You can be a contractor doing 10, 20, 50, 100 million dollars in revenue. You may have a beautiful job report, but then you look at your bank account and you're broke. You're pulling out your line of credit just to make payroll.

If you're a contractor and you drive a really big truck, but you have a really small bottom line, that's what I was going to say, check this out. Here's why it's so problematic to not know your numbers. I see this all the time.

With contractors, they brag about how much money they're making. In fact, I did a video not too long ago and I was talking about pricing is one of my shorts and somebody commented, I've never had a problem with pricing. I've always made plenty of money.

And it's like, sure, you may say to yourself, I make 200 grand a year. I make 500 grand a year. I make a million bucks a year.

But number one, I would ask you, is that gross profit or net profit? Because gross profit is before accounting for overhead. Big difference there. And if you're talking about net profit, here's what I challenge you to do.

Before you go any further, before you brag about your bottom line to anybody else, go to our website, coltivar.com. Up in the navigation, you'll find under tools where you can look at benchmarks. We have it published. It's all the benchmarks by trade and you can go and see what the average operating profit is for contractors in different spaces.

You should definitely do this in your business because I've talked about this multiple times before, but I was once speaking at the CFMA conference. It's the construction financial management association. And they put on this conference in Phoenix.

And I was there teaching this course on strategic financial leadership. Kind of boring, right? Well, I thought it's cool. But anyways, in the room, there are over 300 executives.

And I said, how many of you think you have a competitive advantage? And like 80% of the room, they shot up their hands are like, we have a competitive advantage. We have a competitive advantage. And I said, okay, look, let me define what a competitive advantage actually means, because it sounds like a bunch of buzzwords and a bunch of jargon, right? I said, a competitive advantage means you're earning above industry average profits.

That's why I said, go to the Coltivar website and look at the benchmarks before you say anything else, because maybe you're a plumber and maybe your operating profit should be between seven and 8%. But if you're operating at a 5% operating margin, guess what? You don't have a competitive advantage. I'm sorry if that hurts your feelings, but it's the truth.

Numbers don't lie. That's why I love business is because numbers tell the whole story. And if you don't understand the story behind the numbers and how to influence those numbers, you're just guessing.

You're just relying on grit and sheer hard work. You don't want to do that. You don't want to live by the gut.

I did that in the past. I lost a ton of money in the process. Don't make the same mistake as me.

Okay? So that's what I would do first is look at your operating profit compared to the industry average and ask yourself, are you earning above industry average profits or below industry average profits? All right. That's what we're talking about today is your net profit, right? Your net operating profit, the bottom line of the business. Now you can ignore things like other income and other expense because those items aren't core to your business.

I just want to focus on how much money you're actually earning from your day to day operations. In other words, your core offering. That's me trying to level set the conversation.

Now going back to that itty bitty profit, here's why it's so dangerous. Even if you're earning an 8% profit and you're bragging about it, right? Oh yeah, I'm making all this money here. I do $10 million a year in revenue and I make $800,000 in profit and take home.

I'm so rich. Here's the misconception. Number one, profit is not cashflow.

Did you know 70% of companies that go bankrupt are actually profitable when they close their doors? In other words, they have profit, but they don't have cash. That's why they go bust. Underneath profit, you have two main things that impact your cashflow.

Number one is your working capital and number two is your CapEx, which is short for capital expenditures. That represents the amount of money you reinvest in trucks, trailers, tractors, skidsters, trenchers, sod cutters, rototillers, excavators, everything, the building, all of the assets required to run your business. And depending on whether you are a light capital intensive business, a medium capital intensive business, or a heavy capital intensive business, you may be pouring a lot more money back into your business than you actually think.

All right. So those are the two things, working capital and CapEx. And those are the hidden costs that don't show up on your income statement.

They don't show up in profit and they could just blindside you and they could put you in bankruptcy court. All right. So you don't want to go there.

So let me give you some numbers. Let's go back to the 8%. So you're celebrating about the 8% margin.

You think you're doing a lot better than everybody else, but then let's just imagine that you're working capital. Okay. So you're doing jobs for GCs and you have a lot of money tied up in retention.

You also have work that you've performed, that you paid employees to do, that you've incurred material costs to put in place, but you haven't billed that. That's your underbillings. That's showing up on your balance sheet.

That hits your working capital and you may have money in accounts payable and other things like that. So basically your working capital is the difference between your current assets and your current liabilities. So that as a percentage of your revenue can range quite a bit.

For some contractors, especially specialty contractors, they may have 10 to 15% of their money tied up in working capital. So just think about working capital. Let's just keep things simple.

Let's say it's 10% for easy math. You're earning 8% profit as a percentage of your revenue, but 10% of your revenue is tied up in working capital. That means you're underwater by 2% just with working capital.

But then you have to go out there and buy more trucks. You have to buy more trailers, more tractors for more crews because you're doing more volume. And then the picture gets really, really ugly.

And that's why you can be a contractor doing 10, 20, 50, a hundred million dollars in revenue. And you may have a beautiful job report. You're looking at your job profitability report.

You're looking at your WIP. You're like, we're good to go. We're making margin on all of our jobs.

But then you look at your bank account and you're broke. You're pouring on your line of credit just to make payroll. You're trying to talk your spouse into doing a home equity line of credit so you can put money into your business and actually make it another year.

This is no way to live. So that's why it's so important to understand the story behind the numbers. And that's why it's important to understand those two things, working capital and CapEx and how they relate to a business.

Because let me just give you some figures for capital expenditures. For light asset businesses, they typically invest about a half a percent to two and a half percent of their revenue back into CapEx. And like I said, CapEx doesn't show up on the income statement.

For medium asset based businesses, you could be putting two and a half to 6% of your revenue back into equipment in trenchers, skidsters, etc. And if you're a heavy capital intensive business and you have big old bulldozers, earth movers, excavators, etc., you'd be dumping 6% or more of your revenue back into equipment. And like I said, those numbers don't show up on the income statement.

They show up on the balance sheet and the statement of cash flows. And those two statements, they get completely ignored by most contractors. So that's what I wanted to bring to light today, because I see so many businesses not pay attention to the right numbers in their companies.

They don't have the KPI dashboards. They don't have the forecast that gets them from revenue profit all the way down to cash flow for the next 12 months. So they could see what's going on in their business and what's coming down the line.

They're not tracking their backlog properly. And all these things combined together creates a financial disaster waiting to happen. So I don't want you to go there.

I created a cash flow blueprint specifically for the construction industry and contractors. You can get it by going to Coltivar.com or check the link down below. And it is a comprehensive guide that number one, breaks down cash flow into its component parts.

So you can understand what makes up cash flow. I also explained the eight levers of cash flow. I give you a checklist and I give you a plan for your business to execute on because cash flow is what will make or break your business.

I designed it for non-financial people. So you don't have to be a nerd like me to understand it, but trust me, it will be super beneficial for your construction company.

All right. That's what I have for you today. And until next episode, take care of yourself. Cheers.

And if you're a heavy capital intensive bit, I do $10 million a year and I make an 80. So think about it. So think about they're not tracking their backlog profit and they can just sign.