right now. Construction is really busy. Um, we are probably the, the industry right now. And I think Matt touched on this a few weeks ago when we had met on the show. Um, the construction industry is one of the industries right now with the highest, uh, competitive, um, areas for, for retaining employees. super busy, super competitive. But with that being said, if you’re finding that you don’t have time to job costs each and every one of your jobs, that please hire somebody to do that because that is really your only way to determine whether or not you’re, you’re actually doing a net net profit of any sort.
Speaker 1 35:48 Um, not only that, over time it will cause your estimates to get better and you’ll be more on point when you’re going into the pocket. It’s all like an accountant though. No, I’m not in an account. I’m just pragmatic. I think just logistics standpoint because when I do deal with, um, with contractors who come to me, I like to deal with them proactively prior to them, there being a problem. However, you know, we do what we do. Um, but that is an area that we do want to provide coaching to clients on is, is really, that’s how you stay out of trouble and you stay out of trouble when your numbers are right because when your numbers are not right, then you’re robbing Peter to pay Paul to get through a job. And then you have a complaint from a customer and it’s just snowballs. If you can keep those numbers right, you can work effectively. Um, and job costing is, I can’t stress the importance of that and change orders and that’s for sure.
Speaker 2 36:38 Oh yes. And you mean approve change orders that are fully executed, highly like fully executed. But we have a program in case you don’t get it executed, we have a plan B that I’m so glad you’re on the show. I mean, this is what you do. So a plan, so let’s not, let’s not forget what the show is all about. It’s about building a hugely profitable construction business. All of this is our tools in the toolbox and in a more, and they’re like key things that you gotta look at every month to make sure that you stay profitable. Once you get to profitability, you’ve got to stay profitable. Uh, so many income you should be aiming for at least 10% if not higher. I’ll say North of 15%. Why? Because, so if that’s the case into two simple math, if you were happened to achieve the, the a great gross profit margin of 25%.
Speaker 2 37:29 If you’re operating an expensive GNA is 10% you should have gonna have 15 cents fall to the bottom line. Assume you’re collect everything. So what’s important to know all of these things is it’s not just one ratio is not just, um, what percentage you have in work in progress is the aggregate of as your current ratio in your debt service coverage ratio, which we’re gonna talk about in the next show, and your debt to equity ratio. All of those shows play into if you’re bankable enough for you to get the money that you, that you need to continue to grow the business. So right now, stay tuned, but there’s a lot more to cover. Believe it or not, you listen it to business and legal talk with Leon Claudine, we’ll be right back.
Speaker 3 38:07
Speaker 0 38:21 welcome. Come back as I’m waiting for my producer gave me the, okay. Hey, this has been such a great show.
Speaker 2 38:45 Oh, for those who are just tuning in, this is, uh, the, your listen, it’s a business and legal talk with Leah, Claudine, and we’re all about helping you build a business that is profitable and sustainable. And according to our producer, our offer a, what do you call that? Our are just as exciting as the on my conversations. Why? Because we’re just have this passionate back and forth about how to grow each other’s businesses. So Claudine, I mean, I don’t know about you, but this has been a great show.
Speaker 1 39:15 Fantastic. No, and I honestly, we should definitely need to circle back around because there’s a lot of things that you’re bringing up that I know people who are out there in the trades are listening and they’re, it’s either sparking something in their mind or it, you know, Oh, I need to do that, or that’s something I should, I should really be focusing on, or it’s raising another question. Um, and that we should be circling back around. And I really want to encourage anybody who’s listening. If you’re, if you hear something on the show that either raises a question for you or you’re not really clear and you want a little bit more information, please hit us up on the website or hit us up on the email or give our office a call. Um, we definitely want to follow up and finish questions and, and finish concepts that maybe we’ve touched on here on the show.
Speaker 1 39:59 Um, but you know, for, for whatever reasons, it’s sparking some, some kind of interest or you want to follow up. And, and I know we’ve had a couple of clients, um, say that we’ve said something on the show and then, you know, all of a sudden it made them think, I think when one that just comes to mind as, you know, we were talking about payroll and pay subs and, and what things that needed to be on paystubs. And we had several people, I think went back to their offices and looked at the pay stubs and you know, we got phone calls. It was like, Holy moly, where, you know, we’re not in compliance, so just don’t hesitate. I know your, if you’re out there, you’re probably, you know, either working, listen to the radio or driving, listen to the radio, um, give us a call and follow up on it because a lot of what we’re talking about, we’re just barely cross scratching the surface barely. And there’s so much eight
Speaker 2 40:45 hours on this and it wouldn’t that be enough is because our passion is a, we wished we could just transfer our knowledge to you. That is been hard earned over years on seeing what works. That doesn’t work. This is actionable stuff. If you’re doing some of the things that we’re talking about today, you’ll be better apt to getting financing if that’s what you need or actually getting bonded for bigger jobs. Yeah. So I to dish, two things I want to talk about before we wrap things up in the last segment is bonding and financing. So, um, bonding is your ability to be insured against, you know, unfinished jobs and um, surety companies are the ones that actually, uh, insured. Um, for, you know, there’s two types of um, uh, bonding criteria. One is per and the other one is on the aggregate of all the jobs.
Speaker 2 41:36 And um, typically what you, you know, the goal is to get 10 to one aggregate to bond. It is. So there’s, there’s a ratio that you want to go for and this 10 to one, what does that mean? So you get on average $10 for every dollar of equity you have and your business and that equity comes from your balance sheet. And what is your balance sheet is probably the most important financial document or your business and is going to play into the financing part of that I’m going to be talking about next. So for your bonding capacity, your assets equals liabilities plus equity. The very last section of your balance sheet is your equity is either going to be hopefully a plus, not a minus, but say for instance that you have half, half a million dollars worth of equity in your business. So that time Stan is 5 million.
Speaker 2 42:32 It would be the aggregate bonding capacity that you would have for you to be covered and which is not for you. It gives declined the certainty to so they can check it off their list that you’re able to finish and you have the adequate means to finish in a job. The second portion is, and that plays out in the balance sheet mostly is the, the um, your current ratio. So let me talk, let me, so this is, this is something that I am dealing with just about every other day basis is banking and financing. So a bank is going to look at three things for just about any business wand. They’re gonna be making sure that you’re profitable, right? And profitable to the tune that they can calculate your maximum debt service coverage ratio, which is the DSCR. That means your cashflow over your debt service.
Speaker 2 43:23 So if you have, so if, if, if you are getting alone and your debt service, which is your principle and equity is gonna be $100,000 a month, they want to make sure that you can cover the at least 20% more. So you’re eating net income, it’s gotta be $120,000 a month. So 1.2 over one. So if you missed all that, you know there’ll be a transcription of the show. Eventually we’re going to, you can actually go find it. I think it’s very important that you know your debt service coverage ratio. Second is your current ratio and your current ratio is something that I’ve talked about before in other shows, which is your current assets over your current liability. What are your current assets? Is anything that you can liquidate to cash within 12 months? Obviously your cash right and your money market accounts, your accounts receivable is huge and your current assets and your current liabilities are all the liabilities that are due within a year. Now wait, here’s the magic number. The magic ratio is one and a half to one meaning meaning that you’re going to have one and a half times more current assets that you do current liabilities, which in construction is actually the definition of working is your current assets minus your current liabilities.
Speaker 1 44:34 So, but we still give examples of current assets, not just the assets that the company owns, our contracts with it in an asset. So I have a contract to do $100,000 job or a $10 million job. Is that considered an asset?
Speaker 2 44:48 It’ll play into the shirty. It’ll play into future work and which is, you know, technically it’s under under revenue because you may have the contract, you haven’t done any work on it. So the current, okay, so the current ratio, your current assets, what are they? You earned their revenue, you build it, but you haven’t gotten a paid. So it is produced an invoice that you are reflecting your profit and loss, but you haven’t collected it may or may not have collected. So say if you have half a million dollars in your bank account. Right. But remember what I said, don’t get too excited when you have familiar construction that can, money can be gone tomorrow. But say you do have half a million dollars and you have $1 million worth of AR, so your current assets are one and a half million, you know, or that prepaid stuff can be, it can be part of it as well.
Speaker 2 45:33 But you’ve got that in the biggest current liability is your accounts payable. Then you got your unfunded payroll liability if you’re doing a for it, for your payroll, um, in any or that debt that must be paid within 12 months. So the summer that say it was, um, $1 million to keep a simple, so you have one and a half million dollars worth of assets, current meaning that can be liquidated to cash over current liabilities. So here’s the X, here’s the way the bank thinks about it. They thinking you’re gonna fail. Well, of course now is the bank is there to make you profitable? No. Do you know one thing the bank cares about the most? They can rebate how much money they make, how much money they make on you right now, disrespectful bags. But this business is business, but it’s also come, comes in. Other thing come out of it is your working capital and construction.
Speaker 2 46:26 You’re gonna hear a lot about working capital, right? Which shorter definition is take what we’re, what we’ve been talking about. So your working capital is your current assets. Let’s go. Let’s go back to that example. One and a half million dollars worth of current assets minus a million dollars worth of current liability. So your working capital of this half a million, that plays an important role. But that’s just so, so we talked about that, right? So we talked about the debt service coverage ratio of 1.2 to one. You got your current ratio, one and a half to one and last button Elise’s your debt to equity. So, so banks will finance you somewhere between two and a half and three to two 50 and $3 per every dollar of equity that you have. So if you have half a million dollars worth of equity, you can go up to a million and a half dollars worth of financing.
Speaker 2 47:15 So all of those things, and then to begin to add or take away depending. So if you have a lot of, so it, remember the whole thing about over billing and under billing over billing is a liability. It’s a current liability. You collected it by, you haven’t really earned it. And then under billing is an asset, but it’s not good for cash because you may have earned in revenue, but you haven’t build this so he’s not sitting on your bank account. So that plays into your current ratio too. So that’s why I love construction because there’s a lot of moving parts, right. Everything is a puzzle that you have to put back together. So, so remember those days and you got to stay on top of your work in progress. I know that we need to wrap up this show. So Eddie, any final thoughts on this? I’m Claudine. I see you.
Speaker 1 48:01 No, no. Whenever you die and whenever you get deep into the numbers of my, my, my, I start to lose track. I mean, I’m following along because we have talked on a number of the shows about bank, um, you know, Tate yeah. And obtaining capital and, and bank financing. And that, I think this is the resounding, um, kind of overarching messages that, um, you have to have your, your ratios correct. And a lot of people just don’t look at those ratios. They literally, and unless you’re managing your day to day numbers, you will have no idea what your ratios are. And, and by, by the way, um, a lot of lending, there is, um, a caveat in the contract that you will maintain certain ratios. Um,
Speaker 2 48:49 right. And we were just dealing with a situation like that with
Speaker 1 48:53 so heads up, heads up, read the fine print, definitely don’t enter when it’s yeah. Contracts without, um, you know, having a real, real strong understanding of, of what your contract means. Because once you do that and you go into default, we lose our options
Speaker 2 49:08 while we’re on the subject. Don’t ever look at a contract. You have to sign that. You have to personally guarantee with our having someone like Claudine or clouding and look at it on, on the, on the, on the legal side. And on the business side, you’ve got to have somebody who knows what ratios you’re going to be out here too. So it’s an open book test. So have somebody like somebody like me or, or somebody who understands ratios and understands bank financing and understand how that plays into your financial, um, roadmap that can help you with
Speaker 1 49:33 and don’t feel overwhelmed by it. This is something you’re not currently doing. If you’re really saying to yourself, why I don’t really watch my numbers very well, I don’t like doing it. Don’t really want to do it and hire somebody to do it. It’s worth, worth. And it’s not that expensive in the scheme of things. It’s really not all that expensive. And somebody else can do it. Somebody who loves to do it and it’ll provide you the guidance that you need. So if you’re one of those who just does not have an interest in numbers, and I said just that you just, it, it’s something you can absolutely hire somebody who loves to do it.
Speaker 2 50:05 So it’s been a great show. Thank you so much. Um, call us (559) 207-3148 or (209) 427-2200. Hey, he’s been a great show. Take care everybody. We’ll talk to you next week. Thank you.
Speaker 0 50:21 .