If you’re not familiar with the Profit First philosophy, you may get the wrong idea from its name. This week, we’re talking about how Profit First is really about people, and how implementing the cash flow method can help you build a stronger, more sustainable company with happier employees.
Topics we cover in this episode include:
- How does Profit First = People First?
- Business owners deserve to get paid
- Profit First provides guardrails for spending
- What do you do with the profit?
Visit the episode page at https://contractorsuccessforum.com/people for more details and a transcript of the show.
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[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we are gonna discuss how Profit First equals people first for contractors in our contracting business. And who do we have with us today to talk about that? We have Wade Carpenter with Carpenter and Company CPAs, and we have Stephen Brown with McDaniel Whitley Bonding and Insurance Agency. And I’m Rob Williams, author of the Pumpkin Plan for Contractors. And my company is IronGate Entrepreneurial Support Systems.
And today, what does that mean to us guys? How is Profit First the same thing as people first? What? What’s your–
How does Profit First = People First?
[00:00:47] Stephen Brown: No, I mean, you’re saying you put profit first, right?
[00:00:50] Rob Williams: Yes. We put profit first in order to make people first. Because without cash and money, you can’t take care of your people.
[00:00:58] Wade Carpenter: You know, a lot of people take the title Profit first and they think of greed. They think you’re trying to be greedy. And I remember a story from a few years back, it’s a friend of mine that’s a mastery member of the Profit First Professionals. And she told me a story about when she first started rolling this out to our clients. And one of her clients that never read the book called her up after seeing her advertisement and said, do you know what this sounds like, you, it sounds like you’re prioritizing taking your profit over what we do, and that’s not what it’s all about at all.
[00:01:35] Rob Williams: Yeah, because we actually had an employee get a letter very similar to that from somebody who probably had not read the book, I think either, and they said Profit First equals greed. And so, there’s an article, the title of that, that Profit First equals greed question mark.
But the point was, that’s not greed. That Profit first is just being a responsible way of handling anything. And I’ll ask you just real quickly, read this letter. Where this whole article came from, was a letter from an actual employee responded to somebody in response to somebody saying, that’s greed, that your people should come first.
And so this is the quote. This is from employee. This is not the owner writing this letter. So it’s real quick, but it says we totally understand how it sounds when we say Profit First. But it’s never meant over people. Profit First is a cash management method that ensures you put a percentage of your earnings into a designated profit account to ensure that your business stays profitable and sustainable.
This company has been the most family friendly of any that I have ever worked for. The first that has said that they are family first and actually means it. But our goal is to eradicate entrepreneurial poverty, and to make that happen, we have to convince people to pay themselves first. So, it’s interesting that employee just took it on themselves to write this letter back and respond to themselves.
So it was just somebody, it wasn’t a coach or anything, it was a front desk person. And to have that understanding and that letter inspire some of these articles, and this is, I think it’s going viral. I’ll we’ll see whether it’s going viral, but it’s, it’s come out well, um, it’s pretty, pretty meaningful to me.
Business owners deserve to get paid
[00:03:29] Stephen Brown: Contractors, I’m sure it’s all businesses, but contractors start a business, that’s their baby. They sacrifice for it to help it grow and neglect themselves. And then as a contractor gets older and realize that they need to tuck money away for their retirement, then they take more money out of the company.
And I think the great thing about the Profit First is that you stress that the management of your overall income includes a profit for yourself. And it’s not 80%, it’s not some crazy number. It’s a workable number that allows the contractor or the owner to pay themselves, pay their bills, support their family while their company grows.
[00:04:13] Wade Carpenter: I say it all the time. I see contractors that take home less than their receptionists make. And I’ve said this many times on this podcast, but you know, a lot of business owners are just like me. For the first several years of my businesses, I would plow all my profits back in. There are obviously stories where there are owners that take way too much and they drain their companies out, but the vast majority of contractors, small business owners in general, they keep plowing the profits back in and they don’t learn to build a sustainable business, a healthy business that can support them first, and then they can take care of their employees.
[00:04:52] Stephen Brown: Yeah.
Profit First provides guardrails for spending
[00:04:52] Rob Williams: It’s great. And you just said it, some people do take too much money, they just don’t know what it is. Profit First has those standard percentages that people should take out of what they’re making. So it’s actually a guardrail on a contractor if you’re an employee, on the business owner taking too much money out.
Because when they take too much money out, they probably don’t realize they’re taking too much money out. They just drive by the car dealership, and they, whoa, they really want that truck. So their emotion takes over and they don’t really have anything except for looking at their bank account. And they’re like, well, there’s a hundred thousand dollars in there. Let me go buy that truck. And it may not be allocated for that.
So when you have these guardrails on your account, you have the amount of money set aside in, in these different bank accounts, that’s the right amount to take. There’s a psychological aspect to this that actually makes you enjoy taking that money out better because you don’t have to worry about feeling guilty because one day you do go to that car dealership and you buy it and you feel excited about it. Well, the next day you might feel guilty.
If you know that has been a, the correct percentage and you’re living within that percentage, you feel so much better about spending that money and you can enjoy it. But my point in this part of the conversation was it not only gives them the money, the wages, like Wade’s talking about that they should earn so you have a healthy owner. It also puts a guardrail on them from taking too much money out because a lot of people that haven’t read the book or they aren’t doing it, don’t realize that the owner has his owner’s pay. And that’s a separate account from the profit. So the owner gets paid for what he’s doing there, but then there’s a profit for the company that the investors, the owner as an investor, or maybe there are investors that don’t work there.
They take that, so that’s the Profit First that we’re actually talking about. And then we can talk about now what do you, if you’re doing that, what can you do with this money? What are the benefits of having this?
[00:07:03] Wade Carpenter: A lot of people equate it to the corporate greed. And right now the statistics say there’s about 32 million small businesses in the US. And they provide almost half of the private employment in the this country. And small business owners are what built this country, and that’s what sustains this country.
And a lot of people that are employees, they think that the owners getting rich. And, I haven’t found any direct studies on this, but I did look up one that sort of seemed to indicate what I believe is that 2019 Economic Policy Institute report that basically looked at what a owner did in the company and then equated that to somebody working for somebody else, and they tended to make about $15,000 more.
And I don’t know really what if, how accurate that is, but I know that’s true. And a lot of the employees out there, they don’t realize how much the owner is struggling.
[00:08:00] Rob Williams: You just said they only make $15,000 more on average than that. I think that’s a huge point that people, it actually even surprises me and I’m–
[00:08:09] Wade Carpenter: Well, like I said, it was not a direct correlation, but, that, that’s what we were trying to figure out with that.
[00:08:15] Rob Williams: Yeah, that’s a great point because now that you say that it’s not surprising at all because there are so many owners that are making less than the employees, that even to balance out those owners that do make millions of dollars. So, it’s, that’s really interesting because you’re really kinda looking for the median, not the average. The typical owner and what he makes rather than that. And this article we’re talking about, how does it feel working for an owner that can’t pay his mortgage?
[00:08:47] Wade Carpenter: The employee doesn’t know that, that’s the thing, and they don’t realize that. But what I have seen, I implemented my business about five years ago. And I’ve helped several contractors put that in theirs. And the turnaround, when they apply it properly, is amazing. And, I’ve seen some people do exactly what I’ve done is that the more we grow, the more benefits I can provide to them.
I in particular changed my simple IRA plan to having a 401k profit sharing this year, just so that I could give more to my employees because they take such great care of me, and I’ve seen several contractors being able to do that because they’re more profitable.
What do you do with the profit?
[00:09:30] Rob Williams: That’s great. Because what do you, let’s talk, what do you do with the money? That’s one thing you do with the money. Because when people hear profit, they think that means going in buying a boat, or going and buying a car. So profit in the company, you gotta do something with it. It can be cash reserves.
I think we have a list here in this article that we were talking about in the first one, like you just said, profit sharing with employees. That’s one of the first things that you do with the profit account that you’ve got. You split it between the owner and the employees typically.
And then the second one that I just mentioned is vaulting up your cash reserves so you can be able to stay in business and keep those employees working when we do go through a downturn or maybe, I know we’ve had a lot of other conversations, when you don’t get that receivable, that you were counting on doing. You’ve got a little bit of cash in there for a rainy day.
And let’s say, I’ll just finish going down here, the capital improvements. How do you do that for your company? How in that might be buying new equipment, might be, buildings may be something. Yeah. I guess for us it’s typically equipment, in the contractor–
[00:10:40] Wade Carpenter: was gonna go with that.
[00:10:41] Rob Williams: Yeah. Talk about that for a minute.
[00:10:42] Wade Carpenter: I think, you know, business owners, we all say, hey, we wanna plow the money back in and one day it’s gonna pay off for us. One day. So we’re gonna buy this equipment. We just justify it in our brain, but we never end up taking what we should.
We never learned to run a sustainable business. And when you continually go buying that new truck at the end of the year just to save on taxes, and erode your profit just, needlessly, that’s what kills a small business.
[00:11:16] Rob Williams: Oh yeah that’s so good. Let’s see, and we’ll go into these other things. Employee wellness programs, that’s another one. I don’t see that as much in the, in construction– actually, I guess we are starting to see that a lot more. We didn’t have that a lot back in my days, but we’re seeing a lot more of the employee wellness and safety programs even, that’s where you can put the progress.
And then the big one that we don’t get, that we do see in our industry are the community programs. How many contractors support a baseball team or some kind of sports team or build a Habitat for Humanity house. That was our big thing was I was on the board of Habitat for a little bit, but the main thing we did a St. Jude House for about four years, donated a house each year. And that was a huge thing for us. But those community events are huge. And where does that come from? That comes out of profit. Just because you make a profit doesn’t mean you’re not doing something worthwhile with that profit.
[00:12:10] Wade Carpenter: Stephen, you’re being awfully quiet. Any thoughts here?
[00:12:12] Stephen Brown: No I get it. I totally get it. If you don’t have any accounting system in place, you’re sitting on a bunch of cash, you don’t know where it needs to go, right? So, it’s just there. It’s stressful. You’ve got it. And you wanna spend something, but you don’t know if you do, how it’s gonna affect your bills, your cash flow, and everything else.
And just whole idea of Profit First, and I’ve always liked is that, there’s just different accounts you park your money in. And outta sight, outta mind. You park your expense monies where it needs to go, and also your profit so you can afford to live and take care of your company.
I see so many contractors just stressed out of their minds.
[00:12:56] Rob Williams: Yep.
[00:12:57] Stephen Brown: Over this very subject.
[00:12:59] Wade Carpenter: Yep.
[00:12:59] Rob Williams: I tell you, I wish I’d had this for so long. Just we used to call things benchmarks. That was the closest thing we had to a Profit First system. And we’d have these industry benchmarks and these peer groups and, but I wish we had this back then. That would’ve taken out so much stress.
I can remember just all the days that I spent working on cash flow projections, and everything that we, that, this was just amazing. So, the stress part, that’s another thing, but the main thing we’re talking about is Profit First does not equal greed. This is the way to be generous is to take the profit first.
So it’s it sounds like it’s not true, but it’s really true. So, a paradox, I guess. Our word of the day, a paradox.
[00:13:43] Stephen Brown: Wow. I get it. Profit shouldn’t be a dirty word. It shouldn’t be something
[00:13:47] Rob Williams: like–
[00:13:48] Stephen Brown: you’re embarrassed about. But at the same time, in this context, profit is not, the concept of it is it’s not to drive personal greed. The old corporate culture is, my employees work for me only because I allow it.
And if they’re not serving me and my needs, then I’ll get rid of them. And that doesn’t work either for so many reasons.
[00:14:12] Wade Carpenter: Yeah, I mean small business in this country employs over 60 million people. And if a small business fails, then you know, they can’t employ these people. And across the board, about 50% of businesses fail to meet five years. In construction, it’s actually 63% of contractors fail to hit five years in business.
My message for today is learn to create a sustainable business. Yes, it’s not a bad thing for you to take home, a living wage, to be able to pay your mortgage and pay your bills and not get behind on your taxes. And that’s what this is all about.
[00:14:52] Rob Williams: We can’t say any better than that Wade. So we’ll let that be our last closing statement because Wade said it so well. So listen to us here on the Contractor Success Forum because we are here to make you a more profitable business. But what does that mean? That means a more generous business, in this episode as well. Can be.
So thank you for listening. I subscribe. Do all those things that we talk about. Subscribe to us wherever you’re listening to this so we know where you’re listening. This is great. Thanks. And come back and see us on our next show with Wade Carpenter, Carpenter and Company CPAs, Stephen Brown, McDaniel Whitley Bonding and Insurance Agency, and Rob Williams, The Pumpkin Plan for contractors right here.
All right, thanks a lot and see us on the next show.
[00:15:36] Stephen Brown: All right.