Today on Facebook, on one of my Contractors pages, this video was shared during the discussion.. I sat and watched and agree with a lot of it… I want to share it with all of you now!! For Customers, you can watch this and see what other Contractors such as myself and including myself have to go through to run a successful business. Here Is the link to the video and I will discuss each of his talking points next!
His 5 Common Mistakes when running a Business:
1. Not Charging Enough Money – I like how he breaks this down! He does a very good job explaining what Overhead is. He also makes sure to talk about profit. I learned this early on because I took classes on how to estimate and run a business starting out at my Union Hall. Pro-Union Consulting was an extraordinarily good class, however, The International Office of the IBEW did not support this program. I took it and learned a lot, but I cannot compare their alternative since I personally did not go thru it.
In any case, what I did learn and have also learned thru experience is that every job can be broken down with this rule of thumb; 30% Labor + 30% Material + 25% Overhead + 15% Profit = a complete job. Now, in a small company like Innovative Electric Inc that normally have 6 or less employees, that 30% Labor will also include the owners Salary. This company is registered as an S-corp, so we do not have Members and my Salary is cut on the same paychecks that I give to each of my employees. When I do time for each job, my hours are also attached to those jobs, unless I was specifically in the field working on a different job myself, I have the same amount hours for the week that my men do. I do not get paid vacations or benefits either, if you think this should be automatic for THEE OWNER, the big boss… you better look in the mirror and tell that Big Boss he aint getting it until he earns it!
Now, to explain my Overhead for guys starting out, or customers who may not realize it. First we have 1 company truck that is like a Home Depot on Wheels, that truck is what we depend on. I need to keep tags and title and insurance on it, as well as save money for maintenance and a new truck soon. I may even get a loan for a new truck real soon and be paying a payment of $300 a month for such. Also, you may not think maintenance is much, but since I have gotten this truck we have paid for 2 transmissions, 2 Engines, Batteries, Starter, A/C Coils, and more.. that stuff isn’t cheap… In the Video he mentions tires… For a E350, those tires are like $400 apiece and then there is the weekly Fuel, all this has to come from jobs that we do. In addition, every county in the State of Maryland, plus the State itself and DC and Virginia charges for my license every 2 years or so, that is another overhead cost. Then We have safety items for Covid, Training on how to be safe and provide better work for everyone, Meals at times for the guys, Paperwork to send out Bids, Mail out prints and signed documents and contracts, Promotional Items for events and the event costs themselves, Advertising and Website costs and the list just goes on for what could be in the Overhead costs for any given year.
But the last part is the hardest, that 15% profit… Every business whats to grow, to be able to bid larger work and such.. That is what the profit is for. Its not for me as the owner to go buy a new boat, I have a paycheck for that. AND what a lot of owners do wrong, They start trying to take this profit upfront. I am lucky to see such a profit at this time. I would love to see my bank account growing every month, but its very difficult. When business is slow the profit goes back into the business to keep it all working. If you are lucky enough to keep the work coming and each job makes that profit, then eventually your bank account will grow and you can use that cushion to take on larger work, or buy new trucks outright. It’s all part of that bigger puzzle called Cash Flow that is discussed later on.
#2 – Communication – I love how he gives this example… Atmosphere of the project ahead of time is very important and the customer needs to know ahead of time what to expect, you gotta get the customer to trust you! For someone to trust you, first impressions are key! Promptness is a must! Being Honest is a must! Clarifying all possible aspects is a must. And then there is the aspect he did not mention, and these are important! Hiring the right people! You gotta have employees that your customers can trust, sometimes that is who your customers meet, they never even see you, the owner, they see and speak to your guys on the job sites. If you have employees who look or sound like they are on drugs, that isn’t gonna convey trust in your company. How they are dress, how they express themselves or how hard they work is all things that add to the first impression. Sometimes these items alone can lead to a lot of repeat business and referrals! AND those Google Reviews! Innovative Electric maintains a 5-Star google rating and Trust is one of the biggest reasons.
For any of my customers who know me reading this, you know that I am always full of TMI! That’s because I want that trust which you give! Its all part of that working relationship.
#3 – Play by the rules – I love this because it is always something that I have done. As said, I come from a Union Background and in my experience, we have never been allowed to cut corners or do things half-ass. Innovative Electric Inc carries Liability Insurance, Workmans Comp, Unemployment, Licenses and Certifications. We pull permits every time we need too. My guys know the answer when they have a question on how to do something before even asking me much of the time; do it the right way, not the easy way. Also, he does mention about the overhead again… The cost for playing by the rules is passed on thru the overhead!
I was standing in the Baltimore County inspection office once and was talking to the former Head of Inspections. He was showing me the number of lawsuits his office was involved in with other contractors and how many were about to have their licenses pulled and/or be put on the naughty list because of allowing other people to use THEIR licenses. He said, “Why would you want to allow other guys to do work cheaper than you? That’s what your Master’s license is for, to prevent these other guys from doing YOUR work!” And I agree, it is our Work… We are the Master Electricians and these guys who are not licensed should not be doing electrical work illegally! As a customer, always hire a Master Electrician! As an Electrician, GET YOUR LICENSE!
#4 – Book Keeping – Well, in this respect, I know it is very important… Don’t try to wing it! Don’t try to keep the figures in your head! You gotta report to the IRS and if you get audited, you gotta be able to show all these figures.
Now, let me explain what I do. Right off the bat I got software to use, Quickbooks! I taught myself how to use it and after 8 years, I think I got the basics down fairly well. My personality is that of a Shark and a Sea Urchin. I have the days when I can go after new work and write estimate after estimate and such or go to meetings with potential clients or even think of new Solar designs and Electrical systems to get more work….. And then I have days where all I do is sit down and record receipts, record material purchases, go over invoices, reconcile bank accounts and credit cards.. I will sit and micro-manage every expenditure that Innovative Electric makes every month. However, I have also learned the hard way, I tried to hire people for this and they just made mistake after mistake and it has cost me and is still costing me. BUT… eventually as Innovative Electric grows, I will also have to grow and learn to let go and find the right person to handle all those small tasks and filings and such. Running a business is not easy and Book Keeping is an important aspect of it. Don’t try to do everything yourself, its ok to find help and ask questions. When you are small, you can do more, but don’t be afraid to get help when you need it!
Then He mentions cash flow and obtaining financing. Cash Flow is a very big subject, this is how every company and how most Millionaires operate. The little people that work for a living, the 98% of most Americans have been taught to have Savings Accounts, 401ks and Live on a weekly paycheck… However, that is not how the 2% lives… They don’t get loans because of a good credit score… they get loans if their cash flows can support the payments. It’s all about the cash flow, and the ultra-rich has a cash flow that is self-sustaining, they wake up and make $10,000 before breakfast without doing anything because they have a business that earns automatically. For example, they have companies that earn massive rental payments, contractual residual fee payments or a Solar Utility power plant to give a few examples. The Ultra-Rich has this type of cash flow 24hrs a day, 365 days a year, however for the rest of us it isn’t that easy.
Business Cash-Flow for a small company is usually enough money to buy materials and make payroll each week. For Innovative Electric, this is a very tight subject because we don’t have much wiggle room as far as my daily/weekly cash flow. Innovative Electric struggles as most contractors do, we depend on those payments coming in and hope we have enough to cover the payments going out. This is where the financing he talks about in the video comes in handy. I have a few credit cards each with nice comfortable limits that I have set up to make automatic payments on, like for our website that is $400 a month or for payment of the Maryland Transportation Easypass for the truck… I use it for all those automatic deductions that could interfere with my payroll on a Monday morning. My guys wanna be paid and if Home Advisor decides to withdraw $850 on Monday and Paychecks go out Tuesday, I better have enough in the account so they can cash their paychecks. This is why financing is important! It gives you room for that cushion in your bank account and it is GREAT at Relieving Stress!
One of things I do want to mention is setting a company up. PO account are a type of credit Line for Contractors and Business. My guys can go to our local electrical supplier and buy items they need for a job and put it on my PO Accounts and go about their way. However, to get a PO Account, you must have a business in Good Standing (taxes paid) and have a Bank Account that has been open for at least 1 year before applying to get this credit. When I started Innovative Electric, I was still working hourly for someone else. I got the company name, filed all the paperwork and opened my bank accounts before ever doing actual work for the company. By the time I started running Innovative Electric full-time I was eligible to open PO account and get Business Credit.
In the video he also does mention the words draws and payments. As part of the cash flow, this is your income! If you have a contract, you specify in that contract when payments are due: Sometimes you do it in thirds, (downpayment, Rough-in Payment, then final payment), Sometimes its half-down and then the other half at the end, and sometimes it’s a draw every week or every 30days that the job is progressing. Proper Book Keeping helps keeps all this straight and flowing. You need that income coming in as well as knowing what is going out. If you don’t know… How are you gonna pay your guys next week? Or pay yourself?
5 – Managing Growth – Well, this is more of a warning… If you manage your cash flow properly and have available credit lines, you can maintain and grow slowly over time… See, think about this.. if I have a job that’s gonna take 1 Month with 4 guys and my average payroll for those 4 guys is about $2500 to $3000 per week… that’s roughly $12k in payroll alone. But then I go out the following month and get a job that is gonna need 10 guys… and this job doesn’t give you a downpayment. How are you gonna come up with that $12k per week now? Do you have $100k in the bank or financing that can float this payroll until you get paid? Plus Workman’s comp is gonna jump up as well hiring these new guys… Are you ready for that kinda growth suddenly? Just something to think about…
Then the video starts discussing the customers who come and want a cheap price on one job and promise to offer you more work in the future. I call this dangling the carrot. Don’t fall for the carrot.. Its yummy, orange and has a lot of appeal…. But odds are it doesn’t happen.. In 30 years I have lost count of how many times I have heard rumors of all this work coming. This big job here is gonna hire and or that customer there says he is building 10 houses next year down in Millersville. ITS ALL A PLOY! Like he says in the video, this guy dangling the carrot doesn’t wanna pay you right for the first job! Why would you expect him to pay you right for these other jobs?!? And what if he doesn’t pay you at all? What if that last 3rd payment of the job never comes and you have to go to court to even get it, if you get it? How does that affect your cash flow? NEVER Bet on the carrot! Know your worth and stand your ground! If you don’t get his work, then he wasn’t worth your effort to begin with.
Conclusion! My Conclusion from all of this is… Always keep your Overhead as low as possible, be careful over-extending yourself. I have said many times that running a business is like whipping my dick out on the desk and daring someone to cut it off. You gotta be brave enough to attempt it, stubborn enough to deal with it and smart enough to succeed at it and mix in a little stupidity here and there and laughter along the way to enjoy this journey! All I can say is Good Luck if you think this might be for you!