How Construction Business Owners Should Pay Themselves

Are you a construction business owner struggling to pay yourself? Learn practical steps to take control of your paycheck and break the cycle of being the last one paid. Discover common mistakes and how to fix them. Watch now for expert tips on managing your finances and growing your business! 👷‍♂️💰

Topics we cover on this week’s episode:

• 03:23 – Understanding Cash Flow
• 07:55 – Profit First System
• 11:50 – Family Dynamics in Business
• 15:18 – Defining Success
• 18:54 – Working Smarter
• 21:49 – Retirement Concerns

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

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TRANSCRIPT

[00:00:00] Wade Carpenter: Are you tired of being the last one to get paid out of your own business? How can you break that cycle and make sure you’re getting a regular paycheck? In today’s episode, we’ll talk about common mistakes construction business owners make when it comes to paying themselves, and how you can fix them. 

If you struggle to get paid consistently, we’ve got practical steps to help you take control of your paycheck. Welcome to the Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs, joined by Stephen Brown with McDaniel Whitley, Bonding Insurance. Stephen, why is this thought on your mind this week? 

Because 

[00:00:32] Stephen Brown: I see soo many of my customers and clients, especially starting off a company and the things that take a hit to a new construction company owner are his family and his personal income. You’re already good at what you’re doing and making a good living and you think you can do better by owning your own business and a lot of folks can. Absolutely, I get it. 

But at the same time, so many contractors feel the business is coming first in the early stages. Sure, if you have a new baby, that new baby’s going to get all your attention. It’s going to need a lot more support. 

So, I’d like to just talk to those contractors that are not paying themselves enough to support their family and their expenses right now, and what to do about it.

And also, what, Wade, could you do as an accountant and a consultant to help a new construction company owner decide how much money do they need to have before they start their own business? In order for them to take out a reasonable amount of money for their living expenses?

[00:01:42] Wade Carpenter: Yeah, I totally agree with this topic, where you’re going with this, because I absolutely see contractors, they’re the last to eat. They’re a martyr out there. Business comes first and I’m doing what I have to do. And the employee should appreciate me because they always get paid first.

And quite frankly, I did that for a large part of my business until I found Profit First. I don’t want to, we’ll jump into the Profit First thing, but I’ll use the exact same analogy that I think I probably threw out over three years ago on this podcast. If you’re on an airplane and that flight attendant says you got to put your oxygen mask on first before you help others, that is absolutely true when it comes to running your own business.

And if you can’t run your own business so that you can make a good profit and take home a consistent paycheck, you don’t have much of a business. Quite frankly, the contractors work really hard. And when you’re working for somebody else, you don’t always appreciate all the other things that you have to do to run a business.

But when you go and start your own business, typically those people are the hardest working people in the business. They’re working all night and all day and on weekends doing bids and on the job and trying to do everything. And yet they’re probably the lowest paid people in the business for a lot of time. As well as even contractors that have been in business for many years.

So I think this is a great topic and I appreciate you bringing it up.

[00:03:07] Stephen Brown: Sure, Wade. What is it that gets you started on the wrong foot? Is it the mindset of saying I’m starting this business from scratch and I’m going to need X amount to live and to support the business until I can grow my sales?

Or is it, I have these sales and these relationships that will go with me if I start my own business. So I start the business. Do I have enough cash for all the help I need to get the work done so I don’t have to do it all myself? How does a contractor find a happy medium in, in getting these two things done? I imagine if you have unlimited cash, you can purchase your way out of trouble, but that’s not necessarily true.

[00:03:46] Wade Carpenter: Yeah, most contractors are definitely not starting with that situation when they start a business. A lot of times they underestimate how much cash it really takes to get going. As you said, they can probably have the relationships and could go get some work, but they’ve got to realize that if you’re paying people or subcontractors or materials, you’re going to have some overhead and some of that’s got to come first.

 If there’s nothing left over and you’re growing your business and every time you take on a bigger and bigger job, it takes more cash out of your pocket. So it becomes a cycle that I see contractors fall into all the time. And they just keep trying to perpetually make it bigger and bigger.

And they never seem to take home any more money.

[00:04:29] Stephen Brown: Yeah, it makes perfect sense. Then just think about the fact that you’re a new business and you need to borrow money to get started. How do you borrow money? From family and friends that trust you and your business plan? From a bank, from the SBA? And at what point does borrowing that money eat into your profits to where you’re losing money or you’re working for someone else, or you’re working to repay that debt? 

At the same time you’re financing growth. Sometimes a loan is what you need to help get that accomplished. I don’t know, Wade. I don’t know all the answers. I wish I did. I know that they can be studied, and I know they should be studied, and I’m like you. I think the Profit First system is the best way to start. Again, the Profit First system is literally simply paying yourself. Okay, that’s one of the elements of it.

But also putting everything in a separate envelope, so to speak, a separate category to make sure that you’re managing your expenses properly. That way you’re also setting aside your profit. And so you’re working backwards. You’re saying, I’m going to protect this profit first, because that is the key to the success of my business.

[00:05:44] Wade Carpenter: Being able to pay yourself and knowing what you need to take home, that is one thing. But a lot of people think that they can go get these loans from their bank. As an employee, you may be able to get a loan based on your personal credit as long as you got a job. But you jump out in business and you’re on your own and you can’t prove that income anymore, it’s tougher to get a job. And there’s such a big knowledge gap that people don’t understand that most businesses are not going to get any kind of loan for their business for the first three years, unless it’s tied to your personal credit. 

There are also people out there saying you can get all these government grants and stuff like that. Those are a lot fewer and farther in between than most people want to realize. 

So again, that’s one of the biggest things that people need to understand is, yes, you’ve got to be able to pay yourself and pay everything, and not to pivot the conversation, but too often contractors are starting off and they think, okay, I need to get some work. I need to get cashflow. And they don’t have a real appreciation for what they need to take home to be able to make it on that project. 

And they think okay, I’m not going to get this job, my bid’s too high. So they tend to underbid. Let’s just get some cash flow in the door . And it becomes a cycle. And they get in a cycle of doing cheap work, or cheaper than it should be. That’s probably not the right term to use there, but hopefully you understand where I’m going with that.

[00:07:12] Stephen Brown: Sure. They’re doing cheap work and their bank account balances are higher, of course, until they pay all their bills. So you feel like you’re doing better than you are. That’s the universal problem that you always see in the construction industry, Wade. 

What do you do if you’re a listener to this podcast and you’re not paying yourself and you’re stressed over it? Hopefully, you’re listening to this driving between projects and you’re saying to yourself, this a good point. I’d like to do it. I ain’t got time to. I haven’t, it’s too stressful. I haven’t got time. I would say, first and foremost, decide how much it takes for you to support yourself and your family, first and foremost, and be very realistic.

So you can say, man, I haven’t got time for that. Okay. 50, 000 a month. What? Yeah, I can live on 50, 000 a month. Yeah. Okay. Really? What about 20, 000 a month? What about 10, 000? What is your current standard of living that you have to adjust before you start your business or you need to do right now?

Because odds are if you’re not paying yourself, you’ve cut things down to the nub and you’re stressed over the debt you’ve incurred because you still have ongoing expenses. 

So my first point, Wade, would be what is it that you have to do? Okay, you can’t see the forest through the trees unless you can take a deep breath and figure out where you are in that forest.

How am I going to get out of that forest if I don’t have a compass? I don’t know what side the moss is growing on and I’m stuck right in the middle of a bunch of trees and I got to get out to survive. That’s how people feel. That’s what’s going on. 

Then you have other certain contractors that their mindset is I’m going to take everything I can out of the company. That’s fine. The company exists to support you, unless there’s other owners, and that’s where some conflict arises, when there’s other owners and you still have that mentality that the company exists to support you. 

Wade what are your thoughts about what a contractor needs to do, who is literally looking for a bag to breathe into today?

[00:09:18] Wade Carpenter: They need to understand how much they need to be taking home. That is probably one of the first points. But I think the first point I was going to make is that the contractors need to look at themselves and stop being a martyr out there. And stop saying, okay, one day, this is all going to pay off. 

The idea here is that, yes, you do need to probably be doing some things differently. And there are a lot of things like seasonality and, you’ve got more cash flow issues in construction than probably any other industry. You need to do something today. 

I was going to tell the story about Profit First. There’s a lot we can unpack with that, but when I had my business for probably, I don’t know, maybe 15, 16 years on my own, I was always the last to eat. I always made sure everybody else was– and I reinvested profits. I would go buy some software or do, we need a new desk or computer or something, and I was always the last to eat. 

And when I started Profit First, and I started carving out every dollar that comes in to cover my payroll, the moment I did that, I have not missed a paycheck in over six years since I did that. And it’s embarrassing for me to say that. I did the exact same thing our listeners are probably doing. One day this is going to pay off. When is that one day for you? That’s what I’d say to our listeners. 

[00:10:41] Stephen Brown: Maybe we’ve helped you because you’re listening to this. And if you’re paying yourself properly, or you’re not paying yourself properly, or you want to pay yourself more, the formula to do that is to put the systems in place. Put something that helps you reach that goal.

And you do it by help. You do it by people that can help you get there. You prioritize what is most stressful to you and how you want to accomplish that. And Wade, I believe wholeheartedly that the Profit First system. It’s a way to accomplish all those goals. 

And I think you’re right about the martyrdom of running a company. And I see contractors that have been that martyr and then the company starts doing better and they’ve enjoyed that martyr role a little bit. It’s a dysfunction that you’re used to. And when you take a separate approach, it’s healthier. It helps everyone in the organization.

As a contractor, you got to let people go when there’s not work to be done. That’s a simple fact of the construction industry. But you also know that when you have good people, you want to try to keep them and you want to try to help them grow financially. And the best way you can do that is to pay them regularly, pay yourself regularly, and reinvest your profits of whatever you can back into the company through strategic planning.

[00:12:11] Wade Carpenter: Absolutely. I wasn’t going to go into my book that’s coming out, but I do approach , my book different from the original book on Profit First, because I think there’s a lot of people that get stuck on the instant assessment. But there are two main things that, and this is my approach to this. Number one, you need to understand what I refer to as Job Ex, or job expenses. Mike Michalowicz talks about materials and subs, and that’s the biggest part of it, but what is the cash that is going out to other people versus your own people, internal people. And then number two is what is your operating expense, OPEX. And that percentage in cash is what you need to understand is what you need to hit, the monthly nut, if you want to use that term. What do you need to hit to cover everything else if you have no other?

And everything beyond that falls into three other buckets. There’s profit, there’s owner’s compensation, and the taxes. Getting the first two, I think is the biggest piece for contractors to understand. You really need to understand, a lot of people probably know their job costs, or at least they have some kind of idea in their head, but they also don’t have any appreciation what that overhead is in cash flow terms.

Most bean counters like me are going to express it in terms of what does my P& L show? That’s not cash, even if it’s on a cash basis. So I feel like I’m preaching here, but the other buckets that have to be covered are, you got to have some profit and you got to have some money to take home for yourself, as well as that business should be paying your taxes. 

[00:13:45] Stephen Brown: Now, this is a huge point, Wade, paying your taxes, how you bonus yourself. Whether you give yourself a regular paycheck. Whether you take a draw. I think the Profit First mentality is you’re taking a regular either bonus or a paycheck, right?

[00:14:01] Wade Carpenter: Yes, absolutely. And it’s the fact that you’re putting money, I know the title, we’ve said it before, the title sounds greedy. A lot of people, they’re proud of being the last to eat. That may sound good to your employees, but that’s not a healthy business. 

[00:14:16] Stephen Brown: You’re going to be overly sensitive about not flaunting the money you’re making at a company. As you’re making a lot of money, and you’ve got enough to live off of and reach all your retirement goals and any other goals you might have for yourself, then maybe it’s a time to start thinking about reinvesting in your people and paying it forward. Letting them have a chance to run their own business like you did. And make it a little easier for them than it was for you. 

So many of our listeners have done that. So many of our listeners have had a mentor who is a business owner that helped them get their business started with great advice. I think your book, I can’t wait for it to come out, Wade. It’s so practical and it’s so perfect. Every concept that we’ve discussed, like I mentioned, I can’t wait to read it. 

What would you say to our customers that want to do something now about this? 

[00:15:07] Wade Carpenter: Again, I think that’s one of the key points is understanding what does it take in a cash flow standpoint? We’ve helped several contractors over the years implement this. But what I’ve come to realize is that as well as my own business, a different type of business, but the same kind of thing is like you realize in cash what it takes.

It motivates you to go find the right type of work and knowing what it’s actually going to cost you on that job. And not have some nebulous number that’s, overhead is 10%. We’re just going to tack 10 percent in overhead and profit. And that never seems to work. You’re going to understand exactly what it costs you in cash. So that’s the idea is, it’s going to motivate you, if nothing else, like this is what I’ve got to hit. 

Sometimes the small projects are the ones you make the biggest money on. If you could turn a bunch of those that’s perfectly fine. As opposed to some people that, let’s go do the, 2 million job as opposed to 300, 000 job. And they’re making a lot less money and digging theirself a bigger hole.

[00:16:11] Stephen Brown: Then you’ve got Wade, you got the family dynamics of wanting to support and help other family members in your company. And if you really want to help them you’ll have a good functioning business and they will bring something to the table to help. 

I see so many of my customers that start off and have their spouse be their accountant because it’s something they don’t want to deal with and they don’t want to pay someone else to do it.

And of course, who looks after your money better than your spouse? But, they may not be the best suited for it. And you throw someone into a situation for a job that they’re not suited for and they don’t want to do it. And then you’re an enabler. You’re enabling that family member through your company. And then you’re faced with even tougher decisions to make in the future.

[00:16:59] Wade Carpenter: Yeah, unfortunately I, so many contractors are out there doing that, and they have their spouse, significant other, whoever, cousin, aunt, whoever doing it on the cheap, and they– yeah, and they resent the job. They hate the job. 

You may think, okay, they’re not gonna steal money. Although I can vividly point to some of my contractors where one in particular has a sister that embezzled hundreds of thousands of dollars of payroll taxes until they found it. Hopefully they have the best interest at heart, but they don’t necessarily have the inclination or training to do accounting.

But I think that we’re going off on a different topic there. So we’re kind of getting off the topic of paying yourselves, but we had to, because sometimes you’re paying other family members, because that’s at least putting some income back into your pot. If you pay your, your, your spouse to do it that creates an expense that might help 

[00:17:50] Stephen Brown: your tax purposes and also let you not have to go hire someone to run your books for you. I get that.

But I’ve also seen over and over again those spouses resent being thrust into that role. Now I would say if you’re starting a new company, it would be wonderful to have a spouse with gifts and abilities that you need to run a successful construction company, of course.

But never again, it’s just something to think about. It’s all about taking care of yourself. Profit First helps everyone. Profit First mentality helps you. It helps your ability to manage your company. It helps your ability to leave a legacy for others. It helps your ability to make the kind of living you want out of your company, whatever, and define it in any way you want.

Success. Success is something that you have to define. In my mind, Wade, the success is managing your company. And it not managing you. That’s success. Whatever’s going on, whatever the numbers are, people get so caught up in the final numbers. What is your income after taxes? What is it you’re taking home?

How much money do you have? Do you remember in that movie Wall Street with Michael Douglas and Charlie Sheen? One of my favorite lines was when Charlie Sheen said to Michael Douglas character, Gordon, how many yachts do you need to water ski behind? That made me laugh because seriously. You have to decide how many yachts you want to water ski behind.

If you have something good, you want to replicate it, right? What’s wrong with that? Nothing. But at the same time, your definition of success may be skewed right now. And you might be saying what my company could be someday will be my definition of success. I’ll be making the kind of money my old boss was making plus more.

I’ll be the most prestigious company out there. There’s nothing wrong with that. But at the same time, are you being a martyr about it? Do you have unrealistic expectations of what your company can do and what you can do? That’s where outside friends, consultants, advisors can help you be honest and real about it.

And that’s what you need. I wouldn’t say it’s an accountability person, but it is actually. It’s someone who can say, what is it you want? What do you want to accomplish and how do you get there? And can objectively look and say, you’re straying from what you told me. Has that changed? Is that not your current goal or ambition for your company?

Then again Wade, of course, me saying this to you is preaching to the choir, but I just, it’s something I wanted our listeners to hear over and over again. I see so many contractors that have built up a nice net worth and they’re just burnt out. It’s I’m just selling, I’m packing it in.

And that’s your prerogative, isn’t it? Because it’s your company, pack it in. Now, you can liquidate your sale, you can sell it at a return on your investment of how you set up your business. Any way you want to do this is your prerogative, right? 

But I’ve seen contractors completely reinvigorated with the idea of working smarter and not harder. They figured it out and they want other people to understand it. And that’s why we have this podcast. Because we see that and we understand the frustration that our customers go through day in and day out by not being able to see their way out of the forest.

By not being able to put the oxygen mask on in order to help themselves and others, like you said. Someone chopping wood all the time that doesn’t ever take the time to sharpen their axe. And they’re just flailing away at those trees with the dull axe. 

All of us have cut on trees with dull axes. We know what it’s like. That’s pretty much all I had to say on the subject.

[00:21:47] Wade Carpenter: that analogy. And, unfortunately we see a lot of contractors on the other side of that coin, probably more than, they go 5, 10, 15 years, 20 years, they get in retirement. And construction is hard on a body, it’s like you can’t do that forever.

But they come up to retirement age and they really have nothing to show for it. And they’ve worked 20 years and they’ve never really taken that paycheck home. And so originally the notes you sent to me was like, how do we mechanically pay ourselves?

[00:22:19] Stephen Brown: What points do you think our listeners need to hear from that article I sent you?

[00:22:24] Wade Carpenter: It’s going to depend on how they’re structured and, if they’re an S corporation or whatever. I think they were going into whether you pay yourself as a salary or have to pay your taxes with estimated tax payments versus your withholding or whatever. 

But the key, number one, is to be able to carve out these buckets for taxes. Profit. Profit needs to be there and owner’s compensation. But the profit bucket, I think we had another conversation recently about taxes and, you said it then, it’s you worry so much about taxes that you cut out your profit and you perpetually dug yourself in a deeper and deeper hole in debt by buying another truck or something like that.

And maybe you needed that truck and maybe you could justify that truck in your mind. But my message for today is contractors need to understand, you need to learn how to build a healthy business. My final point would be build that healthy business and say enough’s enough and let’s go do something about it.

[00:23:27] Stephen Brown: Okay. 

[00:23:28] Wade Carpenter: Let’s go ahead and wrap this one up. Wanted to thank everybody for listening. If you got any thoughts or feedback on today’s discussion, we are always happy to hear, answer questions, hear your thoughts. Drop them in the comments below. 

Again, thanks for listening. you enjoyed this episode, please share, and subscribe, and follow us every week as we post a new episode, and we will see you on the next show.