Busting Profit First Myths, Pt. 2
Stephen, Wade, and Rob are back with a second episode on Profit First myths. This week they dive deeper into common misconceptions about the Profit First method, TAPs, and working with a Profit First Professional.
The myths we discuss this week:
- I don’t need to work with a certified Profit First expert to implement the system.
- Anybody can teach Profit First.
- My business won’t grow if I take my profit first.
- Profit should be used for capital expenditures.
- Profit First says to put aside 15% for taxes. That’s not enough.
- If I can’t hit the Target Allocation Percentages (TAPs), the system won’t work.
If you missed part one, go back to hear the first six myths. And don’t forget to send questions or content suggestions to us at the links below.
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[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today, we have part two, dos, of the Profit First myths. That is myths about Profit First. On the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business.
And again, in one corner warming up is Stephen Brown, our celebrity construction bond agent sponsored and from McDaniel-Whitley bonding and insurance. Yes. And in the other corner, we have Wade Carpenter, Carpenter and Company CPAs helping contractors nationwide. And I’m Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, helping drive profits in your businesses. And today we have part two, part dos, of the myths of Profit First. And our celebrity bond agent Stephen Brown will be reading these questions– these myths, not questions, myths.
[00:01:14] Stephen Brown: These are myths Rob. These are myths. These, these are myths about Profit First.
[00:01:20] Rob Williams: Yes, they are myths. That means not true. Not true.
[00:01:25] Stephen Brown: Okay. Alright.
[00:01:28] Rob Williams: Okay.
[00:01:29] Stephen Brown: I don’t know. You’re going to have to sell me on the fact that these myths aren’t true.
[00:01:33] Rob Williams: All right. Wade and I are here.
[00:01:34] Stephen Brown: –into this stuff.
[00:01:36] Rob Williams: Is why we are here for you to dispel the myths of Profit First today.
[00:01:41] Stephen Brown: Wade, I thought of a perfect slogan for you. The C in CPA stands for Carpenter!
[00:01:49] Rob Williams: Yes.
[00:01:51] Stephen Brown: Certified Carpenter. Alright. Hey,
[00:01:54] Wade Carpenter: You don’t
[00:01:54] Stephen Brown: on.
[00:01:55] Wade Carpenter: on your house.
[00:01:59] Stephen Brown: Myth number seven, guys. Profit First does not need a certified expert.
[00:02:07] Wade Carpenter: You definitely can read the book and do it yourself and try to do it yourself. One thing we were talking about was that, a lot of people don’t do it correctly. Or they take pieces of it, or they don’t carve out an owner’s comp account.
I was just discussing that with a client yesterday and why they needed to keep that. Definitely things that I would think that, anybody could implement this, it’s a simple system, but as I’ve joined Profit First, and the more I work with people, you realize that there are just a lot of quirks to it. And you may think, you know, it was just putting it in bank accounts, but there’s thought and strategy that goes behind it. And when you run into challenges, when you need accountability to make sure these things work, when you need the system on setting up the rhythms and getting it implemented properly, and looking at it monthly, quarterly, annual basis. Things change, as we’ve said, and you need some help and outside help definitely helps you avoid that tunnel vision that a lot of us get about our own businesses.
What do you think about that, Rob?
[00:03:19] Rob Williams: Yeah, I think there’s actually, this is a two-part question, I believe, Stephen. Your two-part question. There’s an expert, but then a certified expert. So I know when I started Profit First somebody had told me about it, and so I dug into the books and read a lot and did it and I was helping a client with it and we kind of partially did something. We didn’t get very far in it. It helped set aside some taxes, and it just barely scraped the surface. And I fought through this for a year or two and didn’t really get very far with it.
And half the stuff that I had done, I had done something, so it was happening, but it was not the Profit First way because the Profit First book just doesn’t have enough pages to explain a lot for that. So the certified part, when you get somebody that’s actually in the Profit First family here, certified, we share information and have discussions every day on the board. We ask each other questions. I get emails and little messages all the time. Oh, there’s a question. Can you help answer this? All day long I’m getting these.
There’s just a plethora of information out there and knowledge. So you don’t run into those experiences. The cost to have an experienced certified person, to me, far outweighs the investment you put into that. The effort that you’re going to save from learning this thing that takes over and over and over again.
So hopefully we head off a lot of those same mistakes that hundreds of thousands of people have already made. So that’s why the certified– people probably don’t even understand, there is a, Wade and I both are Mastery Certified Profit First members. So that means we have gone through our testing and then they recertify us and retest us. And we, I meet with my coach every– my Profit First coach’s coach every two weeks and we go over these things.
So there’s a lot behind the scenes. It’s not just like we took a little test and had some knowledge and read an extra book. It’s a constant ongoing process that hopefully we can help those clients avoid a lot of the mistakes.
[00:05:25] Stephen Brown: Okay, well, that leads into myth number eight then perfectly. Which is… myth number eight is anybody can teach Profit First.
[00:05:37] Rob Williams: It sounds like the Ratatouille show: “Anyone can be a chef…”
[00:05:41] Stephen Brown: Yeah, you teach it and support it.
[00:05:43] Rob Williams: So, so yeah. Can anyone teach and support Profit First? Anyone can be a chef. A Profit First Professional. Sorry. I have kids that watch Disney things, Ratatouille and stuff. So.
[00:05:56] Wade Carpenter: Well, that’s not necessarily true. They don’t accept everybody as a Profit First Professional.
[00:06:01] Rob Williams: That’s that’s actually true. So, so no, as the chef explained, it can come from anywhere. You can be an expert, but anyone can’t do that, they do have to get accepted. You have to go through these interview processes and you have to have experience. And then, then we have to go through six months just for the very first certification. After—
[00:06:21] Stephen Brown: Well, anyone can be a CPA or a lawyer or a doctor. That’s a fact. But there’s a lot to it.
[00:06:30] Rob Williams: So, so anyone can teach and support it. I think there’s a lot of things with this myth, the direction that this could go. You need experience as a business person and books to be able to get into that. But then we also get that training that we’ve gotten from Profit First to share the hundreds of thousands of businesses’ experiences that have gone through this before.
So having a Certified Profit First person help you and teach you and support you is– you get a lot of that extra benefit rather than just having somebody else read the book and support you. Wade, what do you think about that one?
[00:07:11] Wade Carpenter: Well, I can talk from my personal experience because back in 2014, when the first edition of Profit First came out, I read it, and like a lot of CPAs, I dismissed it. And, a couple of years later I had a client that said, I read the book. I’m implementing in this in my system. Can you help me? I was like, sure. I know the system. I hadn’t implemented it. And, yes, we can handle the bookkeeping, that kind of stuff. That is pretty straightforward. But when it comes to helping somebody actually implement it and learn the quirks and the things that go wrong and why you may fail at it and what to do when you’re short on cash or, those kinds of things.
I didn’t really learn anything until I became a Profit First Professional and started implementing for myself. And every month when I looked at my books, I learned something new. Even my own books. The insight that we get from thinking about the behaviors and the structure that’s behind Profit First, that doesn’t come from reading a book.
There’s some great information in the book. We’ve talked about it on other podcasts, but there are definitely some quirks to construction that are not in the book. And there’s a derivative book that talks about it. They do a horrible job of it, in my opinion. But you know, there’s a lot of quirks that me and Rob know just from working with these– either living it or working with it– that we know from construction.
So that was probably my long-winded answer. Sorry about that.
[00:08:47] Rob Williams: No, that’s great. That’s great.
[00:08:49] Stephen Brown: No I’ll buy that. From what I’ve observed, that’s definitely true.
[00:08:53] Wade Carpenter: But you’re going to wait until the end of the quarter, right?
[00:08:55] Stephen Brown: Right. I’m going to wait till the end of quarter. Right now, I’m gonna move on to myth number nine of 12. I won’t grow if I take my Profit First.
[00:09:08] Rob Williams: I liked this one because I always thought– the expression, it takes money to make money. And return on the assets. And so it was always a formula. I was a finance major and MBA, so it seemed like a lot of the venture capital and these business owners, it was always about, well, you make this 30% return on investment.
So a lot of my spreadsheets that I had when I was projecting things out were based on how much assets in there. And it was always just about the percent. We kind of made these assumptions that you’re going to make this percent return on your assets and your investment. And that myth kinda got, it’s not, it’s not standard at all, what percent that you make on your investment, particularly in the construction industry.
What Profit First, and the Good to Great guy, Jim Collins, for decades studied these businesses and it wasn’t the ones that were always taking the chances and going out and putting this stuff. It was the ones that could be steady and grow. And if you take the profits out, what Mike and a lot of the other people found is your business is healthier because you’re healthier and you can run your business healthier.
I tell you what, I was not physically healthy a lot of times when I was cranking everything back in the business. I had a lot of different businesses and my strategy was, let’s have a four year plan. Let’s put everything in here, and it just about killed me on a couple of these projects and my mindset wasn’t as good as it could have been.
There’s so many things, even moreso today, technology drivers that make running a business a lot cheaper. You don’t have to have the overhead that you may have had to have back years ago. I know in the seventies and eighties in our office, we had, 12-15 people just sitting there typing in invoices. It was just a massive paperwork thing. And today you don’t have that. You’ve got all these computers and systems. So maybe if that was true 30 years ago, I don’t know, today, make yourself happier, take that profit. Because it’s about, eradicating entrepreneurial poverty is what Mike says, but it’s that mindset. If I’d had a clearer mind about what I was doing in the past, I think I would have been a lot more successful. If I had been taking some of those profits out. Wade, what’s your take on this one?
[00:11:48] Wade Carpenter: Well, I can definitely dispute this one because ever since I joined Profit First and implemented it, I’ve had the biggest growth. My firm has been on autopilot for 20 years, and when I implemented this, we’ve taken some huge leaps. And constraining my cash makes me think about, what do I want to do with it, and it’s, were you getting the higher ROI on our marketing, those kinds of things. But we have never grown like we’ve grown since I’ve implemented this.
I’ve seen it in other businesses and it spurs something that, you’re looking at your bank account on a very regular basis. And even though right now we advocate in Profit First that you should have a couple of months of overhead put in. I actually have four months of overhead put aside, but I constrain my cash accounts still. And it still feels like, every month that I have to go out there and get some more.
[00:12:50] Rob Williams: Yeah.
[00:12:51] Wade Carpenter: And that’s what’s pushing me to the higher and higher levels.
[00:12:54] Rob Williams: I’ve got one more point on this one. That was a great point. Forgot to mention before. When you start your business, if you start with Profit First, you’re identifying the profitable business model in the beginning. And you are growing that. It forces you to have a profitable business: product offerings, your sales offerings, your models.
What happens to so many businesses, and I know I did it: I’ve got an example of a window business I got into that was terribly not profitable because all the overhead. If I had been doing Profit First, I would have grown those profitable businesses.
Narrow it down early. So you don’t spend all this time and effort on something that at $1 million, wasn’t that profitable and you didn’t have the cash flow, then you grow it to $4 million. You still have a $4 million bad business. If you start this in the beginning, you start with a healthier, I guess it’s like a healthy baby. You start it up front and then grow that healthy business.
To me. That’s actually my favorite argument about starting this early and, and taking those profit first. You’ll eliminate those bad portions of your business and your sales early and you’ll grow a more, a healthier business. On the business side, I was talking about the individual earlier, but grow that healthy business early. How about that? We ready for the next question?
[00:14:20] Stephen Brown: I can just tell you guys, you all really nailed that. I enjoyed that very much, and you got me fired up with that last one. So thank you. Myth number 10. Profit should be used for capital expenditures.
[00:14:34] Rob Williams: That is a myth. And that is so interesting because I know I’ve made this mistake. I was glad to go over these questions again, because even on the coaching, I have to remember this. Profit is the money, the cash designed for the people that have invested in this company.
If you spend the profit on your business, if it’s a capital expenditure inside your business, then that’s an expense. It’s no longer profit. And you’re not really making those profits. You’re not having that healthy business. You’re not, you’re no longer making those percentages anymore.
This was a great thing because I’ve, even as a coach, I’ve actually fallen back into this. I’ve said, well, let’s do this at the end of the quarter. Then you can decide whether to buy some equipment with that. Maybe buying the truck, if that’s your truck that you personally buy, then maybe you can count that, even if you’re writing it off to your businesses, I can see maybe justifying that. If, if it’s out of the profit account.
So Wade, where do you want to go?
[00:15:40] Wade Carpenter: We’re gonna let you know, I’ve kinda gone the other way too. Because I’ve said many times on this podcast about the contractor that is so worried about taxes that December 27th, they’re in their Ford dealership, getting that brand new F-250 loaded up. They don’t want to pay taxes on it. They’ve erased their profit for the year. In fact, they’ve spent some profit that they’re going to have to pay for years down the road.
Too many people will plow that profit back in. I know I did it for 20 years before I started Profit First. You plow it back in and you tell yourself that I’ll make an investment in my future by putting this money back in. We kid ourselves. At the end of the day, if we don’t have a sustainable, healthy business, then we’re just putting money back. I, I was really bad about buying the software or the next thing, equipment to help us run faster or whatever, got to get the system right.
And if you keep plowing it back in, and never take something for yourself, I had a contractor that came to me and said, 60 something years old, and he’s made some great money in construction, but he hasn’t kept a dime.
And a lot of us, maybe sitting behind the desk, we can do that, but construction guys can’t do that forever. We can’t do that forever either, but you know, you’re going to have something put in reserve. And if you never learned to put your profit aside, you’re never going to have it.
[00:17:11] Rob Williams: Yep. That’s great. That’s a great point, take that. And that needs to go towards retirement planning, towards something. Take that out and then having in your op ex and or, or if you’ve got an equipment account, you’ve got something separate that’s not your profit account, you can use it for that.
So this is a great thing, and I need to remember this one as well. Just that cap ex is for the investors’ profit. If you need to save up for other things to put back in your business, that needs to be out of your operating expenses or, or an account that’s specifically set aside for that.
[00:17:48] Stephen Brown: Okay.
[00:17:50] Rob Williams: All right. How about that one?
[00:17:51] Stephen Brown: All right. Good. Myth number 11. Profit First says you should put aside 15% for taxes. That’s not enough.
[00:18:01] Rob Williams: I just got to go to Wade for this one. I like this one too.
[00:18:05] Wade Carpenter: I think we recently answered this, but your profit is based on your net income, not based on your gross income. And so if we’re talking about 15%, that may or may not be, in a lot of contractors cases, that may be too high. If you’re looking at 15% of the gross, you’re looking at 15% of the net. And depending on how you’re structured, like if you’re a sole proprietor or something like that, you may have some extra self-employment taxes, but what I do is say, what was last year’s taxes, where we think we’re going to be? Typically for a lot of my contractors, it might be, four or 5% is plenty.
[00:18:44] Rob Williams: Yeah. I’d say the people that are asking this question, we may have to help them define gross and net. So the–
[00:18:51] Wade Carpenter: After expenses.
[00:18:53] Rob Williams: So if you have your real profit, all the money comes in, your sales, your what we might call revenue, might be called gross revenue, gross profit. That money comes in and we set some money aside for your materials and your subs, and then you have your real revenue.
So when we talk about the 15%, it is the money, let’s say you’re a $5 million business. You put $4 million aside for materials and subs. So you got a million dollars of real revenue left to run your business.
This 15% that Profit First is talking about is the 15% of that real revenue, which would be $150,000. So that is not 15% of your net profit. It’s 15% of your income. So that may be the 40% that your accountant told you to put aside. So, I guess we don’t want to get into a real deep number, but that 15% is of real revenue, not 15% of your profits. So it could be 40, 50% the same thing as 40 50% of your profit.
So understanding what you’re multiplying by 15% is what’s really important here. So it’s not saying you’re in a 15% tax bracket. So, if you are in a 15% tax bracket, let’s get on Profit First to get you to a higher tax bracket.
[00:20:18] Stephen Brown: Sounds good. Wade, anything else? All right. Before we move on to myth number 12, what does TAPs mean?
[00:20:28] Rob Williams: Target Allocation Percentages.
[00:20:33] Stephen Brown: Okay. Last myth. Number 12. The very last myth that we have for you in this show is: I must hit those target allocated percentages. My TAPs. I must hit them. What’s the answer?
[00:20:50] Rob Williams: Yes. These are not shoes or taps or playing the things. These are your target allocated percentages, which you have as a suggested goal that comes out of the book. So.
[00:21:04] Stephen Brown: If you don’t hit them, does the system not work? What’s going on with–
[00:21:07] Rob Williams: Oh, my gosh. Well, the system, your business is going to have to grow and you’re gonna have to learn to get to these things. These targets, let’s start with where they came from. These target allocation percentages came from many many businesses across the industries as a percent of the real revenue, which is amazing, it was a great benchmark system across multiple industries.
We’re lucky to have these figures in the book for different sized businesses. The book says it’s the top 13%, or is the top 17%? It’s a top percent of businesses that are successful, it’s not your average business. And this is the goal that you want to get to.
You’re probably not there yet. We occasionally I’ll have somebody come along that’s already there, but you’re probably way below those. And your goal is to hit those percentages over time. You don’t need to hit them right off. You’ve got to take time to mold and work on your business because Profit First is the scaffolding and the benchmarking system to help you get to a more successful profitable business.
You don’t need to hit them that first day. They are a goal that you want to hit over time and you want to learn, it’s really more about constantly improving. We have some businesses that do much better than those. Why not be in the top 1%? The top 1% might be better than those target allocation percentages.
So you don’t have to stop when you get there. You keep going. How about that? Wade, what do you, what do you feel on that?
[00:22:42] Wade Carpenter: Well, again, the target allocation percentages in the book are across all industries. And I know when I first got into Profit First, I’m so used to the benchmarks in a construction financial statement, I was like, this can’t possibly work. Believe it or not, if you look at it and you actually break it down with real revenue, they’re a lot closer than you think, but they’re also suggested guides and there are situations where some will do better. Maybe that heavy equipment guy that’s got low overhead runs it out of of his basement, versus the contractor that’s got this really fancy office. They may be doing better.
And again, they are suggestions and it depends on your facts and your circumstances to how you’re going to do. They are just guides and they are something to strive for, but not something that you should beat yourself up with if you don’t hit them. Our goal is to help you maximize what you can out of what you do. So that’s what they’re there for. They’re targets and they’re suggestions.
[00:23:46] Rob Williams: And they are, we don’t want to say they’re not realistic because I know from my land development business, I was of the opinion when I started looking at the numbers, we had a really successful year this year or two ago, and I was looking at numbers and I said, well, let’s just for fun compare these on our real successful year. They were within 2%. I couldn’t believe how close they were to those because I thought land development would just be a whole different animal.
But after you’d take out the subs and everything else, and you looked at that, it was unbelievable how close they were. So they are good benchmarks. Don’t dismiss and say, it’s not going to work for me because people are achieving these numbers.
I actually have more people think that they’re not realistic for their business, but they are realistic. You can work on these small numbers, just inching up at a time. They have been proven to be realistic, even in our construction industry, but they may not be your numbers.
So you don’t have to – and especially you don’t have to hit them this quarter. That’s probably the biggest mistake people make trying to implement it. I made that mistake. I put those percentages just to start off and started allocating it. Then I had to start cheating and I had to start pulling money out because that, wasn’t where I was.
You have to start where you are and then you have to build up to that. If you try to hit those off the bat, you’re going to possibly create a real mess. Those are goals that you want to go with. So yes, so you don’t have to hit those TAPs. That is a goal suggestion. Many businesses are, and it may be that you even have to change your business model a little bit to try to get that.
But that’s what a successful business should look like.
[00:25:29] Stephen Brown: Okay, guys. Appreciate it.
[00:25:31] Rob Williams: Yeah, these were our, our Profit First myths. The top myths that we could come up with for Profit First. And this is really been in a very great Contractor Success Forum that we had discussing today. So take a look at those show notes. There’s going to be so much information about these myths out there.
Send us your questions. So if you’ve got any questions for us, send them and we are here to help you drive your profits.
Stephen Brown, a construction bond agent with McDaniel-Whitley bonding and insurance company. Thank you for asking us those questions today. And Wade Carpenter with Carpenter and Company, CPAs giving us vast knowledge. Dispelling the myths of Profit First. Have a great day and see you at the next Contractor Success Forum.