Profitability Over Revenue — Luke Boyenger on Capital Discipline, MCAs, and Why Some Contractors Should Cut Revenue in Half

Welcome to Finance at the Jobsite, the podcast where construction finance meets the field. I’m your host, Rishi Srivastava, founder of Beiing Human. In each episode, I sit down with construction CFOs, controllers, owners, project managers, IT leaders, ERP consultants, and industry experts to uncover how they connect the back office with the field, choose and implement technology, manage cash flow, and drive profitable projects. Whether you are running the numbers, leading the team, or designing the systems that keep projects moving, this is your place to learn what’s working, what’s broken, and what’s next in construction finance.

Today, our guest is Luke Boyenger. Luke, welcome. Thank you so much. Appreciate you having me on today. The theme of the episode is profitability over revenue, capital discipline, and building resilient construction businesses. First section is on your career and perspective. You’ve worked everywhere from EY audits to director of accounting, to now running a fractional CFO firm for construction companies. What did those earlier roles teach you that most contractors never get exposed to? Yeah, great question. Uh, and, and maybe even stepping back a little bit further than that, b-before I even pursued a, a career in finance, uh, ’cause I didn’t actually start my accounting degree until I was 24.

I, I grew up working in, in the trades and manufacturing and, and family businesses. And my dad ran a, a manufacturing company that went bankrupt in the 2007, 2008 financial crisis. And I was, I was young. I was late teens, early 20s when that all went down, and I didn’t un-understand why. So I went back to school in my mid-20s ’cause I wanted to understand what did, what did we get wrong? Like, what did we do wrong that everybody else didn’t that caused us to go bankrupt and, and they were able to survive a, a rough economic time? And so I was paying really careful attention in all those years at Ernst & Young and in, and in corporate America.

And what I figured out about what my family did wrong was that we didn’t understand the financial side of our business well enough in terms- Hmm … of really understanding what our product cost us to make so that we could price for profit and make sure that we, we managed profitability and, and cash flow in, in the business in a way that allowed us to be a healthy business that was sustainable even through hard economic times. And I just find that in most small businesses, say under 50 million in revenue, that tends to be one of the biggest issues. Yeah. It’s tough to understand businesses.

It’s a complex entity. You’ve mentioned that finance is the biggest skill gap for small and mid-sized operators. Where do you see contractors most confidently wrong about their own businesses? In the ones that I talk to, it usually comes down to, like, project-level profitability or, or what we would call gross margin. ‘Cause I, I talk to a lot of construction business owners. Uh, you know, I’m running a fractional CFO firm specifically for construction companies, so I talk to a lot of construction companies that are interested in, in potentially working with us.

And the number one thing we find is in initial conversations they might say, “Yeah, we’re, we’re 25% gross,” or, “We’re 30% gross. We’re 40% gross.” They, they’ve all got, like, this number that they’re super confident is their gross margin that they’re achieving in their business. And almost without exception, when we dig in and we get into the numbers and, and really start understanding the business, we find that the gross margin is pretty much always lower than what they think it is. Yeah. Actually, most, uh, construction Owners, they probably are salesmen and builders, not necessarily, uh, P&L calculators.

Yeah. Well, and that’s exactly why the, the finance side of the business is usually the biggest gap. It– because the people who, who go buy or start construction companies are typically not people who went to college and graduated with a, an MBA in finance and, and really understand that side of business. It’s usually people who are really good with their hands. They, they grew up in the trades. They, they knew how… They had a skill, and they started selling that skill, and they grew into a bigger business, and they’re really good at, at the actual service side of the business, the, the thing that they do, the thing that they sell.

They picked up some sales skills along the way because they had to if they wanted to grow business. But it just seems like the last thing that ever gets put into place in most of those businesses is the actual finance side, the side that drives profitability, cash flow, and builds a sustainable business model behind the business. Next section is profitability versus quote, unquote “happy revenue.” You’ve said something that really changes conventional thinking. To double profit, some companies need to cut their business in half. Can you walk us through that happy revenue Looks like in construction You’re asking about the, the difference between revenue growth and profitability, and what makes revenue healthy, and why would a business need to cut revenue in half to actually achieve a higher level of profitability, which seems counterintuitive, right?

But it’s because, and, and this goes back to most construction companies not really having that finance seat filled in the business. Everybody kind of just assumes that if I’m having trouble with cash, meaning I don’t have enough cash, cash is always tight, that I just need to go do more sales, more revenue, more jobs. That will bring more cash into the business and solve the problem. And so that’s where you see these companies that, that go from, you know, 10 million a year, 500,000 net profit to 20 million a year, like 250,000 net profit. Where you actually are doing twice as much work and earning half as much profit in the business because you went out and chased revenue instead of chasing profit and cash flow.

And revenue in construction doesn’t actually create cash flow, it consumes cash flow. Because you’re usually working with, I would say most of the time, 60 to 90-day payment terms on most construction jobs. So you’re 60 to 90 days of, of labor and materials into a project before you collect a dime on that project. So you do that across 10, 20, 30 projects, and you’re just accelerating negative cash flow. So it’s, it’s strategy, it’s financial structure, it’s capital management, it’s all that financial side of the business that’s what’s missing that’s keeping you from getting to the cash flow.

It’s not revenue that’s missing. Well said. What are the warning signs that a contractor is growing revenue at the expense of profit and often doesn’t realize it until it’s too late? Yeah. You know, there’s the obvious one of, of looking at the P&L and, and just watching the net profit number go down and down and down. But usually the biggest red flag that pops up that gets everybody’s attention is cash. It– you just, you keep watching your bank balance, and instead of getting bigger, it’s getting smaller. Your line of credit, instead of being paid off every month, is growing, right?

You, you have a f- uh, let’s say a, a $500,000 line of credit. It goes from a $100,000 balance to a $200,000 balance to a $300,000 dollar balance. You’re just stepping further and further into that line of credit. Eventually, it gets maxed out, and you’re having to go out and look for other forms of capital that you can get to continue to fund the business, keep the doors open, keep the projects rolling, keep the cash flow coming in. If that’s the cycle that you feel stuck in, it’s almost guaranteed that you have either a profit problem, a gross margin problem, or just a cash management problem, all of which are finance side of the business that tie back to the underlying business model that the, that the company is running on.

You know, actually tough to run a construction business. It’s a- Oh, yeah … payment terms are so… Yep. Yeah, you’re right. And in fact, people have asked me before, “Look, you run a fractional CFO firm teaching construction companies how to be more profitable, have better cash flow, how to grow in a healthy way. Like, if you’re so good at this, why don’t you just go buy a construction company?” It’s like Because they’re freaking hard to run. If I’m being honest, like you… I think running a construction company is almost more of a calling than anything. You know, there’s, there’s just people out there that are super passionate about construction, and I’m one of them, but not from the running a construction company side of things.

I, I like the level of impact that we’re able to have by, by helping other construction companies run in a, a more optimal way that, that produces healthy profit and strong cash flow. To me, that’s where I get life and meaning and, and I get excitement. I, I look forward to getting out of bed every day and doing that. But you’re right, running construction companies is really, really hard. And America wins when small businesses win. Yeah. Absolutely. You’ve seen real contractors actually shrink from $20 million to $10 m- million and end up making more money.

What made those owners willing to take that leap? Yeah. Honestly, they just got sick of not making any money. It was 5 million in revenue, we’re not making any money. 10 million in revenue, we’re not making any money. 20 million in revenue, we’re still not making any money. And there’s just this wake-up call that eventually kicks in and says, “Hey, if doing the same thing is not producing a different r- a different result, maybe we need to stop and think about doing something different.” And, and that’s where that light bulb comes on and says, “Hey, chasing more revenue isn’t solving the problem.

What if instead of chasing revenue, we chased profit, and we structured our jobs in a way that was going to produce healthy cash flow? And as a result of doing that, we’re gonna win a lot less work, because we’re gonna bid higher. We’re gonna bid at a level that actually allows us to make money. So we’re not gonna do 20 million in revenue, but guess what? We’re actually going to make money. We might only do 10 million instead of 20, but we’re gonna do a million net profit on 10 million versus 250,000 net profit on, on 20 million.” And, you know, I’m not making up numbers here.

I, I, I’ve seen this play out in real life. Revenue is irrelevant. Means nothing The point of business is to make profit and produce cash flow, and if your business isn’t doing that, it’s broken. Next section is cash flow and capital infrastructure. Many contractors rely almost entirely on a line of credit and their own cash. Why is that a fragile capital strategy as companies scale? Yeah. Well, it’s because it, it creates risk, because most construction companies are not sitting on a, a $5 million war chest of cash sitting in the bank. That’s their, their rainy day fund, and if crap hits the fan, they can go draw from it and they’re gonna be fine.

Most construction companies are living week to week from a cash flow perspective, and if all you have is your cash and a line of credit, you’re one three to six-month slow season or economic recession away from being out of business. And the reason that it’s not wise to operate solely on cash and line of credit is because it doesn’t give you the capital structure that you need to support the business through economic hard times, through growth, through scale, because they– most businesses haven’t done the work or, or just simply been running the business long enough to develop a deep enough pool of cash that cash and line of credit is sufficient to run the business.

That’s not everybody. We’ve worked with businesses before that they had the $5 million war chest in the bank of, of just $5 million liquid cash sitting in a bank account, and they had like a $5 million line of credit on top of that That company didn’t need anything else. You’re, you’re golden at that point. You don’t need anything else. But that’s not most companies. Most companies are like, “We got enough cash in the bank to make payroll on Friday, maybe, we hope, if that invoice gets paid like we think it’s going to, then, then we can make payroll, and we’ve got $100,000 line of credit on 10 million a year in revenue.” Right?

It’s, it’s just not enough liquidity. It’s not enough access to cash to be able to sustain the operations of the business for any meaningful amount of time. When you talk about capital infrastructure, what does that mean in plain English for a 10 to $30 million subcontractor? Yeah. I th- I think it really just means business model. Like- Right … how has your business been designed intentionally and thoughtfully in a way that it has the access to capital and liquidity that it needs to, to be able to sustain operations and grow the business? So it’s just thinking through the way that you’ve structured your work and going back to, are we pursuing revenue or are we pursuing profit?

And if we’re doing a su- a sufficient level of profit, what are the terms on that profit? Are we 90-day payment term? Are we 30-day payment term? What’s the gap that we have to fill? Uh, and what products are we using to fill that gap? Because if we’re 90-day payment terms and we’re out a half a million dollars in materials and labor on a project before we ever catch it, ca- recapture a dime of that through our billing, we have to have access to a half a million dollars of capital to be able to do that work. Where is that capital coming from? Did we plan it in advance, or are we reacting and saying, “Oh crap, we’re out of money, but now we need to go get a high-cost merchant cash advance loan or something like that to, to cover a short-term cash flow need where we’re paying, you know, predatory interest rates now When talking about capital structure, capital strategy, we’re talking about being intentional about understanding the capital needs, the cash needs of the business, and building a plan around that for the work that you’re taking on, where you can see on any given job the cash flow cycle of that job, where you’ve got cash flow shortfalls, and how you’re going to address that.

Are you pulling from savings? Are you tapping the line of credit? Are you using some other financing product? Where’s the capital coming from that you need to sustain the operations of the business? Totally. I just, uh, posted about the MCAs. One construction company just filed for Chapter 11, uh, last month, and MCAs were the culprit. 120% effective interest rate. Yeah. I mean, that’s like usury, you know? It’s, yeah, I mean, we, we, we took on a client recently- Yes … that, that had some MCA loans, and I mean, you could just feel the anger and the vitriol coming from that business owner every time the, the MCA loans came up.

And he, he, he wouldn’t ever call them pr- MCA loans. He would only ever call them predatory lending. Uh, because, yeah, it, it feels that way, right? Uh, when that’s the only kind of a- capital that you have access to, it’s not, it’s not fun, and you get stuck because the interest rates on those loans are so high that they consume all the profit in the business, and it keeps you stuck in that cycle. What are some smarter capital tools or structures contractors should be thinking about before they are under pressure? The, the number one is cash, and that is going back to, to what I said about war chest, the $5 million war chest.

I, I think every construction company owner should have a very high priority of accumulating as much cash as humanly possible. Like, before you increase what you pay yourself, before you do distributions to buy the, the ski boat or the vacation home or the whatever, build up a safety net of cash in the business. That is by far the single greatest source of capital and liquidity you will ever have, is your own money But so many people take all of the profit out of the business as soon as it’s available so that the business never is able to build that liquidity cushion, that cash cushion in the business that they can rely on.

And so they’re forced to use low-quality products like merchant cash advance loans and other forms of high interest debt instead of being able to use their low cost cash to be able to fund things. But you know, there, there’s some specialty products out there that, that we like, you know, when and where it makes sense and, and is a good fit, like some construction materials financing products for example, where if you’ve got a $5 million project you’re doing and, you know, 25% of it is materials and you’re not gonna get paid for 90 days on the job, you know, maybe that’s a great place to use a construction materials financing product where it adds, you know, maybe 2% to the total cost of the project.

You build that into your bid, by the way, because you shouldn’t have to pay for loaning them money basically is what you’re doing. So you plan in advance, we’re gonna take on this work, we’re gonna finance the materials because they’re expensive and we’re not gonna get paid for them for 90 days. And so the cost of that financing is say 2%. We’re tacking that on as a pr- a cost of the project and we’re only gonna do the project if we win the bid with that in there. This goes back to we’re not taking unhealthy revenue in this business anymore. We’re only taking revenue that is healthy, that is sustainable, that drives profit and the cash flow that we need to be able to run the business.

Yeah, this lady, she just posted, uh, that there are some banks that we don’t know about. Those banks are called subcontractors. They fund the projects. Yeah. It’s true. It’s absolutely true. Um, you know, it… I, I almost think that subcontractors should be FDIC insured because they’re, uh, they’re almost more of a bank than a lot of actual banks are. Exactly. And they’re not even charging interest. Yeah, absolutely. But, well, it’s because everybody’s so afraid of not winning the work, right? It’s I need to be the lowest bid so I can win the work. But that is that revenue growth mindset, and that is how you end up doing 20 million a year in revenue at 250,000 profit instead of 5 million a year revenue, 500,000 profit, right?

Everybody would rather be the $20 million company for some reason. I’d rather be the company that makes 500 instead of 250 Definitely. Also, there’s less stress, right? If you’re running a $5 million company, you as an owner has less stress. Mm-hmm. 100%. Next section, Luke, is operator versus owner mindset. In your experience, what’s the biggest mindset shift contractors need to make when moving from operator to true business owner? Yeah. I, I think it’s just the, the formalization of the business side of the business. Uh, yeah, I, I, I see a lot of people when they get started, everything’s kinda back of the napkin, if you will, where, you know, maybe they started as a handyman, and they, they wrote out paper receipts to people, or their, their accounting was in a Excel spreadsheet, if it existed at all.

Maybe it was just their bank account. But as you grow, you’ve gotta start thinking about your business as a business and you as a businessman, and not as a trades person. And a businessman, a business person is going to think about their business as a business and look across the board at, okay, what are the legitimate things that a business needs to have, and what do we need to do from a business strategy and business model perspective to be able to afford those things? Because I look at so many businesses that never made that turn, and they just kept pricing the same way they did at inception when the owner was the one doing all the work.

Well, that model has to change when you grow, when you scale. A $500,000 a year business does not run the same way as a $5 million a year business. You’ve got to now price for insurance and taxes and employee compensation and, and all these other things that you didn’t have to take into consideration when you were a, you know, a one-person business back in the day when you first started. And so there’s so many companies that get to five, 10, 15 million in revenue, and they’re still operating like a small business that can’t afford the right level of insurance or a bookkeeper who actually knows what they’re doing or, or, or that kinda stuff.

And it’s just, well, you know, this is just the nature of construction. You know, it’s a, it’s a tight margin. You can’t afford all this stuff. You, you get by with what you can, and I just think that’s the wrong mentality. I think you gotta build a business model and look at, what kind of business do I wanna run? What kind of insurance does that business need to have? What kind of accounting people does it need to have for me to be able to have the information I need to make good decisions? Uh, you know, what kind of employees do we need to have? What do we need to pay them?

What kind of benefits do we need to attract those kinds of people? So that you can see what’s it gonna cost to build the business I wanna build, so you can price for it. Instead of pricing to win jobs, not making any money, and now you can’t afford a bookkeeper or the right insurance, and you’re just leaving yourself open to all kinds of risk. It- it’s just a different way of thinking about running a business. How do you help owners stop managing by gut feel and start managing by a small set of financial signals that actually matter? Yeah. We, we do it by bringing consistency and discipline into the process, where, you know, most businesses, most construction companies, I’d say under, for sure under 20 million, maybe even a lot of them under 50 million, don’t have a true, like, CFO-level skill set in the business.

And I’ll say that’s true even if they have somebody with the title of CFO in the business. A lot of times we find that someone’s got that title, but they don’t necessarily have the skills that go with it And so we solve that problem by bringing people who have real world construction CFO experience. They’ve got the skills, they’ve got the knowledge, they’ve got the capability of solving problems in construction businesses. And we keep it pretty simple. We have a pretty standard CFO report that we go over every month with our clients that gives them, like, the five things every construction business owner needs to know.

So it’s things like revenue trend, margin trend, net profit trend, cash balance trend, um, just some basic, basic ke- KPIs supported by an underlying 12-month cash flow forecast that shows the impact of dec- the decisions we’re making today on cash flow three, six, nine, 12 months from now. So we’re now making decisions based on profit and cash flow, not gut instinct or how much money is in the bank today. When you’re a small company, let’s say you’re running $500,000 revenue, all you’re probably looking at is your bank statement. Can I run next month or a couple of months?

That’s all you’re thinking. Like at 5 million, I feel like that’s kinda not good thing. Yeah. Well, and it’s not, because at 500,000, you’re not doing that many projects, right? Mm-hmm. You can kind of just keep a track of everything in your head, and it’s, it’s not that big of a deal. You, you know where you are, you know what it’s gonna cost, you know how much you’ve spent, you know how much you have left to bill. You kinda just know that all off the top of your head because you’re not doing, you know, 40 different million-dollar contracts at once, right?

It’s, it’s just not that hard to keep up with. But at 5 million, a- and especially like 10 million, 20 million, 30 million, you’ve got so many crews, so many employees, so many projects going on at any given point in time. There’s no human way possible that you’re gonna be able to keep track of them all in your head or, or on a spreadsheet that you manually maintain or, or by looking at your bank balance and just instinctively knowing how long that cash can last you. It’s just, it’s too high volume, too many transactions, too much variability, too much risk to be able to manage it that way once you get past like, yeah, probably around 5 million in revenue.

It comes discipline and execution. You’ve worked with owners who know what they should do financially, but still don’t do it. Why is execution so hard in construction finance? Well, I think it’s two things. It’s, one, there’s a difference between knowing what you should do and knowing, actually knowing how to do it. Like most business owners know that they should be forecasting cash flow. Very few actually have the skills to know how to do that. So they don’t execute because they don’t have anybody in their company who can do it Second, most owners are spending so much time running around putting out fires and just responding to things constantly that they don’t have the time to get out in front of anything and to think proactively and to make decisions today about things that are coming three months from now.

It’s just constantly trying to keep the whole c- house of cards from falling apart every single day. So they never get to step out of panic mode and get into strategy mode where they can start executing on some of those things that they know they need to do. So this is where, like, someone who’s a little bit outside of the business can have more impartial view about the business, too. Like, when I’m running the business, let’s say construction business, I’m just so absorbed on, on day-to-day. I’m just thinking about all these chaos that I am fighting right now.

Yeah. Third party view for sure, but even more specifically, third party view from somebody who only does that every single day for a living, where they’re coming to the table and they’re having a conversation with you and you’re saying, “Hey, I think I’m gonna take out this merchant cash advance loan to cover my short-term liquidity needs, and then I’ll pay it back on this schedule.” It, it’s having somebody in the room who can say, “Let me tell you about 12 other businesses I worked with that did that and why it didn’t work and why I think you shouldn’t do it either.” Right?

That’s just a completely different perspective. What financial disciplines, weekly, monthly, quarterly, make the biggest difference for contractors who finally get control of their business? Yeah. It’s, it’s all the disciplines that govern cash, honestly. It’s, it’s the weekly review meetings. Do we have any accounts receivable past due? If so, who’s following up on them and when? And, and what are we doing to push those people to pay so we get cash in the door sooner? It’s the monthly forecast reviews of what does cash flow look like over the next 12 months?

We’re looking at that every single month, and we’re looking at an update to the budget, update to the projections. What do we see coming three months from now that we need to be having a conversation about today? That needs to happen every single month. And then quarterly, it’s, it’s the higher level strategy. It’s the more board level conversations, if you will. What kind of opportunities are we pursuing? What shifts do we need to make in the business model? Who are we trying to become as a company? And, and strategically driving an intentional direction in the business as opposed to just kind of taking yourself wherever the sales lead you.

When you send out these air invoices and you say like, “If you don’t pay me in 60 days, I’m gonna charge you f- 10% interest rate,” nobody does that actually, even if the customer doesn’t pay in like less than six months. So why do we even write that on the invoices, like we’re gonna charge you interest rate? I think it just makes people feel better to, to put it there. And it– I think that, I think some– in some types of work and in some locations, th-there’s maybe some, some legality around whether or not you can even do that. But ultimately, everyone’s afraid of, of breaking relationships, right?

And it’s like, well, I had terms with a, with a GC. They s- that they were gonna pay me on 60 days. They’re now 120 days out on an invoice, and we’re still not getting paid, and, and they’re like, ”Well, we’ll pay you when we get paid, so deal with it.” And they don’t wanna do anything about it ’cause they don’t wanna piss off the GC because they wanna get more work from that GC in the future. And it’s like, I get that, but at the same time, going back to healthy revenue If you have a GC that tells you they’ll pay on 60-day terms and doesn’t pay for 120 days, why would you want to do more work with that GC going forward?

And certainly, if you’re going to, you need to approach it very differently. Now, when you’re planning that work, when you’re putting together the bid for that work, you need to plan on 120-day payment terms because they’ve just demonstrated to you that that’s what they’re actually going to do, regardless of what the terms are. If you’re not gonna pursue any legal action against them, then at least protect yourself upfront with the way that you structure your bid, where you’re pricing in the capital that you’re gonna need from a line of credit or construction materials financing or something like that to be able to float that 120-day payment term, charge the contractor for it in the bid so that at the end of the day, when you finally do get paid, you’re still whole.

So GCs are tricky, uh, ’cause, like, we also send some invoices to some GCs, no one pay, pay net 30 to us. Yeah. Yeah. Well, and it just goes… E- everyone’s always like, “Yeah, but we’ll lose the revenue. We won’t, we won’t get as much revenue. We won’t, we won’t get as many jobs.” Like, yeah, I know, but you’ll make money. Yeah. And timing matters. Like, instead of giving me $1,000 today, you’re giving me, like, after, let’s say, three months, then the $1,000 are not the same, right? The one received today and the one I get in three months. Yeah, 100%, especially if you’re paying interest that you’re not charging the customer for for that three-month period of time.

Right. And, you know, I, I also have all these loans from these MCAs. They are sucking my blood. Yep. Yep. Very interesting, yeah, construction businesses. Th- these are good people, man. I mean, they don’t- Yeah … deserve to be, like, treated like that. No. No, absolutely not. And you know, the, there’s a reason why we chose to work with construction companies, and part of it is that that’s, that’s the world I grew up in and, and I understand it, and I know it, and I like it, and I like those people. But the other part is they’re just, they’re good people.

Like, the people you meet in the trades and construction are just down-to-earth, really good, trustworthy, honest people and, and we love working with, with those clients. Well said. The last section, Luke, is looking ahead. For a subcontractor doing $10 million to $50 million today, what are the biggest financial mistakes you see that will limit their growth over the next five to 10 years? What tends to happen is when you get to 10 to 15 million and, and you start setting your, your eyes on 25, 30 million, and I’m gonna sound like a broken record here, but people start thinking about, how do we go get another 10, 15, $20 million in revenue?

And that’s where you run into these scenarios where you go from a healthy profit at 10 to 15 million in revenue to breaking even or even losing money at 30 million in revenue. So the biggest financial mistake is focusing on growth from a top-line perspective and trying to hit a revenue target instead of focusing on growth from a bottom-line perspective and trying to hit a profit target. ‘Cause revenue should just be something you back your way into. And it should be, we need a, call it 10% net profit. In order to do that, we need 20% to cover overhead, which means we need 30% gross margin on all the work that we do, which means we need to bid at 30% gross margin minimum, or we’re not gonna hit our target profitability.

So we don’t ever bid a job at less than 30% target margin on the project, because if we do, we’re not gonna hit our own required internal rate of return. Now we’re just gonna go grow revenue at whatever rate or whatever pace we can based on hitting those internal metrics so that, you know, maybe it takes us a lot longer to get to 30 million in revenue, but when we actually– when we do finally arrive at 30 million in revenue, we’ll get there with $3 million a year in profit instead of loss or break even. Yeah. I liked the idea of backing out from your net profit margin.

How should contractors think about building businesses that are resilient, not just profitable, especially with market cycles, labor pressure, and tighter capital? Yeah. You– It goes back to, to what I said earlier in the conversation that you need to think about long term in your business. And if you’ve been in construction very long at all, which most people who are in construction have, have been in it their whole lives, so you know it does not matter how good things are right now. Hard times are coming. It might be six months from now, it might be six years from now.

Who knows? We have not had the last financial recession the world’s ev- has ever had. We have not had the last economic hard time that the world is ever gonna have. We probably haven’t had the last global pandemic that the world has ever gonna ha- has, is, is ever gonna have, right? Hard times are coming again, and if you are not intentionally building up a safety net in your business of cash, then you are not future-proofing your business. If you’re riding the wave thinking things are great, cash is flowing, I’m living, living the dream life and taking all the profit out of the business, you are setting yourself up for future bankruptcy.

You have to think long term, and you have to build a business that can weather six to twelve months of hard economic time because it will come. And delay the, the rewarding of yourself from your business from the very beginning. Always maintain, have really, really clear visibility into what six to twelve months of cash in your business looks like, and that number grows as the business grows. And so your, your s- your rainy day fund, if you will, your safety net, whatever you wanna call it, the account where you’ve got your excess cash stored needs to grow with the business and it needs to be capable of covering six to twelve months before you start taking excess distributions and, and capital and profit out of the business.

Actually, when I think about like a small business, let’s say somebody who’s doing less than a million, I really don’t feel like there is any separation between like personal finance and business finance. It’s like you are on the line for the business, and I don’t get the concept of like just thinking about like putting money in business because whatever I have is in the business. Yeah. What do you think? I think from, from day one, if you’re going to start a company, you need to draw a very clear line between that business and yourself personally. Form a legal entity, set up a bank account for that legal entity.

The only funds that go in and out of that bank account are funds related to the business, revenue you earned, legitimate business expenses, nothing else. If you need money personally, you take a distribution or you write yourself a paycheck. Keep it separate, keep it clean from day one. I was talking to a co- construction business owner there, you know, and they don’t keep it clean. Uh, I’m telling you, under $1 million construction businesses, it’s, uh, total chaos. It’s, I’d say it’s total chaos, like up to even 10 million in revenue, I would say. I mean, we’ve seen eight, $9 million a year companies that, you know, the, the owner has a rental house that he owns personally, but he makes the payment on the rental house from the business checking account.

You know, there’s just so much muddying of the water between business and personal that it, it creates not only legal exposure, but just a lot of confusion that makes it hard to run the business, ’cause now, well, how profitable is your business? Because you’ve got non-business expenses hitting your P&L now, so it’s, the business looks less profitable than it actually is, which isn’t good if you need to go talk to a bank and get a line of credit increase. It just, it doesn’t make sense, and a lot of times people do this out of a fear of paying taxes. It’s like, “Oh, well, I need to run as much expense through my business as I can to reduce the amount I, I owe in taxes.” And it’s just not a smart thing to do.

What you’re risking to save a couple bucks on taxes is not even close to worth it. And, uh, the other thing, uh, that we see a lot is people who create these, these complex legal entity structures where they’ve– they have one construction business, but it somehow manages to operate in four different legal entities, where they’ve got an entity that owns all the equipment, and that entity leases the equipment to the operating company that does roofing, and they’ve got another entity that does framing and, and they’re all owned by trusts, by like different layers of stacking trusts, where you’ve got like 10 or 15 trusts and legal entities all wound up in this crazy complex legal structure to try to protect the business owner from paying taxes or being sued or anything like that.

And They think it’s smart because they see the, the giant companies of the world, the, the Apples and the Teslas of the world doing this kind of stuff, and they go, “Well, that must be the smart thing to do, so I’m gonna do it too.” But what you forget is those companies have massive teams of lawyers and accountants managing that structure correctly so that it’s clear, they know what’s going on, and they’re actually getting the legal and tax protection that they’re looking for. Most small businesses who try to do that don’t do it right, and they end up doing something that’s called piercing the corporate veil, where because you didn’t manage those structures right, you don’t actually get any of the legal protection or tax protection that you were trying to get out of them.

You just create legal exposure to yourself personally by not executing that, that structure correctly because you don’t have the team of lawyers and accountants running it for you to make sure it’s working correctly. You’re way better off keeping it simple, keeping it clean, keeping it organized, doing it legitimately. If you owe taxes, pay it. It’s not that big of a deal. If you could leave construction owners with one uncomfortable but necessary financial truth, what would it be? Man, all right, if you’re gonna make me s– if you’re gonna make me go uncomfortable, I would say it’s that you don’t have anybody in your business right now who’s capable of solving your profit and cash flow problem.

Your bookkeeper is your cousin. Your CFO is your spouse. Neither of them have any training or formal experience in either of those things. You don’t have the talent that you need in the business. You don’t have the experience, you don’t have the skill set of somebody who actually knows how to solve underlying business model issues that create profitability issues, that create cash flow issues, that are causing the constant spiral of struggle that you feel. And you will not get out of that hamster wheel until you commit to getting the right skill set in the business.

Not the right title, the right skill set. Somebody who’s actually solved those exact problems before in a real construction company. Luke, thank you so much for coming onto the show. Thank you so much for having me. I enjoyed the conversation. Thanks for listening to Finance at the Jobsite. If you found today’s conversation valuable, share it with a teammate and subscribe so you don’t miss the next episode. You can listen on Apple Podcasts, Spotify, or Audible, or watch on YouTube. Just search Finance at the Jobsite. Until next time, here’s to building smarter, faster, and more profitable projects