Don't confuse revenue with profit. Don't think that you're profitable and everything is great and then you run out of cash. Make sure that you know your numbers, because if you know your numbers, you will be so much more successful in your domain.

Most contractors in the construction industry think they're profitable and all is well until they run out of money. Let's talk about why knowing your numbers isn't just optional. It's a matter of survival, especially in an industry that's notoriously known for super thin margins.

Think about it. A general contractor, all right, a commercial general contractor in the construction industry, do you know what their margins are? It's like 2% on average. Imagine that. You do a $1 billion job and you make $20 million in profit. If you're average, but what about the companies that are not average? Can you imagine doing all of that work and you just walk away with $20 million? It's crazy, right? Or imagine a plumbing company. The average operating profit for them is around 7% to 8%.

If you're wondering where you stand at coltivar.com, you could go to our website and we have industry benchmarks that are published for free. You can access them right there and you can look at operating profit by trade. That's a great way to get started to understand whether or not you're operating above or below industry average.

So if you think about that, a lot of companies, even if they do have 7% operating margins, like with the plumbing company example, they think all as well. I don't have to worry about anything. I can just continue as is. But the problem is there are a lot of things that are not in profit, like working capital and investments in trucks, trailers, equipment, skidsters, front end loaders, et cetera, that can kill you from a cash perspective.

So let me talk about the three biggest mistakes that I see with contractors. I've spent my entire career in the construction industry, turning around and growing businesses as a CEO, as a CFO to million, a billion dollar companies and an advisor to many more. I've spoken at a lot of conferences. I speak with contractors all the time. And here's what I have found.

Number one, most contractors make financial decisions from the gut. Scary, right? In other words, they're making hiring decisions. They're estimating from the gut. Sometimes they're guessing, right? I'll share a story with that in just a minute. They're buying equipment based on gut feel like, yeah, we got a lot of backlog. We should go out there and invest in a $500,000 front end loader or whatever it is. And this is a crazy way to run a business because you will go out of business.

If you're not careful, there's always survivorship bias, right? It's like, oh yeah, I know this guy. He never looked at his financials and he's successful. And it's like, yeah, but what about all the ones that didn't survive? All the companies that ended up going bankrupt? What about them? They weren't looking at financials. So making decisions from the gut can be super dangerous.

I just met with another specialty trade company the other week and we were looking at their job profitability report. And then we're comparing that to evaluate whether or not their estimating system was accurate. And what we found was that they were good with materials. And I think most contractors are. When you go out there and you do take off and you price out your materials, most of the time you're right. And in fact, a lot of contractors will put a fudge factor or some type of contingency in there to cover materials that may be wasted or shortages or whatever it may be, right? So from a material standpoint, most of you are good. All right. So I trust that.

From a labor standpoint, though, you may not be good. Your production rates may not be accurate in your estimating system. And in order to get the pricing where it needs to be, you're just making adjustments to your overhead and profit. And that's what this company was doing. Essentially the estimator was reading through all the specs and then doing the takeoff and putting all the numbers into the estimating software. And then it would spit out a number and then you would hand it over to the owner of the company who would review the bid and then make some adjustments at the end. So he's like, ah, it's a little high. I'm going to drop it by a thousand here or it's a little low. I'm going to increase it by a few thousand here. And then the bid would get submitted. And like, that's no way to run an estimating process, right? Because it's not repeatable, it's not scalable, and it carries a lot of risk.

All right. But a lot of companies are doing this. They're shooting from the gut, especially when it comes to estimating guess what the number one lever is in the majority of businesses out there. The number one lever to drive profits is pricing. So if your approach to estimating, if your software is off, if you don't have a good system in place, you're putting your business at a tremendous amount of risk because you're just one job away from going out of One bad estimate on a big job will kill you. Okay. So I've seen this a lot. So that's number one is that owners are making decisions from the gut.

Number two, what I see is that too many owners or business leaders in construction confuse revenue with profit. So let me explain when companies are starting out in construction, oftentimes they don't follow a percentage of complete method to recognizing revenue. And this is what happens. You get a signed contract from a customer. You're like, Hey, I need to deposit to get you on the schedule. They give you a hundred thousand bucks. Great.

So you invoice them, right? They give you a hundred thousand bucks. Then when you invoice them in most accounting software, it's just going to record it as revenue today. But guess what? That's not your money. You didn't earn that. You are assuming a liability. You're taking their money in advance of any work that's being put into place.

So instead of recording it to revenue, you should be recording it as a liability on your balance sheet. But guess what? Most contractors aren't. So they keep it in revenue. Then since the job doesn't start until next month, there's no cost to go against that revenue. So profits look great. Then the next month happens, and you're not going to bill again because you received that deposit upfront.

And that's going to cover the next month's work that you're doing, that you're actually putting into place. And now you're incurring all these costs, but guess what? You have no revenue because it's in the prior month. And therefore your profit looks terrible. And this creates like schizophrenia in owners. Contractors are looking at the financials. They're like, wow, we're super profitable next month. We're terrible. We're going out of business next month. We're profitable next month. We're terrible. And the cycle continues.

So essentially when you're like this, sure, you can play business, right? Just like you play house when you're a kid, I guess, look at financial statements and think, yeah, we're good. But you're just tricking yourself. You don't even know what your profit margin is in your business when you don't follow a percentage of complete method. So revenue is not profit. And money you collect upfront is not earned revenue until you put the work in place. That's why you need to follow a percentage of complete method. So you collect money. It's a liability. It only becomes revenue when you record that completed out in the field.

They talk about this all the time with contractors and it seems to like blow their mind. But if you're not doing a percentage of complete method in your business, you are basically looking at a bunch of garbage with your financials. It's not even helpful. Okay. So that's number two.

Number three is that contractors, they don't have a weekly pulse meeting to look at financials or certain KPIs, and they don't have a KPI dashboard to understand what they should be paying attention to in their business. So the weekly pulse is where you could gather your team together and you could look at things in real time, like throughput on your projects. How much revenue are you earning per hour, per day, per super, whatever it may be. It's better to track gross margin, right? Per job. But you're not going to know that until after the job is closed out.

Number two, you could be looking at your backlog. You could be looking at your bid win ratio. You could be looking at the number of leads coming in. So there are different things you could be looking at on a weekly basis. Coupling that with any macroeconomic indicators out there, like number of new building permits issued, number of new construction starts, whatever it may be.

And if you want macro trends, once again, you could go to coltivar.com. It's totally free. We track macro trends for the construction industry. Just go to tools, navigate there. You'll see all the economic indicators.

And the reason why that's important is because if you're not doing your weekly pulse, if you're not looking at macro economic indicators, and if you don't have a KPI dashboard, you're just flying blind in your business. Let's face it. You're just flying blind. And cash in your bank account does not equate to profit and profit does not equal cash flow, right?

So in cash flow is not the same as cash in your bank account. When we're working with contractors, we help them to understand how much cash flow are they actually generating? In other words, how much cash do they make after they pay all their bills? They account for the money and working capital, right? They're over under billings in retention, et cetera. And that's going out the door for capital expenditures, trucks, trailers, trenchers, et cetera, right?

So if you don't have some type of KPI dashboard, if you don't have a weekly pulse, if you're not looking at economic indicators, you're literally just going out there getting work, doing work, getting work, doing work, and you're not measuring and you're not keeping score along the way. That's crazy. Okay. So you can change this. It's not your fault. Like if you're stuck in this position, don't feel bad. It's not your fault. Nobody taught you. I'm sure from a financial perspective, how to run a business.

That's why I'm doing this channel to help contractors just like you that are struggling out there. And that's why I think the construction industry is so notorious for thin margins because you have so many people in the industry just guessing. But if everybody was able to price right and if people knew their numbers, things would be radically different. I may not change the entire industry, but if I could change one company at a time like yours, Hey, that's great.

So that's what I wanted to talk about today. And the last thing I'll say with the dashboard, it's one thing to have a dashboard in your business and be like, okay, I see my revenue per hour, or I see my gross profit, or I see my free cashflow, whatever it is. Okay. The indicators on your KPI dashboard. It's another thing to know what to do about it, right? Because with our clients, like when we're working with them, we have this KPI dashboard and we have green, yellow, red indicators.

The last thing you want to do is be working on a green indicator where over here, you're like bleeding to death with a red indicator. So when I'm working with clients and contractors, I'm like, look, here are your red indicators. Here are the three things you need to do in the next 30 days, go do them and then come back and let's meet next month. And let's measure progress. Let's get the red to a yellow, the yellow to a green, and let's keep the greens green.

But too many contractors, they don't know what action steps to take based on the KPIs because there's this disconnect. And therefore they just stay stuck and it's not their fault. They just don't have the tools. They don't have somebody to connect all this together.

You look at a whip, you look at your profit and loss statement, you look at your 13 week cashflow. And it's like, how does all that tie together into one cohesive story that you can use as a business owner to go make decisions out there in the real world? All right. That's what I'm talking about. Okay.

So don't confuse revenue with profit. Don't think that you're profitable and everything is great. And then you run out of cash, make sure that you know your numbers. Cause if you know your numbers, you will be so much more successful in your domain.

All right. That's what I wanted to leave you with. If you ever want to talk about your business, you want to talk about your numbers. You just want to hop on a strategy call. We offer a 20 minute free call. You can book that by going to Coltivar.com. All right. That's what I have for you until next time. Take care. Cheers.