Money mindset: The psychology of profit in construction

Have you ever felt like the world is ending because your bank balance is low and you don’t know how you’re going to pay your people or your bills? Or you’re on top of the world because your bank balance is high, but the next day the cash disappears? Let’s talk about the psychology of money and how you can use your innate habits to control your construction company’s success.

Topics we cover in this episode include:

  • The Gathering Principle
  • The Principle of Designated Spaces
  • The Principle of Sequencing
  • Lay the foundation of your business first
  • Rhythm and the Principle of Consistency
  • Temptation
  • Abundance vs. Scarcity Mindset

LINKS
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

TRANSCRIPT

[00:00:06] Wade Carpenter: Have you ever felt like the world is coming to an end because your bank balance is low and you don’t know how you’re going to pay your people or your bills? You ever felt on top of the world because your bank balance is high, then the next day the cash disappears and you have that feeling of doom again?

Today we’re talking about the psychology of money and how you can use the innate habits in all of us to control your construction company’s success.

Come on in. Let’s talk about it. This is the Contractor Success Forum. If you’re new here, I’m Wade Carpenter with Carpenter & Company CPAs. With me, my co host, Stephen Brown with McDaniel, Whitley Bonding & Insurance.

Stephen, a lot of cash flying around in construction and it can appear and disappear just as fast. Any initial thoughts on this?

[00:00:41] Stephen Brown: What a great topic and what a relaxing topic to talk about. First of all, you’re stressed over money? Here’s a game plan, something you can do about it. I think it’s great, Wade.

[00:00:51] Wade Carpenter: You know, Implementing Profit First in my business over five years ago, as well as helping many contractors implement it in theirs, has made me see the way people act around money and the Profit First book talks about some concepts and the habits.

 Today I’m going to talk about some of those things Michael Michalowicz does talk about in the book. But my perception of how people treat money, a lot of times it is an unconscious decision because they are baked into all of us. How we react to those decisions spells the difference between success and failure. That’s what I wanted to talk about today.

I want to start with one which is really not in Mike Michalowicz’s book.

The Gathering Principle

[00:01:26] Wade Carpenter: The first concept is accumulate and what I call the gathering principle. Let me give you an analogy to start this off.

Say you’re the owner of a buffet restaurant. The food comes in and you immediately take it off the truck and stick it right on the buffet table. And people come in and eat it and the owner doesn’t take time to eat. They make sure that their people get fed.

At the end of the day, they get to eat what’s left over. And a lot of times what’s left over is that cold three bean salad nobody else wanted, if there’s anything.

[00:01:53] Stephen Brown: I’m sorry, I like three beans, go ahead.

[00:01:56] Wade Carpenter: A lot of times we take what’s left over. ,

[00:01:58] Stephen Brown: Sure, and you’re getting paid less than your employees, your good employees. You’re taking out less from the company.

[00:02:05] Wade Carpenter: Right.

So going back to this buffet analogy, If you think about your own business, the money comes in one place, and then you got to pay your people, immediately goes right back out. Then you got to pay your vendors and suppliers, and if there’s anything left over, it’s left to chance. You don’t really know whether you got something for tomorrow.

When we accumulate it in one place, we can’t spend it in the same place. If we do, it’s just like that cash that comes in, it goes out just as fast. It’s easy to feel like you’re on top of the world because a lot of cash came in, but then it goes right back out and maybe you bought something that you wish you hadn’t because it’s oh, I forgot about that bill coming due.

Have you ever seen that?

[00:02:41] Stephen Brown: Sure. It’s just a natural reaction, isn’t it? How you perceive things. We live in our little valley. There’s so many things going on that we’re not perceiving, because we’re so busy and lost in our own little time and place. That’s a good point, Wade.

[00:02:57] Wade Carpenter: The point of Profit First is we’re going to carve our money up into different bank accounts, and we do not pay money out of the same bank account that it comes in, just like that buffet.

The Principle of Designated Spaces

[00:03:06] Wade Carpenter: The second concept I wanted to talk about was allocating, or the principle of designated spaces.

 You can think about an envelope budgeting system. Mike Michalowicz talks about the concept of Parkinson’s law. If you don’t know Parkinson’s law, it was originally defines the concept of time. It’s basically time expands to fill the a lot of time.

[00:03:24] Wade Carpenter: So if you’ve got a lot of time to do a project, it’s going to take a lot of time. If you only got a little bit of time, it’s amazing how fast you can get some things done.

 If you’ve ever watched a construction company trying to meet a deadline, the last blitz before you’re done sometimes is most productive time. The point Mike Michalowicz makes about it is this concept of Parkinson’s law adapts to any resource. When we have a lot in the bank, we feel invincible. When we have very little, we feel like the world is coming to an end.

[00:03:51] Stephen Brown: Either way, it’s not good. You feel like the world’s coming to an end. The stress just kills you. You’re thinking, how am I going to get through this? I don’t have the resources to do it. And it’s getting to be crunch time on this project. And then you have too much cash in the bank and you’re invincible, then you’re not concentrating on getting the job done.

And you’re thinking that it’s okay to relax and let me stroke my ego a little bit and kick back and enjoy the fruits of all my efforts.

[00:04:17] Wade Carpenter: One of the points Mike makes is that we act very differently when we have a lot of money versus a little money. When we have little money in the bank, we get very frugal and we spend it very differently.

[00:04:27] Stephen Brown: It’s like that analogy of the toothpaste. It is absolutely amazing to me how much extra toothpaste I can get out of my tube when it’s empty. It seems like I never get to a point of throwing them away because there’s always more you can get out of it.

[00:04:42] Wade Carpenter: Right. We do act very differently when we have more money versus little money. Sometimes it’s unconscious decisions, but by carving it into smaller buckets, by putting it in different bank accounts, it gives us a clarity to know exactly how much we can spend and also puts that scarcity mindset about it.

 We’re going to talk about the scarcity versus abundance a little more later. It lets us know if we hire that next person. , one of the biggest things is the clarity and the peace of mind that comes from knowing each dollar’s purpose. And if things are getting tight, then you got to do something about it, versus having everything in one bank account, and you got to spend everything out of that.

[00:05:19] Stephen Brown: That makes perfect sense.

 You take a job, you give them a price, and you get the work done, and then you get your check. And you take that and , you pay your employees first because that’s mandatory to get them to come back and do more work.

[00:05:33] Stephen Brown: Then you got to pay for your materials so you can keep those materials coming. What about the other things that exist that you just don’t think about? That’s why it’s so smart to set up different bank accounts. These accounts are designed to help you think of the different things that that check that you get paid on the job has to go for. Without that, how do you know whether you’re getting ahead or not?

 It’s like the large contractor of mine that was giving advice to a smaller contractor said we account for the shovels. The shovels are going to wear out and you got to understand that once that shovel wears out, it seems like a little thing, but it comes out of our profit if we don’t plan for it. It’s the smallest detail, but it’s the mindset that you have to have.

[00:06:12] Wade Carpenter: We’ll come back to this, but scarcity versus abundance has a lot to do with it. We can think we’re as thrifty as we want, but there are a lot of things we do that are controlled by our habits. And we can’t change our habits, but how do we change the structure of our system so that we work within those habits?

[00:06:28] Stephen Brown: It makes a lot of sense.

The Principle of Sequencing

[00:06:30] Wade Carpenter: So let’s talk about the next one, and that is order, or principle of sequencing,

Mike Michalowicz talks about the primacy effect, or essentially what you put first gets done. And Profit First, the title may sound awful greedy, but if you don’t put profit first, it’s not going to be there. From a behavioral standpoint, it is human nature. And we value and prioritize what we attend to first.

If you’re overweight and you smoked and you drank all your life and you have a heart attack, you come out of the hospital and you survive it, for many people, they’re going to put their health first and it gets done. And a lot of times that will change their life.

But what we put first in our life. are the things that we get done.

 From a financial discipline, taking and allocating that profit first ensures it’s going to be there in cash when it’s all done, when we need it.

[00:07:14] Stephen Brown: Of course. And like you said, Wade, the whole idea of saying Profit First just sounds so greedy and capitalistic, but that’s not the point. The point is you have to focus on something. What you do with your profit is up to you. You can do anything you want with your profit. But the purpose of a business to survive is to make profit.

[00:07:33] Wade Carpenter: I’m glad you led me directly into my next point.

Lay the foundation of your business first

[00:07:35] Wade Carpenter: You know, for construction the analogy of building a building. You got to lay the foundation first. You don’t want to put up the walls before you put the foundation up.

And having profit is the foundation of a business. It allows for growth . So if you want to have a sustainable business, you need to find out how to find that profit in your business.

[00:07:55] Stephen Brown: What I do for a living, Wade, surety bonding, the approval process is based on your ability to make a profit. Your track record making a profit, your accounting system, measuring your profits. Because if you don’t know how much profit to put on a job and how to maintain that profit, then you’re not a good risk to the bonding company. You’re going to be a claim.

Rhythm and the Principle of Consistency

[00:08:14] Wade Carpenter: The next one was Rhythm and the Principle of Consistency. There’s a lot of psychological benefits of having a predictable routine. There’s a lot of different theories around habit forming .

 From a Profit First standpoint, he talks about in the book, the 10 24 rule. Which means we’re going to do things on the 10th and the 24th. And in construction, a lot of times it has to be more often like weekly, simply because we’re paying our employees weekly, or subs. But when you just ad hoc, just like the money comes in on that buffet, it goes right back out. So if you allow everybody to scream on Monday and Tuesday I got to have a check, I got to have a check, you just tell them no, we pay everybody on Fridays or every on the 20th of every month. That establishes a routine that allows you to get out of that unpredictability of that cash.

[00:08:57] Stephen Brown: I think the routine is everything. You’re going to kill yourself. If you don’t have that routine in place. You’re getting in a vicious cycle where their dependence is totally on you. So that’s just one example.

[00:09:08] Wade Carpenter: Back to the rhythm principle, not only money going out, but it also coming in. As we accumulate that money, we want to put it aside, and then we’re going to allocate it In our different buckets on a certain time date of the month.

 The 10/24 rule doesn’t have to be yours, but you do need to establish a routine. And by doing so, the money in, and then the money out, gets you out of a lot of the chaos that is the day to day in construction.

[00:09:31] Stephen Brown: Okay.

Temptation

[00:09:32] Wade Carpenter: The next concept has to do with temptation.

In the book, Mike Michalowicz relates, if you have chocolate chip cookies in the house and you’re trying to lose weight, it’s awful hard to avoid that temptation. And we’re trying to remove the temptation to the extent we can. In money, it’s the same thing. If we have money, we are tempted to spend it.

And I wanted to give a couple of analogies in the way of money, that hopefully will resonate. Anybody that’s got a retirement plan at work, a 401k, since they brought those out, people have put aside money for their retirement.

Before that, a lot of people never did. If it wasn’t put aside for them, they were going into retirement broke. So what happens with a 401k? They take it out of your check. Before you even see it, before you spend it, and you don’t miss it. So that’s one very good way that it works well to make sure that people have money set aside for retirement.

Another analogy with money, if you’ve got a mortgage on your house and they escrow your real estate taxes. I don’t know what they are there in Memphis, but ours have gone through the roof.

But, if you had this bill come due in November, and you haven’t thought about it, $5,000 it’s not going to be there.

The mortgage company making you put aside a little bit every month, it doesn’t hurt as bad and make sure that you’re able to cover it and you don’t lose your house because you hadn’t paid your taxes.

[00:10:45] Stephen Brown: Of course.

[00:10:46] Wade Carpenter: In Profit First, not facing these daily temptations, we do that by removing some of the temptations of putting it in a separate bank account. Sometimes we’ll put a profit account in a different bank, and we’re not tempted to spend it.

 Avoiding temptation can go a long way to making sure that you have a clear, consistent, and successful contracting company.

[00:11:04] Stephen Brown: Okay.

[00:11:05] Wade Carpenter: One other one is putting a priority on yourself.

The owner is the last to eat, the owner makes sure everybody else is taken care of, but a lot of times the owner is the hardest working person in the business. They know how everything’s done. They work all day and all night and all weekend.

[00:11:20] Stephen Brown: And they’re stuck with that cold three bean salad.

[00:11:22] Wade Carpenter: Absolutely. There’s an old saying, it’s leaders eat last and that sounds all well and good from a motivational standpoint, but from the standpoint of you running your business, I think that’s bad advice.

[00:11:33] Stephen Brown: I think it’s atrocious advice. It’s like being in an airplane. They tell you to put the oxygen mask on first so you can help others.

[00:11:40] Wade Carpenter: You went exactly where I was going with this.

That flight attendant says, you got to put your oxygen mask on. If you pass out, you’re not going to be able to help anybody else. And exact same thing. You got to be able to survive as the owner of the business.

Otherwise you can’t take care of your employees or take care of your customers or anybody else. And too often we jump into business and we’ve become the martyr, but we never learned to make it profitable. So it runs without us.

And when that happens, that business is worth nothing because, what it would take to cover what you do in your business, you would be paying a lot more money than I’m sure you do. To replace what you do, you’ve got to learn to do that as well as, it’s got to be rewarding for the owner, or otherwise it’s not worth being in business. You just bought yourself a job that you’re not getting paid very well.

[00:12:27] Stephen Brown: You just bought yourself a job and you’ve got 8,000 times more stress than you had in your other job.

[00:12:32] Wade Carpenter: If you look at the failure rate of businesses across the spectrum, construction is actually a little worse than a lot of them, but the ones that make it are the ones that actually learn to pay themselves and become profitable.

 Owners, learn to put your oxygen mask on, work on your profitability, and if you’re not able to do that, you’re not going to build a long term survivable business.

[00:12:53] Stephen Brown: Okay. That makes a lot of sense. I’m thinking in my mind, and as the owner, as you pay yourself, you should have the same sort of principles in place for managing your personal expenses and Income.

[00:13:02] Wade Carpenter: Absolutely. And it works very well. And this is not all about Profit First, but a lot of these principles that he brought out, go a long way to making sure that you have a sustainable business.

Abundance vs. Scarcity Mindset

[00:13:12] Wade Carpenter: To move into the next topic, the thought of the abundance versus a scarcity mindset.

 We talked about, we’ve got a bunch of money in our account versus a little bit of money and how we act differently.

 There’s a big difference between, if you have an abundant, feeling of self worth and, you can sleep well at night, you’re not worried about where things are going to come from versus the scarcity mindset.

[00:13:33] Wade Carpenter: How am I going to. pay my employees? I keep seeing contractors take these loans that you got to pay by the week and the interest rates are, they’re horrible. We end up, doing these things to make sure that we continue to run.

 The point I’m coming to here is, by adopting this scarcity mindset of bringing order to your cash, where we’re putting it in buckets, and that gives us this scarcity mindset about it, eventually leads to feeling of abundance. Because we know exactly what we’ve got cash to spend for, as opposed to, we got it in one bucket and then we don’t know if we’re going to have enough to do this or that or grow through this this next contract.

What is amazing to me, and I’ve seen this in myself as well as some other people that I’ve helped implement Profit First, is– I’ll just use my own self.

 When I first started my CPA firm, I ran up a bunch of credit card debt to be able to afford to get started. That hung over me for a long time. I had a mortgage on me, and in the last few years, I’ve actually gotten control of my business and I’ve paid off all those credit cards, as well as paid off my mortgage.

[00:14:35] Wade Carpenter: And having that mortgage payment, you just don’t know what that abundance mindset has done to hey, I can go do other things. I don’t have to worry where my next meal is going to come from.

You end up stacking back cash and this abundance mindset is, we’ve got it put aside and I don’t have it saved for any particular reason, but it’s there if I need it and I can take advantage of opportunities as they may arise.

Versus , I got a deal on a skid steer or something like that. But I can’t do it because you can’t get financing or, you don’t have the cash to do it. Does that make any sense?

[00:15:06] Stephen Brown: It makes perfect sense.

It’s the analogy, you’ve got a full refrigerator versus an empty refrigerator. And when you’ve got a full refrigerator, you feel good. We can sleep at night. But empty refrigerator, , where’s our next meal going to come from? We do often get a little more creative. When our refrigerator is empty, we get resourceful, and that leads to a feeling of abundance.

How many times have you just opened the door to your refrigerator and just stared? You got tons of stuff in there, but you’re like what’s in here? What do I want? This whole abundance versus scarcity really makes me think about, the purpose of your construction company. And the purpose is to, first of all, take care of yourself and your family.

You set certain goals. You say, we’re living beyond our means. You’re not applying the same Profit First principles of scarcity versus abundance to communicating to your family. This is what we want. This is where we are. It takes X amount of money a month to do what you want to do, and we’re not there.

How do we do that? We go backwards. We figure out what’s important to us. It may be paying off that house. So you don’t have to worry about not having a roof to cover your family’s heads and keep them safe that’s a fundamental thing.

[00:16:18] Wade Carpenter: Absolutely. Last point I wanted to make on this . We’ve already brought this up, but the cashflow clarity and empowerment that comes from having the system in place. it doesn’t happen overnight.

 I think about the analogy, we’re starting a business. It’s like going on this cross country road trip. You’re trying to get from Georgia to California without a roadmap or a GPS system. You don’t know where you’re heading and don’t know which way to go. You don’t have a compass and if you get there, it’s by sheer luck.

A lot of times in our business we just do not know if we’ve got money to spend to be able to do this. Actually just two days ago talking with a prospect, they were like, I don’t know if I can afford to hire another technician. I don’t know if I’ve got the cash to do it.

Putting the parameters around it, putting the money aside , the ability to sleep well at night, Profit First gives you that roadmap, that GPS. Every dollar has a purpose. And , we know what we have to do with that dollar. If we want something more in that category, we know what we got to do to get it.

 We’re reverse engineering that roadmap. So we’re starting in Georgia and heading to California and we’ve laid out our plan.

[00:17:21] Stephen Brown: I’m an old guy, so when you say lay out a roadmap, it’s like laying out an old timey blueprint. They don’t exist anymore except on your cell phones and it’s not long before GPS is gone. But I sure like sitting down there and studying the map and thinking my routes out. This was before we had, folks telling us how to get to Georgia properly.

[00:17:41] Wade Carpenter: I’ve seen some things where people take teenagers out on a midnight hike in the dark. A lot of times we feel like we’re in the dark where we’re heading with our company and you just have no idea where you’re going.

 Somebody gives you night vision goggles, and all of a sudden you’ve got this clarity and advantage that your competition doesn’t have. All of a sudden you know how to get there and win the game.

 That’s my closing thought on it. I hope some of these thoughts on the psychology of it resonated with our listeners.

[00:18:08] Wade Carpenter: And, applying this is really not hard. It’s just more of adapting your system to make sure it happens.

[00:18:14] Stephen Brown: Absolutely.

 There’s a lot of psychology to making the system work. But you mentioned earlier the envelopes. It’s basically the most fundamental principle of taking an envelope and putting all your expenses on a different envelope. Your utility bills, your credit card bills, your insurance, your mortgage, your food, clothing allowance. You were supposed to have an envelope for everything you need, even though you don’t have the money to put in that envelope.

That’s what I was saying about the shovel. You got to account for the use of a shovel. Shovel’s going to wear out. It’s going to break eventually. That’s the mindset you have to have. And the envelope system, where you’re putting them in a different envelope, it’s the same as Profit First.

There’s so many things in running a construction company that you have to consider, and there’s so many pitfalls out there that could trap you. I’d say construction is unique in that regard, but then again, it can be so rewarding.

[00:19:06] Wade Carpenter: Well, thank you for that, Stephen, and thank you all for listening to the Contractor Success Forum. Check out the show notes at ContractorsSuccessForum. com or on the Carpenters CPA’s YouTube channel for more information. We would appreciate it if you consider subscribing and follow us every week as we post a new episode, and we will look forward to seeing you on our next show.