EPISODE 88 – Overheads Are A Financial Killer!
EPISODE 88 – Overheads Are A Financial Killer! |
Hey there, welcome to another episode of the Builders Business Success Podcast. It is episode 88.
And in this episode, we're talking about number three of the list of fateful eight problems that builders run into. In fact, they create themselves in an attempt to create a solution, I know that sounds weird.
So we have the pain, the business isn't working the way we want it to, we've got cashflow pressure, we're struggling to find work, we've got too much work, we're struggling to find good team members, what have you.
And then we try to come up with solutions to fix these problems, but what we've found, there are eight problems that are caused along the pathway to the solution of fixing those very, very common pain points in a building business.
And we are talking about number three today of the fateful eight, which is increasing overheads, inadvertently. This is an absolute killer because it causes stress and there's nothing worse than money stress.
When you've got money stress, it seems to amplify the stress of every other problem you've got, like if you've got a health problem, or a relationship problem, or any kind of problem, it exacerbates the consequences of those other problems when you've got money stress on top of it, so it's a really great one to get rid of, so that's why we are covering it in this episode.
There is a much smarter way to manage overheads and we're gonna unpack those in this episode. Plus there's a lot of myths that need busting that cause poor financial decisions.
Plus we've got idea of the week in this episode and it's all about some quarterly disciplines so that we'll save a ton of money and guarantee to increase profit, so that could be a good idea of the week.
So if this is your first episode of Builders Business Success Podcast, we are the construction business podcast or the building business podcast.
I'm Mick Hawes if this is your first one and I'm your host in the podcast. And I'd love to be a construction business coach, or if you wanna call it builders coach, that would be cool too.
*Transcription of the show*
So let's get stuck into this week's episode. As I said, this week's episode is all about overheads, and overheads are an absolute killer financially.
Overheads are not often thought of, we kind of, we start to accumulate them. And the problem with overheads is we go, "Oh, let's have the subscription to that magazine, or let's add an extra phone onto the account, or let's get this little bit of software on a subscription, or let's lease a new vehicle, or let's own our own excavator and trailer," instead of hiring them and all sorts of things.
And the trouble is that when we are adding overheads, what we do is we convince ourselves just about that one cost, "Oh, that won't cost much, it's only 30 bucks a month, or 90 bucks a month, or the repayments for our excavator are only 300, $400 a month," we break it down, it's actually a sales technique.
If you've ever studied sales its you break it down to the smallest amount is the technique. And when the salesman is selling you the insurance policy, the life insurance policy, or the extras on your motor car or whatever, they'll break it down, and they'll basically say like, "It's really only the equivalent to a cup of coffee a day." And you start to think, "Oh, well, I can afford a cup of coffee a day," but you don't think that you're not paying it every day.
If you paid it, and I don't know whether you how much you pay for your coffee, but some people pay eight bucks for a cup of coffee. But if you were paying your eight dollars a day, it probably wouldn't be so bad, it's still an overhead.
But what tends to happen is you don't pay it every day, maybe you don't pay it every month, maybe it's an annual thing. And you figure that out eight bucks a day times 365 days, it adds up to a big chunk of change and then we are not prepared for that bill when it comes around.
So how we expand our overheads is fundamentally flawed to start with. Many builders, and I know this for a fact because I speak to many builders and I work with them on their financial situation, many builders don't keep track of their overheads and it spirals out of control, similar to what I just talked about we kind of add that 'cause it's not that much, and then we add another one 'cause it's not that much, and then we add another one 'cause it's not that much, it's only a cup of coffee a day, and then we add another cup of coffee a day.
Soon, it's 10 cups of coffee a day and it's a massive amount of unnecessary overheads. And then the other issue is we start to convince ourselves, hypnotize or rationalize, if you've ever listened to the audio or read the book, "The Seven Habits of Highly Effective People," by Stephen Covey, and I highly recommend that you do. He talks about how we rationalize to ourselves.
But the interesting thing is he breaks the word rationalize down into two words, rational, lies, and that's what we tell ourselves. Basically we bullshit to ourselves that it's all okay to save us the pain of owning up to the mistakes that we've made, to copying up to the mistakes that we've made.
We're better off just putting our head in the sand, and I've had Blackbelt members who tell me that that they just feel like that the easiest path when they get into of trouble is to ignore it, is to stick their head in the sand, and they honestly say that. And if our guys are honestly saying it, I know that there's a heap more of you out there that are doing that same thing and we've gotta stop it.
Many builders don't, I can't believe this still happens, and you might be thinking, "Oh, bullshit, they don't do that," they do do it because I speak to many of them and I ask them these questions and it's patently obvious that they don't add their overhead costs to the costs of jobs.
There are still builders out there, and I think I said it last week, but a week or so ago, a friend of Builders Business Blackbelt, Scott, sent me a text to say that 106 builders just went broke in the last 90 days. 106. The reason for that is more often than not financial mismanagement.
And I cannot believe that there are still builders around that don't calculate all of the costs of their car lease, their car maintenance, their car insurance, their phone, their insurance, the everything to do with their office and admin, and dah, dah, dah, and they don't calculate all of the costs, and add that into the cost of a project. I wonder why that many builders say, "I've put 20% profit margin on top of this, that's our profit margin."
But at the end of the project there is no profit because that profit has been sucked out to go to things that we hadn't thought of such as that list I just mentioned then. Most builders don't know what the cost is per day to keep their doors open.
Do you know what that cost is? If you don't know what that cost is, you should know what that cost is. You should know what it costs you every single day to keep your doors open down to the cent. I should be able to wake you up out of a deep sleep.
Don't ask me what I'm doing in your bedroom in the first place looking at you while you're sleeping, but I should be able to creep into your bedroom and wake you up and go, "What's the cost to keep your doors open on a daily basis?" And you should know the figure.
'Cause if you know that figure, it's fairly simple to go, "Okay, this project's going to be 100 working days. I need to get my a cost to keep the doors open, multiply that by 100 and add that into the cost of the project." Have a think about that, make sure you're doing it.
So, as I mentioned before, there are myths, right? So, let's dispel some of these myths.
One of them is, to be successful you've gotta look successful. And I kind of agree to it to a certain extent, but not if you're going to increase your overheads unnecessarily.
I think rather than to be successful, you've gotta look successful, I'd rather you think to be successful, I've gotta act successful, which means professional, punctual, have good communication skills, good leadership skills, good systems, good procedures. That's going to make you more successful than looking successful.
There's a few successful looking builders out there, but I can guarantee you once you scratch the surface a little bit, they're in a mountain of debt and their businesses built on a house of cards and could go under at any moment.
Like there was a big franchise builder that went bus down here in Hobart only a month or so ago.
Looked very successful from the outside, but bang, over it went and it went really, really quickly.
So, you don't need to have an expensive dual cab ute, and a flash Harry Builders trailer and all of that sort of stuff, you can get away with what you can afford, you don't have to put yourself in unnecessary debt just to look good because you think that I've gotta look good and look professional to be successful and be looked upon as professional. It's the way you act, not the way you look.
You don't need big signage on your sites. You don't need the flash uniforms. You don't need to spend a shit ton of money on your website. You do, but when you can afford it, when the business can afford it. I really love in the "Profit First" book, particularly the audio book, I like listening to Mike rather than reading the "Profit First" book.
But I always remember there's a part in the book where out of the goodness of his heart he was trying to help a guy who was in extreme debt, and he was trying to help him by explaining the principles of Profit First.
And one of the parts that he was explaining he said to the guy about being able to afford the costs of rental for an office and so on and so forth. And the guy came back to him and said, "Mike, that that might be okay in theory, but in practice, if I were to do that, I wouldn't be able to pay the rent on this office building."
And Mike just looked him straight in the eye and said, "That's right, you can't afford this rent, that's what this process has shown you.
Your business can't afford this rent. You've of move it back to the garage where you started this business until you learn how to manage the business properly financially." And it works every single time.
The Profit First system will show you what you can afford and what you can't afford, and we're gonna talk about a target and so forth in just a little while. There's another myth, I need to have an office to look professional.
It's great to have an office and look professional, but the business has to be able to afford it. And one of the mistakes that I made until my accountant, after I educated my accountant into the principles of Profit First, he then came back at me 'cause for the first 18 years of our relationship with the accountant, I was pretty good at rationalizing, right, rational, lying, telling lies that I believed, and I told them so well that he would believe them.
And I could come up with a reason why we needed a Range Rover for the road and a Range Rover for the bush, why we had to have two separate Range Rovers, and one of them on lease and all this sort of stuff, it was all bullshit. And I would say we only need to make this extra sale a month to take care of that.
And he bought that until I showed him the Profit First and how we divide things up into percentages and all of that sort of stuff. And then let's say our operating expense percentage at a certain point was 40% or 45%, which means that out of every dollar that came into the business, only 45% of it was allocated to operating expenses.
And instead of saying, well, if it costs 1,200 bucks a month for this lease, which I was able to sell him, he would say, "No, no, no, no, no, you've gotta make an additional amount of sales so the 45% of your sales goes into the operating expense to pay for this lease, not the exact amount of sales.”
So I couldn't sell $1,200 a month to pay for a $1,200 a month lease. I had to sell almost $3,000 worth to be able per month to be able to add a $1,200 lease to the equation, which made me very, very quickly stop bullshitting and stop rationalizing and stop adding costs because the amount of work I had to do to rationalize a cost after we implemented Profit First was phenomenal so, and I don't like working too hard so that stopped pretty quickly.
You don't need a new office until and unless Profit First says that you can afford it. You don't need a display home, and I've heard all the stories why you need a display home, you don't need one of those until and unless Profit First says that the business can afford it. You don't need to advertise on TV, radio, and social media until Profit First says that you can afford it.
So what do you need to do? And how do you need to do it? Well, number one, do an instant assessment. If you haven't got one of these yet, it's in the "Profit First" book, but in Profit First, and Mike says, go to his website and you can download it, when you download it, it's still only a PDF. But what I've got is a spreadsheet that does all of the magic calculations behind the scenes.
So once you put your revenue in and then your cost for materials and subcontractors in, it automatically brings up what your real revenue is, and then it puts the appropriate percentages in for the profit, for the owner's remuneration, for the tax, for the operating expenses, it already puts the targets in the spreadsheet and all that sort of stuff, and it's a very, very cool tool.
And you need to do these instant assessments, so you know what percentages are going in these four spaces and how wrong they are because until and unless you know the truth, you won't change your attitude, you won't change your decisions.
This tool will make you change your decisions. You need to understand what real revenue is. A lot of people think that it's the income that comes into their business, that is revenue, but it's not the real revenue.
Great story, when we first learned about Profit First, it was enough years in the past ago, that we weren't even specific builders coaches, we had builders in our tribe, in our gang, in our posse, but we had lots of other types of businesses as well before we really went refined and specialized in just builders. And we had one of the biggest agribusinesses in the state as one of our clients.
And they thought that they were a $6 million business a year. And they would spend, and leases, and new trucks, and trailers and all that, and have old stuff just lying around and always, always were struggling financially.
We fell over Profit First, we thought we've gotta implement this in the business of our clients, so, they were one of the first people we did it with.
What we found out was they had an income of $6 million roughly a year, but the real revenue of the business meaning once they paid are raw materials, and once they paid for all of the subcontractor costs, what was left was about 660,000, right?
That's not 6 million, it's a bit over 10%, 11% of what they thought. And the moment that they became aware of the revenue, the real revenue of the business, their behaviors changed dramatically. They stopped all of these leases that they just kept doing for new vehicles, and trucks, and what have you.
And they started selling stuff, and they started doing their own servicing of things and what have you, and they really tightened up which was really fortunate because the year after they did that was a really, really bad year for the agricultural industry where they were, and they had a really poor year, and had they not done that they would've been outta business completely because they'd done that and fortunately just did it the year before that downturn, they were able to survive, since then they thrived, they've been able to take advantage of the better years.
But you need to know what real revenue is, and you need to set a target for operating expenses.
And that target for operating expenses is going to be a percentage of your real revenue and the instant assessment can work all that stuff out for you.
I'd say read the book as well but if you haven't got a copy of this instant assessment, we did a post in the tool shed a few weeks ago where you could get one. If you haven't got one yet, ask for one.
All you need to do is jump in the chat. If you want help with it, jump in the chat and ask me nicely, and I might help you with it because this is a bloody game changer.
Once you've got a dashboard of the truth of your financial situation, I guarantee your decisions will change, you'll make much better financial decisions.
So jump in the chat and ask for an instant assessment, we'll get you one, and if you want a hand with it, just let us know and we'll figure out how to give you a hand with it as well.
If you want help with anything that we've talked about so far, or in any other podcast, topic that we've talked about, it's pretty easy to get over on the left hand side, there is a navigation section in the tool shed, and one of the options is Get Personal Help, click on that, fill out a form, we'll get on a call.
Another way is just to ask your question in the chat. If there's anything you need help with, all you need to do is jump in the chat, straight to me, ask a question, off we go.
So, there's a number of ways you can do that. So I hope that was thought provoking, and I hope you really start to take charge of your financial situation instead of living in La La Land about it and instead of using a hope strategy.
I see it so often and it just breaks my heart because it's totally unnecessary, and too many builders are using a hope strategy. The bottom line is if you do not know your numbers when I come into your bedroom in the middle of the night and wake you up out of a deep sleep, you don't know your numbers, you are using a hope strategy.
It's all well and good to say, "I can get my numbers, they're in the zero or whatever," not good enough, know them, know them for when because it will happen, I will be in your bedroom one night and I will wake you up, and when I do, you need to know those numbers.
So, please make the effort, know the numbers. Okay, idea of the week. We always have an idea of the week just to, we thought we'd make it beneficial, but we just really wanted as an excuse to get the picture of the floating light bulb 'cause it's very cool.
Idea of the Week
Idea of the week is, I thought it made sense to sort of weave it in amongst the, what we've just been talking about.
And here's the idea of the week. At least once a quarter, so four times a year, do a cost check. What are things costing you? There I bet you you've got a bunch of subscriptions to various things that you either don't use enough or don't use at all.
We just had a two day intensive for our Builders Business Blackbelt members and we were talking about these ideas, and a few of them had found that they had been slack with this, and some of them it was like three grand a year of stuff, and it had been going for six years and they're just paying, and it's like this happens all the time.
So go and have a look at your PayPal statements, and your credit card statements, and your bank statements, and see what's reoccurring and coming out and say, "Do I need that? Do I need that?"
And again, going back to the instant assessment, if you start to run some scenarios with your instant assessment and see what a small change per month can have over a year, for instance, it starts to get very, very motivating.
So, look at your subscriptions, look at wastage. How are we wasting unnecessary costs, both onsite and office and admin? And I'm talking about power bills and things like that. Are we leaving the lights on? Do we fill the kettle all the way to the top every time we boil it just for one cup of tea?
All of these little things that can reduce our costs and you're going, "Oh, you're being a bit of a pedantic dick head." Okay, well, fair enough, I can cop that. But being a pedantic dick head means that you look at that little cost, and that little cost, and that little cost, and that little cost, and that little cost.
And I used to be the guy that wouldn't bother about that sort of shit. I'd just say, "Well, let's just earn more money" rather than dicking around with these little costs, so, I'm not that guy anymore.
Look at all of the little costs because they will add up to a significant cost that is coming straight out of your back pocket like that. Every dollar you save on a cost can be transferred across to profit that will drop directly into your back pocket. So look at a cost check every quarter by canceling subscriptions, looking at wastage on site and in the office.
You can do things like every year, or in your quarterly cost checks, any insurance premiums, and telephone plans and things like that, get onto the telephone company and say, "Need you guys to sharpen your pencil, we need to be on a better plan than this."
Look at that at least once a year because you will save. Also with insurance, don't just pay the insurance, ring up your insurance company and say this, "I need you to reduce your premiums or I'll be going to look at another company." And that's all you need to say. And nine times out of 10, you will get a reduction in your insurance premium, and if they don't, go and look at another company. But you've gotta make the effort, and don't take no for an answer, call the bluff.
You don't have to cancel your insurance policy, you just have to get off your butt and go look around and look for a much more competitive premium for your insurance. You will find it, but you will also find that they are far more flexible than you give them credit for with their premiums, all you've gotta do is ask.
As I said, use your instant assessment to run the scenarios. And then the last thing I suggest you do once a quarter is a quarterly price rise. Challenge yourself to raise your prices to a point where you are uncomfortable, and use that discomfort to focus on how can I add more value?
So, when I am presenting the price for my project, I am representing significantly more value than other competitors that that client or prospect might be talking to, but use it as a monthly discipline to raise your prices and to add value, perceived value from your prospects point of view.
So I hope this podcast episode was thought provoking. I hope it stimulated you to start to look at some things. Every little thing that you do in relation to what we talked about today is going to put more money in your pocket, and your choice not to bother and go and do things and ignore and put your head in the sand is taking dollars out of your back pocket, it's taking money away from you and your family.
If you do this stuff, it's giving more money to you and your family. So, I encourage you to do that. I also encourage you as being part of the tool shed is to put a post in with a win that you've had recently, maybe something that you've done from one of the podcasts, pop a post in the tool shed and tell us of your wins 'cause wins are very inspirational.
If you've learned a lesson, if you've made a mistake and learned a lesson, please put a post in the tool shed and tell us about that lesson because the more lessons everyone else can learn from you, the less mistakes we have to make to learn those lessons, so please share your lessons, please share your wins.
Ask questions. Make suggestions, there's a suggestion box in the tool shed. If there's something you wanna say in the tool shed, make some suggestions.
And as I said ask for some help, and you can do that by jumping in the chat, or we've got a personal help on the menu over there, that's if you're looking at your computer screen, the same thing pops up on your phone, but down the bottom there, it says, Get Personal Help, click on it, and let's get on a call so we can ask you how we can help you with our resources that we put into the tool shed, nago with your business, what's in the way, and we can create very, very quickly a tailored solution for where you are right now and where you wanna go.
There's always just this one thing, roadblock that's in the way, and it's different for each building business, but if you have this external perspective and you're not sort of too close to the front lines or the coal face, it's easier for us to see what that one thing is and we can give you an idea what it is and point you towards the resources to fix it.
So you're going to go further, faster with that external look. So, jump on there, get some personal help, reach out to us in the chat, more than happy to help. I hope this episode was thought provoking, valuable, thought stimulating, I hope it changes some things and ask us some questions if you need that help.
So we'll be back again next week. Now, in the chat, there is a link. Can you just go to that link and copy that link. 'Cause it's a link that I want you to share. If you've got subbies, if you've got other biz builders that would get value out of the resources in the tool shed, love you to invite them into the tool shed.
So all you need to do is grab that link, share it through text, share it through email, share it however you can, bit of skywriting perhaps dunno how effective that would be, but I'd love to see it. But share that link of around. Get more and more people in here who are willing to engage, okay?
Now this is something that we are actively kicking into gear that if you are in the business, in the builder's tool shed we expect you to be active, we expect you to post, we expect you to engage, we expect you to ask questions, make comments on other people's posts, share your wins and lessons, add to the suggestions to improve this environment. And if you're not, if you're just going to be a lurker in the background, you will be removed from the tool shed. So don't say we didn't on you.
We genuinely, genuinely wanna help you, but we created this environment so we can control it and have it full of active engaged people who are focused on success, that's what we promise when people on the outside to come in to join, so that's what we are going to create.
So please don't get offended if you get removed from the group, you're more than welcome to reapply, if you do get removed from the group, you're more than welcome to reapply to come back into the group when you have decided you are serious about improving your business and not just being a silent lurker in the background listening to things when it suits you but not contributing at all.
We need a group of contributors. If you're not gonna contribute, you won't stay in the tool shed. There you have it, sounded a bit full on then but, it doesn't need to be, let's have some fun, let's just some jokes, let's share some funny stories.
All of that is engagement so we can help each other, communicate our stories of success, and the mistakes and stupid decisions that we've made, share those as well so we can have a laugh at your expense, it's all good, but we can learn from it as well.
See you in the tool shed. I'm Mick Hawes from Builders Business Blackbelt. Bye for now, see you next week.