Key Takeaways
1. Implement Profit First to transform your construction business
Profit First for Contractors will show you how to make the numbers work in your construction business and will give you a scalable and repeatable process to guarantee profits and manage your cash flow at the same time.
Profit First revolutionizes cash management. This system prioritizes profit by allocating a percentage of income to a dedicated profit account before paying expenses. By doing so, construction business owners ensure profitability from the start, rather than hoping for leftovers at the end.
The system leverages human behavior. Profit First works with natural tendencies, such as the inclination to spend available resources (Parkinson's Law). By setting aside profit first and operating on what remains, businesses are forced to become more efficient and innovative.
Key components of Profit First for Contractors:
- Set up separate bank accounts for different purposes
- Allocate income based on predetermined percentages
- Gradually increase profit allocations over time
- Focus on cutting unnecessary expenses
- Raise prices to reflect true value
2. Break free from the Craftsman Cycle and focus on profitability
Operating a construction business in the craftsman cycle leads to inefficiencies in production, working for free, and never making a sustainable profit.
The Craftsman Cycle traps contractors. This cycle involves constantly chasing work, underpricing services, and struggling to make ends meet. It's characterized by:
- Being busy but not profitable
- Not paying yourself a regular salary
- Confusion between markup and margin
- Fear of saying "no" to projects
- Always being behind schedule
Escape the cycle through Profit First. By implementing this system, contractors can:
- Ensure profitability on every project
- Pay themselves a regular salary
- Charge appropriately for their work
- Learn to say "no" to unprofitable jobs
- Build cash reserves for stability
3. Understand financial statements and the difference between markup and margin
Markup is the amount of money you add to your COGS to determine your price. Margin is the space between your price (income) and your COGS.
Financial literacy is crucial. Understanding key financial statements like the Profit and Loss (P&L) statement and Balance Sheet is essential for making informed business decisions.
Markup vs. Margin distinction is vital:
- Markup: Percentage added to costs to determine price
- Margin: Percentage of price that is profit
Common mistake: Assuming a 20% markup yields a 20% margin (it actually yields a 16.7% margin)
Proper calculation:
- For a 20% margin, use a 25% markup
- Use the Margin and Markup Table for quick reference
4. Set up Profit First accounts and allocate income strategically
When you take that small action, Mike says: "[S]omething magical will happen. You will start proving the system to yourself. You won't get rich overnight this way, but you will get a wealth of confidence."
Set up five foundational accounts:
- Income
- Profit
- Owner's Comp
- Tax
- Operating Expenses (OPEX)
Implement the allocation process:
- Deposit all income into the Income account
- Allocate funds to other accounts twice monthly (10th and 25th)
- Start with small percentages (e.g., 1% profit) and gradually increase
- Use Target Allocation Percentages (TAPs) based on revenue range
Begin immediately: Even allocating just 1% to profit is a significant step towards changing your business mindset and habits.
5. Gradually increase profit allocations and cut expenses
Efficiency increases your profit margins, or the amount of money you earn as profit on each product or service you offer. Increased profit margins will boost your company's profits without the need for increased sales.
Increase allocations quarterly: Add 1% to profit, tax, and owner's comp every quarter, reducing OPEX accordingly.
Cut expenses strategically:
- Review all expenses monthly
- Eliminate unnecessary costs
- Negotiate with vendors and suppliers
- Look for innovative ways to reduce spending without sacrificing quality
Focus on efficiency: Improving processes and productivity allows for increased profitability without relying solely on increased sales volume.
6. Raise prices to reflect true value and improve profitability
When you start charging your customers for the value of the service you provide to them, your price will go up. When your price goes up, then you will lose some customers. This is a great thing.
Assess true value of services: Include all aspects of your work, including planning, design, and project management.
Benefits of raising prices:
- Attract better clients who value quality
- Reduce workload while maintaining or increasing revenue
- Allow time for providing premium experiences
Overcome pricing fears:
- Recognize that some customer loss is acceptable and even beneficial
- Focus on serving ideal clients who appreciate your value
- Differentiate yourself from competitors through superior service
7. Communicate financial goals with your team and track key metrics
Everything in your business has a number. Make sure your people know the numbers. They want to win the game; they just need to know how to keep score.
Share financial goals: Communicate targets and progress with your team to align efforts and increase motivation.
Key metrics to track:
- Closing rates (quantity and value)
- Project schedules and budgets
- Expenses vs. budgets
- Profit percentages
Implement regular meetings:
- Weekly schedule reviews
- Monthly financial updates
- Quarterly goal-setting sessions
8. Eliminate debt and avoid future borrowing
Debt is not your friend. It never will be. It really is that simple.
Debt elimination strategies:
- Use 99% of profit distributions to pay down debt
- Implement a debt freeze (no new borrowing)
- Create a debt snowball plan
Debt avoidance tactics:
- Build cash reserves (aim for 3-6 months of operating expenses)
- Plan for big purchases in advance
- Use debit cards instead of credit cards
- Avoid overpaying owners
Change mindset: Recognize that borrowing is not a solution to profitability issues and focus on improving business operations instead.
9. Leverage group accountability for sustained success
The worst enemy of Profit First is you. The system is simple, but you have to have the discipline to implement it consistently, and that's where most of us fall short.
Find an accountability partner: Work with someone who can keep you on track with your Profit First implementation.
Join or create a mastermind group: Connect with other contractors implementing Profit First to share experiences and best practices.
Consider professional coaching: Engage with a Profit First Professional or business coach specializing in construction to guide your implementation and growth.
Regular check-ins: Schedule weekly or monthly reviews of your Profit First progress to maintain focus and discipline.
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FAQ
1. What is "Profit First for Contractors" by Shawn Van Dyke about?
- Construction-Specific Profit System: The book adapts Mike Michalowicz’s "Profit First" cash management system specifically for construction businesses, addressing their unique financial challenges.
- Breaking the Craftsman Cycle: It introduces the concept of the "craftsman cycle," a pattern where contractors are always busy but rarely profitable, and provides a system to break out of it.
- Practical, Step-by-Step Approach: The book offers actionable steps, including setting up multiple bank accounts and allocating income to profit, owner’s compensation, taxes, and operating expenses.
- Focus on Permanent Profitability: The core message is to make profit a habit, not an afterthought, by taking profit first and running the business on what’s left.
2. Why should I read "Profit First for Contractors" by Shawn Van Dyke?
- Industry-Specific Advice: Unlike generic business books, it addresses the unique financial pitfalls and habits of construction business owners.
- Simple, Actionable System: The book provides a clear, easy-to-implement system that doesn’t require an accounting degree.
- Real-Life Success Stories: It features stories of contractors who transformed their businesses using the Profit First for Contractors (PFC) method.
- Achieve Financial Freedom: The book promises not just profitability, but also reduced stress, more time, and the ability to pay yourself and your taxes reliably.
3. What are the key takeaways from "Profit First for Contractors" by Shawn Van Dyke?
- Take Profit First: Always allocate profit before paying expenses, reversing the traditional formula of sales – expenses = profit.
- Use Multiple Bank Accounts: Set up separate accounts for income, profit, owner’s compensation, taxes, and operating expenses to manage cash flow.
- Understand Markup vs. Margin: Many contractors confuse these terms, leading to underpricing and lost profits; the book clarifies and provides formulas.
- Start Small, Build Habits: Begin with small profit allocations (even 1%) and gradually increase, making profitability a sustainable habit.
4. What is the "craftsman cycle" described in "Profit First for Contractors" by Shawn Van Dyke?
- Definition of the Cycle: The craftsman cycle is a loop where contractors are constantly busy, taking on more work, but never seem to make a sustainable profit.
- Symptoms of the Cycle: Signs include being booked out but cash-poor, not paying yourself a salary, not understanding financial statements, and always chasing the next job to cover expenses.
- Root Causes: The cycle is fueled by poor pricing, lack of financial systems, and reliance on "bank balance accounting" (making decisions based on the current bank balance).
- Breaking the Cycle: The PFC system is presented as the solution, helping contractors escape this cycle by prioritizing profit and implementing structured cash management.
5. How does the Profit First for Contractors (PFC) system work?
- Five Bank Accounts: Set up accounts for Income, Profit, Owner’s Compensation, Tax, and Operating Expenses (OPEX) to allocate funds with each deposit.
- Allocation Percentages: Assign specific percentages of each deposit to each account, starting small and increasing over time.
- Twice-Monthly Allocations: Move money from the Income account to the other accounts on the 10th and 25th of each month, creating a financial rhythm.
- Remove Temptation: Keep profit and tax accounts at a separate bank to reduce the temptation to "borrow" from them.
6. What is the difference between markup and margin, and why is it important in "Profit First for Contractors"?
- Markup vs. Margin: Markup is the percentage added to costs to determine price; margin is the percentage of the final price that is profit.
- Common Contractor Mistake: Many contractors mistakenly believe a 20% markup yields a 20% margin, but in reality, a 20% markup only results in a 16.7% margin.
- Pricing Impact: Misunderstanding this difference leads to underpricing jobs and eroding profits.
- Correct Calculation: The book provides formulas and tables to ensure contractors use the right markup to achieve their desired margin.
7. How do I set up and use the five foundational bank accounts recommended in "Profit First for Contractors"?
- Income Account: All revenue is deposited here and acts as a holding account.
- Profit Account: Allocate a set percentage (start with 1%) of each deposit to this account and do not touch it except for quarterly distributions.
- Owner’s Compensation Account: Allocate a percentage to pay yourself a regular, market-rate salary for your work in the business.
- Tax Account: Set aside a percentage for taxes so you’re never caught off guard by tax bills.
- OPEX Account: The remainder goes here to pay all operating expenses; if there’s not enough, it’s a sign to cut costs or raise prices.
8. What are the key financial reports and terms I need to understand according to "Profit First for Contractors"?
- Profit & Loss Statement (P&L): Shows income, cost of goods sold (COGS), expenses, and net profit over a period.
- Balance Sheet: Displays assets, liabilities, and owner’s equity at a specific point in time.
- COGS vs. Expenses: COGS are direct costs tied to projects (labor, materials, subs, equipment); expenses are overhead and not directly billable.
- Owner’s Draw vs. Salary: Owner’s draws are distributions from profit, not compensation for work; you should pay yourself a salary for your role in the business.
9. How do I determine the right allocation percentages (PTRs) for my construction business using "Profit First for Contractors"?
- Initial Assessment: Use your last 12 months’ financials to calculate actual percentages for profit, owner’s comp, tax, and OPEX.
- Recommended Targets: The book provides target allocation percentages (PTRs) based on business size and health (e.g., 8-10% profit, 10-15% owner’s comp, 6-10% tax, 65-76% OPEX).
- Start Small: Begin with your current percentages plus 1% for profit, owner’s comp, and tax, reducing OPEX accordingly.
- Adjust Quarterly: Review and increase allocations by 1% each quarter until you reach your target PTRs.
10. What are the most common mistakes contractors make, according to "Profit First for Contractors," and how can I avoid them?
- Confusing Markup and Margin: Leads to underpricing and lost profits; always use the correct formulas.
- Relying on Industry Standards: There are no universal standards; base your pricing and allocations on your own business data.
- Not Paying Yourself: Taking only owner’s draws instead of a regular salary hides the true cost of running your business.
- Skipping the Bank Accounts: Trying to track allocations in a spreadsheet or mentally undermines the system’s effectiveness; physical accounts are essential.
11. How does "Profit First for Contractors" recommend handling debt and cash flow challenges?
- Pay Down Debt with Profit: Use 99% of profit distributions to pay off debt until it’s eliminated, keeping 1% as a reward to build the profit habit.
- Avoid New Debt: Don’t finance projects for clients, avoid unnecessary purchases, and use cash reserves for emergencies.
- Build Cash Reserves: Leave 50% of profit in the profit account each quarter to create a rainy-day fund.
- Track and Improve Cash Flow: Use the PFC system to ensure you always have funds for taxes, owner’s pay, and operating expenses.
12. What are the best quotes from "Profit First for Contractors" by Shawn Van Dyke, and what do they mean?
- "Profit is not an event. Profit is a habit." – Emphasizes that profitability should be built into every transaction, not left to chance at year-end.
- "You can’t sell your way out of a broken system." – More sales won’t fix poor pricing or bad financial habits; systems must change first.
- "Ignorance is not bliss. It is death." – Not understanding your numbers or financial reports can destroy your business.
- "You never have to exist off the leftovers again. You get to eat first." – By taking profit first, you ensure your business serves you, not the other way around.
Review Summary
Profit First for Contractors receives mixed reviews. While some find it life-changing and essential for contractors, others criticize its simplicity and lack of specific implementation advice. Positive reviews praise its contractor-focused approach and potential to improve profitability. Critics argue it's too basic for larger companies and doesn't offer much beyond the original Profit First book. Some readers appreciate the business strategies presented, while others find the author's tone condescending. Overall, the book seems most beneficial for small contractors or those new to business management.
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