Latest / Contractor Business Builder Podcast / Why Home Builders Lose Profit Even When Revenue Looks Good With Jon Markee

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Why Home Builders Lose Profit Even When Revenue Looks Good With Jon Markee · Contractor Business Builder Podcast

• 0:00
  Welcome to another episode of the Business Builder Podcast.
• 0:03
  We've got the honor of hosting John Markey.
• 0:05
  He's the founder of My Builder CPA.
• 0:08
  So you're building software, says one thing, QuickBooks is
• 0:11
  saying something else, and your bank accounts are something
• 0:13
  worse. This episode is for you.
• 0:15
  John Markey helps builders make sense of their numbers and their
• 0:19
  margins. Welcome here John.
• 0:21
  How you doing today? Great.
• 0:22
  Thanks for having me. Likewise, so you want to just
• 0:25
  let the people out there know bit about your background.
• 0:29
  You know what you do in a nutshell and and why you chose
• 0:31
  to be CPA for builders instead of, you know, some other
• 0:34
  industry or just more in general.
• 0:36
  Yeah, great question. So I've been doing this since
• 0:39
  April 2017, hard to believe. And we're known as my builder
• 0:43
  CPA because we focus on residential home builders,
• 0:48
  remodelers and we kind of consider ourselves to be the
• 0:52
  accounting babysitters. So we take our clients and we
• 0:55
  hold them by their hand through every step of the process of
• 0:59
  every financial element of their business.
• 1:02
  There's no question that we refrain from.
• 1:06
  We know that basically every e-mail that has a dollar sign
• 1:09
  that comes to our clients, you know we can contribute in some
• 1:14
  manner to their well-being. So we're really focused on a
• 1:17
  holistic view of success for our clients.
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  Holistic is a good word, I think for construction finances
• 1:25
  because it's it's a lot more than other businesses.
• 1:27
  Typically with just having a clean set of books, right,
• 1:30
  There's all the job costing and project side of things and it
• 1:33
  can get messy and real fast, especially when you're dealing
• 1:36
  with you don't feel guys and they've got receipts full of
• 1:40
  coffee stains and and tears and rips and stuff like that.
• 1:43
  So what are something like the big kind of mistakes or pinpoint
• 1:48
  areas for builders when it comes to keeping their books in order
• 1:54
  or just having good financial data?
• 1:58
  Great. Question.
• 1:59
  So the biggest misconception I see right out-of-the-box is that
• 2:04
  the amazing new cloud based tools are marketed in a way
• 2:09
  where it tells home builders and pretty much anyone off the
• 2:13
  street that they are perfectly well qualified to do their own
• 2:18
  accounting. And even if it might not take
• 2:21
  them all that much time or it might not be that complicated,
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  their expertise is better spent in their business focusing on
• 2:29
  their core product. And I know that QuickBooks wants
• 2:34
  to sell as many subscriptions as possible.
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  So they definitely want you to believe that, you know, anyone
• 2:40
  can be adding transactions from the bank feed.
• 2:43
  But the biggest thing that we see, I tell everyone that bank
• 2:46
  feed is a trap. There's always, you know, with
• 2:49
  every new client we get, there's some kind of mess involving the
• 2:52
  bank feed. There's something that was
• 2:54
  happening in the background that doesn't exactly match the bank
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  feed. And QuickBooks just, you know,
• 2:59
  in all of its glory tries to get you to add transactions from the
• 3:03
  bank feed. So I would say right off the
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  bat, that's the biggest thing that we see is problems with the
• 3:08
  bank feed. Definitely one of my
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  recommendations for every early builder who hasn't done it yet
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  is like, get a bookkeeper, get an account and get your
• 3:18
  financials off of your plate. Because essentially you're not
• 3:22
  trained to do it. You don't have time to do it.
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  And when you're not like comfortable with something or
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  you don't like enjoy it so much, then it just gets left to the
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  sidelines. And that's why so many builders,
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  I find there's trouble and it's like where your numbers at
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  nothing is even close to up to date and it's just it becomes a
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  mess and then no one wants to deal with it until they probably
• 3:43
  reach out to Someone Like You, John, and then you guys kind of
• 3:46
  figure things out and and smooth it out and and all that stuff.
• 3:49
  So I find quickly yeah, so we mentioned about QuickBooks, I
• 3:52
  find project management softwares as well where they all
• 3:55
  like integrate with QuickBooks and accounting softwares.
• 3:58
  And it's always like, yeah, no problem.
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  It's, you know, integrates and you have numbers on both sides.
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  But again, it, it's there's a lot of like kind of hoops to
• 4:07
  jump through to get things to work properly and then having
• 4:10
  them sink and the field guys and all that.
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  How do you deal with like the job costing side of what you
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  mentioned? Yeah.
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  The biggest thing is always making sure that the job P&L, no
• 4:23
  matter what job software you're using, builder trend, job trend,
• 4:26
  whatever you need to be able to run a profit and loss in your
• 4:31
  job software, run that P&L for that specific job, and then go
• 4:35
  into QuickBooks and run that same report.
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  It's usually called profit loss by client.
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  Or you can even just start with a normal profit and loss and
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  filter it so that you're only looking at that job.
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  And if your job software like builder trend is notorious for
• 4:50
  not giving us date driven reports.
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  So every time you look at a job costing report and builder
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  trend, you're seeing all transactions from all dates.
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  That's fine. Just go into QuickBooks and
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  choose the same parameters for your profit and loss there.
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  And then ideally your total cost number in QuickBooks and your
• 5:11
  job software, those should be the same.
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  And you would be surprised even you know, all of these job
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  softwares advertise two way synchronization with QuickBooks,
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  you know, it just sounds so easy, like you just hook it up
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  and it just does its thing and we're good.
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  But I with every client we take on, we come across some level of
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  discrepancy between the job software and QuickBooks.
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  And there's all kinds of number of reasons why that might
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  happen, like cost codes that are not mapped, vendors, customers,
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  you know, all of those things have to be mapped between the
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  two. And if you just miss, you know,
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  one of those data fields, you are missing transactions from
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  one or the other system and you just, you got to get them to be
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  the same. That's how you know it's working
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  effectively. Yeah, definitely.
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  So considering that that mapping is correct and it's working
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  properly, what what do you see? I know every business is
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  probably gonna be different in this regard to some degree, but
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  how do you know which transactions are for which
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  projects or which part of the estimate, which line items and
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  and things like that? That's often a challenge in and
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  of itself. So what's like your ideal way
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  that that gets managed and what do you see builders using that's
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  effective or different ways? Great.
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  Question and you're exactly right.
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  It is so different from, you know, every, every small
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  business is a snowflake to begin with.
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  So you know, every builder does it a little bit differently.
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  But in an ideal world, we would actually start with purchase
• 6:43
  orders because that would give us our budget.
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  It's a document that you can give to your vendor or your
• 6:50
  subcontractor and say this is how much we expect it to cost.
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  And then if that person sends you a bill after the work is
• 6:57
  finished and it's a different number, maybe it's higher than
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  you have the purchase order to go back to, to say, hey, this
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  was our agreement. Why is it not what we agreed
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  upon? And maybe there was a change
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  order or maybe it's perfectly legitimate, but it gives you,
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  you know, an official document. And then as those bills and
• 7:19
  those receipts come in, this is where your people in the field
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  do have to have a basic understanding of your budget.
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  So we recommend people if they're out, you know, making
• 7:31
  trips to, you know, the home improvement store when they get
• 7:35
  receipts, we recommend writing the job name on the receipt and
• 7:41
  then if possible, also the cost code because that completely
• 7:45
  takes the guesswork out for anyone in the back office.
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  We know exactly what which cost code to book it to.
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  And then there's some kind of photo process in place.
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  So you can use job thread, you can even use QuickBooks.
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  There's all kinds of software apps out there that will let you
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  take a picture of the receipt. Some of them, you know, will
• 8:07
  start trying to enter the data for you.
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  I'm, you know, that's a little bit of a time savings.
• 8:12
  It's great. But the biggest thing is having
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  the job name and the cost code written on the receipt or, you
• 8:19
  know, if if you always use the same plumber and they're always
• 8:24
  getting booked to a plumbing cost code, whoever is in your
• 8:28
  back office should be able to see patterns like that.
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  But at the very least we need to know what job it's for on the
• 8:35
  receipt or the bill from the Subs.
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  And when he utilized the technology properly, there is a
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  lot of time saving there. And essentially, like you said,
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  you need that critical information like project and
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  ideally item or the projects or cost code if you will.
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  But the rest of it can be really easy.
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  I was talking with the builder the other day.
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  He's doing a multiple millions of revenue and they were still
• 8:59
  like, you could the desk behind them was full of papers and he
• 9:01
  said he's still entering stuff and even brought his mom.
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  Sometimes they're like come and try to clean stuff up, but it
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  just kind of made more of an issue because she's not trained
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  and doesn't know what's going on, right.
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  So what do you say to builders who are like, I'll hire, you
• 9:15
  know, in-house bookkeeper or my admin person needs some more
• 9:19
  stuff to do so she can do some of this?
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  How do you work with like the office team or a builder?
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  Like what's the what's preferred and what's the expectation as
• 9:28
  far as who does what or how it gets handled?
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  Yeah, good questions. So there's all different levels
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  of office managers and assistants, virtual assistants,
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  and they are not all created equally.
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  So yes, a very high qualified office manager could be capable
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  of capturing those receipts, scanning them and maybe even
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  getting them entered into your job software and or QuickBooks,
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  just depending on what your workflow process is.
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  But what I see, where I see builders getting the most bang
• 9:59
  for their buck, is having that office manager on site who might
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  be able to do an assortment of things in the office, something
• 10:07
  that a remote employee is never going to be able to do.
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  Like if you have an important client meeting, they can make
• 10:13
  sure that the conference room is clean, maybe bring in some
• 10:16
  refreshments. But then really that office
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  manager, when it comes to accounting, all they're doing is
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  making sure that the documents get scanned and uploaded to a
• 10:27
  specialist behind the scenes. And usually a remote individual
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  comes at a fraction of the cost of what it would cost to have
• 10:36
  them in your office. And you can get much better
• 10:39
  talent because that remote individual doesn't have to be in
• 10:42
  your same geographic area. You can find a specialist who
• 10:47
  might be located, you know, far away from your office, but they
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  they only work with people in construction.
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  So when you come across a problem, it's usually not the
• 10:58
  first time that they're seeing that problem.
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  They might have seen that problem on another client
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  earlier that day or even last week.
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  But what I see is when one of our clients has a certain type
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  of problem, it's not very long before multiple clients have the
• 11:12
  same problem. And once we solve it one time
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  for one person, we can just apply the same process at a
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  fraction of the time in the future.
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  Whereas your office manager, when they come across a
• 11:25
  complicated problem, it might be the first and only time that
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  they're seeing it. And it takes them, you know, 3
• 11:32
  or 4 times as long to research it and find a solution.
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  And then in the meantime, the other things that you want them
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  to do in the office, those tasks all of a sudden seem like a a
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  lower priority and they don't get done.
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  So yeah. Yeah, for sure hiring a
• 11:47
  specialist, you know that the quality and they're gonna have
• 11:51
  gone through a long time in the end it's gonna save you time,
• 11:54
  cost less money and all that stuff.
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  Same as like hiring a handyman to build your home, like it's
• 11:58
  probably not going to work out to you while you you want to
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  build a home builder that's built, you know, however many
• 12:03
  10s or hundreds of homes before. So now as far as the profit side
• 12:08
  of the business. So if you start working with the
• 12:11
  client and they're not really making much money, what are some
• 12:14
  maybe some things that you look at or suggest that they look at
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  as far as their numbers to maybe identify profit leaks or ways to
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  improve their, you know, financial health of the.
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  Business, I love this question. So we try to operate on a ratio
• 12:29
  method as much as possible. So we've worked with some
• 12:33
  thought leaders in the industry and we have a, a listing of
• 12:38
  percentages in the format of percentage of your revenue, your
• 12:42
  total income. So a percentage of all of the
• 12:45
  money that you bring in to your business.
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  There's a certain percentage that should go toward, you know,
• 12:51
  your cost of goods sold, like your direct construction costs.
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  And then there's other percentages for your overhead
• 12:56
  like your, you know, your management salaries, advertising
• 13:00
  and marketing, all of those items.
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  And so right off the bat, as soon as we can make sure that
• 13:05
  the profit and loss is clean and it's set up in a format that's
• 13:09
  pretty, you know, close to what, you know, most people in
• 13:13
  construction use, we can drill down into those percentages.
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  And so for someone who's not achieving the profits that they
• 13:20
  would like, we, we can hone in on some of the costs to see, OK,
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  where is their overspending? Sometimes you don't even know
• 13:30
  where there's overspending. You forget, we all forget what
• 13:33
  subscriptions we've signed up for.
• 13:35
  So, you know, those are leaks that are easy to fix pretty
• 13:39
  quickly. And then if if your revenue
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  number is not as high as you would like, we can drill down
• 13:45
  into the specific jobs where you were underpriced.
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  And you know, some people argue that every problem you have is
• 13:53
  somehow a result of your pricing.
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  So if you haven't achieved the profitability that you've wanted
• 13:58
  on historic jobs, you know, we can look to see why is that?
• 14:03
  Is that because your budget, your at your original estimate
• 14:06
  wasn't right or it was priced incorrectly.
• 14:10
  And then those are lessons. You need timely feedback so that
• 14:14
  as soon as you go to bid your next job, you're not leaving
• 14:18
  money on the table. Yeah, absolutely.
• 14:19
  The two big areas that I picked out there were, well, I mean
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  knowing your percentages across like having someone that's
• 14:25
  experienced with it obviously, but checking your expenses
• 14:28
  regularly just to make sure there isn't, you know, random
• 14:31
  things that you're not aware of or stuff that looks out of
• 14:34
  place. A good thing about someone like
• 14:36
  yourself as well is you sort of know what other builders are
• 14:39
  paying for certain things. So I, I know I've seen this with
• 14:42
  clients where they may be having some sort of services or
• 14:47
  subscriptions or, or what have you.
• 14:49
  And it's just like twice or three times what I know other
• 14:52
  people are paying and like giving some suggestions of, you
• 14:56
  know, maybe you want to go with a different option or maybe you
• 14:58
  don't need all this stuff or whatever.
• 14:59
  I, I had a client yesterday, we went through her financials as
• 15:03
  just sort of regular check and her annual subscriptions had
• 15:06
  just like two or three of them had come up and, and we
• 15:09
  literally figured out that one of them she could decrease
• 15:12
  because they were really using it as much as they needed.
• 15:15
  The other one they could eliminate because they had the
• 15:16
  project management software, which was doing the same thing
• 15:18
  as this other thing that they didn't need anymore and ended up
• 15:21
  saving about $1500 a year with like a 510 minute check.
• 15:24
  You know, it's, it, it doesn't take a lot, but it's definitely
• 15:28
  helpful. And what you mentioned about the
• 15:30
  pricing for sure. I, I like to save your money is
• 15:33
  made in your estimating because once the project starts, it's
• 15:36
  hard to like come up with an extra 5% margin on a project.
• 15:40
  You just you don't reach that kind of efficiency gain
• 15:42
  typically, but it's easy to price that in when you start the
• 15:46
  project to make sure that you will be profitable on on the
• 15:48
  other side. Can you walk us through client
• 15:51
  success story that you have and where they started, how they,
• 15:54
  you know, came to you, what their issues were, what you guys
• 15:57
  worked on and and how you helped them?
• 15:59
  Yeah. I can think of a number.
• 16:02
  So one good example is a custom builder who's operating on the
• 16:09
  cost plus method. And when they came to us, they
• 16:15
  were experiencing phenomenal growth.
• 16:18
  They've been in business for upwards of 20 years and they
• 16:23
  knew that they had never really invested in their accounting
• 16:26
  systems, but it got to a point where it was finally costing
• 16:30
  them money because not since they're a cost plus, not all of
• 16:35
  their expenses were getting captured as billable items to
• 16:38
  their client. So they had finished a few jobs
• 16:42
  and they later realized that there was upwards of $20,000
• 16:47
  that they had never billed to their homeowner.
• 16:50
  So that was, you know, so much time had passed after the job,
• 16:54
  the job was done. They didn't really feel like
• 16:56
  going. They didn't feel like they could
• 16:58
  go back to that homeowner and ask for additional funds.
• 17:01
  They wanted to make sure this never happened again.
• 17:05
  So we looked at it from multiple angles.
• 17:09
  First of all, their, their profit and loss statement just
• 17:12
  really wasn't working for them. You know, there it was just a
• 17:16
  mess. There was, you know, a huge
• 17:18
  percentage of all of their expenses were getting booked to
• 17:22
  miscellaneous office expenses. And I know that in the
• 17:25
  QuickBooks bank feed it, it tries to learn your patterns and
• 17:29
  it will suggest, you know, once you book 1 little transaction to
• 17:33
  that account, it's it thinks, oh, you must want all of your
• 17:37
  transactions booked to miscellaneous office expense.
• 17:41
  And then that's how we turn in, you know, that's how we get into
• 17:44
  the trap of the bank feed. So we went through a complete
• 17:48
  cost code redo. We made sure that it's in the
• 17:51
  recommended format that helped them better identify where they
• 17:55
  were going over in certain categories on each of their
• 17:59
  jobs. And then we also rolled out a
• 18:01
  process that was completely standard.
• 18:04
  So every time they purchased something, there's a mechanism
• 18:07
  in place to make sure that those transactions get recorded within
• 18:11
  a few days of them happening. Therefore, we make sure that
• 18:14
  they're getting billed out to the homeowners.
• 18:17
  So that one was just a huge organization project, just
• 18:22
  making sure systems were standardized.
• 18:25
  People in the field felt empowered to send in receipts.
• 18:30
  They knew what the process was, even if it were something for
• 18:33
  overhead in the office versus on the job.
• 18:36
  And then about six months into it, you know, we were able to
• 18:41
  prevent a couple big things. First of all, they accidentally
• 18:44
  paid one of their subcontractors $80,000 twice.
• 18:48
  And just by us catching that, we've basically paid for
• 18:51
  ourselves, you know, for more than a year.
• 18:55
  And then we also, there were numerous instances where things
• 19:00
  may or may not have been marked as billable.
• 19:03
  And so by going through everything that was booked on
• 19:05
  that job, we were able to identify additional revenue that
• 19:11
  should be charged to the homeowner.
• 19:13
  Wonderful. Yeah, with cost plus, it's so
• 19:16
  highly critical because if you miss something, you know you're
• 19:21
  ultimately paying for it instead of forwarding it to your client.
• 19:25
  And it's very easy or things ought to be accounted for.
• 19:28
  I have a client who was in this state with, with the client of
• 19:32
  theirs where it got to that because they kind of got behind
• 19:35
  in their invoicing and they had some change orders in there and
• 19:38
  whatever. So it was just like those avoid
• 19:41
  those difficult conversations later, right?
• 19:44
  With your clients of like, oh, by the way, you know, I need
• 19:46
  another 20 grand for whatever, right?
• 19:49
  So. Well, yes.
• 19:50
  So it's like no matter if you choose cost plus or a flat
• 19:55
  price, the accounting is really pivotal because even if you're
• 19:58
  working on a fixed price and you know, job, you want to make sure
• 20:03
  that every single job related expense is booked to that job.
• 20:08
  Not because it's going to increase your profitability, but
• 20:12
  it's going to improve your estimating ability for your next
• 20:15
  job. And I've worked with a few
• 20:18
  clients who are, you know, have been surprised at how much it's
• 20:22
  cost for blueprints, permits and land surveying.
• 20:25
  Those are, you know, like 3 categories.
• 20:27
  Turn off. Maybe we just went through a
• 20:30
  certain season with those categories, but after we got
• 20:34
  their books in line, we could quickly see, Oh yeah, we need to
• 20:38
  really increase the amount we're budgeting on these little items
• 20:43
  because that all factors into the flat price that is shown to
• 20:48
  the homeowner. Yeah, definitely make sure
• 20:50
  there's nothing missed in, in the job expenses so that, you
• 20:54
  know, estimates should include absolutely everything so you're
• 20:57
  not left leftover lunch. Uh, what's the best way for
• 21:01
  people to get in touch with you, learn more about your services
• 21:05
  and and reach out? Yeah, thanks for asking.
• 21:07
  So if you just go to our website, mybuildercpa.com, you
• 21:11
  can sign up for a financial clarity session right there.
• 21:15
  If you dig a little bit deeper, you'll be able to find the
• 21:18
  scheduling link directly with me on the website.
• 21:22
  There's also a chat function where you can send me a message
• 21:26
  and get in touch and I would be more than happy to have a free
• 21:30
  session with you, you know, just to, to give you kind of like a
• 21:34
  quick assessment of your books and see where you're at and how
• 21:37
  you're doing. Wonderful so put links to the
• 21:40
  website in the description of this video or audio, depending
• 21:43
  where you're listening and no excuses to have messy books or
• 21:48
  not be clear on knowing your numbers.
• 21:50
  Reach out to John here and his team and they'll hook you up.
• 21:53
  So thanks so much for coming on today, John and and helping us
• 21:56
  out with. This thanks for having me.