Building a profitable construction business and maximizing profits in any market can be challenging. However, some strategies and principles can help business owners achieve profit goals. Today, we will explore what profit first strategy is. Susanne Mariga, the CEO of The Mariga Group, identifies powerful strategies for building a profitable construction business by maximizing profits in 2023. She delves into the psychology of achieving your profit goals, emphasizing the value of understanding self-discipline to succeed in your goals. Susanne also shares some tips to recession-proof your business. Don’t miss this insightful conversation with Susanne and Eric Anderton to maximize your profit in 2023!
Connect with Susanne at www.susannemariga.com
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Piling Up Profit: Powerful Strategies For Construction Business Owners
What if buying a truck at the end of the year was not your best strategy for minimizing your tax burden? This is just one of the items that we touch on here with Susanne Mariga. Susanne Mariga is a CPA and Fractional CFO specializing in high-net-worth strategies for 7 and 8-figure entrepreneurs using the Profit First System.
Some of the topics we cover are, what are the first things a company should be doing to maximize their profits in 2023, the psychology of achieving your profit goals, and how you can recession-proof your business in addition to diving into some tax strategies that could benefit your company and some of the dangers and opportunities of expanding into government contracting. It’s a very practical, down-to-earth, simple, and direct discussion. Those are the kinds that I like. I know you’ll enjoy my discussion with Susanne here. Thank you for reading.
Susanne, welcome to the show.
Thanks for having me. I’m excited to be here.
You’re an expert in profitability, so I would like to ask you. What’s the first thing a construction company should be doing to maximize their profits in 2023?
2023 is a year of flux and change. You’ve heard the rumors. I’ve been hearing them for a couple of years now, this dooming upcoming recession. I’ve even heard people say that we are in a recession, but for some strange reason, nobody can find employees. Everybody has a job. In fact, for every 10 people that are looking for a job, there are 16 available. That doesn’t qualify as a recession. What’s important is it’s about having good practices in place that adjust to the times that you’re in is what it is.
We’ve seen contractors where they may do high-end work. They may be seeing a slowdown in the high-end type of work. We’re here in Texas. We had a snowstorm a few years ago and we had a lot of people doing chimney repairs, and suddenly, when it’s been El Niño or talks of La Niña and things like that, nobody’s looking about wanting to get their chimney repaired because there’s no snowstorms happening. It’s about adjusting to the times. One of the things that I like about Profit First, for you that may not know what Profit First is, it’s about creating intentional profitability. In Profit First, we have an account like Dave Ramsey’s Envelope System. All the money goes into one bank account. We call it the income account.
What happens is, twice a month, we allocate money to specific bank accounts based on their purpose. We create that intentional profitability. We have a bank account called Profit, and we allocate part of that revenue to our profit account first, and then we fund owners’ pay because it’s extremely important to pay yourself. I can’t tell you how many companies I meet every day where I ask the owner how much they are getting paid. They’re either getting a fixed payment of maybe $100,000 per year. Even though their company is doing amazing, they’re keeping their salary fixed or they’re not paying themselves at all.
We put aside a percentage of the revenue towards owners’ pay. Because you’re successful, naturally, you’re going to have taxes. You have the best accountants. If you are driving that Bugatti, you’re going to have taxes. We’re going to put away money for taxes. Whatever’s left over can go towards operating expenses. You have a system in place where you are creating limits, and that’s what Profit First is doing. You’re creating a limit on your operating expenses. For example, the more that we have of something, the more we’re going to use it. I think of going to the buffet. You eat a whole lot differently when you go to a buffet versus when you go to an ordered dinner. That’s the same way with money.
When you’ve got an unlimited budget, when all of your revenue can be allocated to operating expenses, suddenly you need to have new equipment. Suddenly you need to have those new trucks. Maybe you need a whole new fleet when you have that money, but when you’re allocating just a specific budget, now you’re going, “I’m filling some constraints. I’m filling some limits. I have to adjust to those limits.” First of all, create a cash management system that works for you no matter what the economy is. That’s based on percentages, a percentage of money going to my profit, my operating expense account, and my owner’s pay. Once you have a system, no matter what happens, you’re going to be able to adapt.
Let me ask you a question. You mentioned having good practices and you mentioned these particular buckets of money, the profit, the owner pay, the taxes, and the operating expenses. I want to make sure I’m following you so far. In terms of the percentages that you allocate to each one of those, do you have any particular guidance or any insight, or is it just something that each company should be able to come up with on their own?
In Profit First, we have fixed percentages, and it’s based upon the revenue of a company. With construction, we know that a lot of it is going to go to your cost of construction. We’re going to factor that in to track that out of your real revenue. The rest of the money is discretional. We do have fixed percentages that I use.
Why is psychology as important to reaching your profit goals as getting a handle on your actual numbers? What do you mean by that?
First of all, it’s understanding human nature and understanding how we’re created. Many times you meet these gurus and it’s all about self-discipline. All those self-discipline is important. At the end of the day, when we make it easy for you and when we make it something that you can grasp and accomplish with little effort, you’re going to be more successful with it. That’s the reason why I do like the Profit First method because you’re creating these buckets and parameters. If I have a tube of toothpaste, for example, and it’s completely full, I’m not bothered when my husband squeezes it from the middle. We get to the end, and it’s all about conserving. We’re squishing that we’re rolling that tube of toothpaste. The same way it is with money.You will be more successful when we make it easier for you to grasp and accomplish with little effort. Click To Tweet
It’s working with those natural biological factors. One of the problems that we have in school is we teach our business owners this accounting equation, which is great. I’m a CPA. I love the accounting equation. Revenue minus expense equals profit. The problem with that is, a lot of times, profit is leftover because we’re focusing on those millions of dollars in revenue, then we’re focusing on being responsible so that we can get bonded. We’re responsible for maintaining those expenses. I have companies coming to me and they’re like, “What’s my profit? In a year, how much do I owe?” They’re not prepared.
By creating that system in place and taking your profit first, revenue minus profit equals expenses, you’re prioritizing your profit now and controlling what that profit is. The emphasis is on not just revenue because you can have a $50 million company that runs at a $1 million loss, but it’s now focusing not just on revenue, but also on profitability, and then squeezing those expenses to fit in what we have.
Let me recap that. You use the formula revenue minus expenses equals profit. You flip that by saying revenue minus profit equals expenses. What you’re saying is that is the psychology or the mindset that you need as you approach reaping the maximum amount of profit from your business.
Exactly. The focus is now on profit. That means I’m going to look at my gross margins. There’s something called Pareto Principle, that 80/20 rule. What the 80/20 rule says is that 20% of my clients or 20% of my projects are producing 80% of my bottom line. Now I’m taking that step back, I’m doing that analysis and I’m going, “Which companies are producing that 80% of my bottom line? What types of jobs are producing that?” For example, if I’m doing concrete and I’m doing dirt, maybe dirt is more profitable in this case. Again, it’s looking at where are micro margins, “What are the trends? How do I increase that profitability and focus versus just trying to get to that $100 million mark?”
Let’s assume that I’m a contractor and I’m sophisticated enough that I know that I need to improve my profitability. What are some of the biggest mistakes or areas that contractors miss that could have the most significant impact on their profitability?
Now in 2023 is variability in pricing and estimating. You are looking at prices that are extremely volatile in the inflationary marketplace. Honing in on those estimates is important. An area now that’s very high risk is we are in a volatile economy. Nobody knows what 2023 is going to look like in December. Now the stock market is roaring, but we don’t know. It’s important to remain agile.
It is watching those fixed contracts. If I’m getting in contracts like leases that are longer than a year, you don’t know what your environment’s going to be like a year from now. The more you allow yourself to be flexible and the more you allow yourself to shift out of a situation that isn’t working for you, the better off you’re going to be with that.
It sounds like what you’re talking about is taking a hard look at your overhead and determining where that overhead is draining your profitability.
Exactly, remaining nimble.
How can I distinguish between overhead that is necessary and overhead that is fluff and not necessary?
One of the things that I like to do when I’m doing my budget, and this is taking my P&L looking at every expense or even grabbing the bank statements, is I’m looking for things. I’m asking myself when I’m looking at each line item, “What’s the ROI on this?” For example, in our firm, we use Infusionsoft or Keap. On its own, it doesn’t necessarily produce income. It allows us to do mass communications. It allows us to save time because instead of having a client not show up for a meeting, we’re scheduling a text that’s automatically sent. Now we’re increasing the probability of that prospect or that client showing up to the meeting.
I don’t have to have a person involved with calling them because they’re getting these automated messages. What it’s doing is it’s saving me money on the people side. I’m automating and I’m getting more efficient. Looking at what’s the ROI, is it producing a direct ROI or is it allowing me to use less resources that create ROI?
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What are some steps, in addition to the ones that you’ve already shared, for a business to recession-proof their company as they’re going through the ups and downs of the economic cycle?
That’s a very good question, Eric, with recession-proofing. It’s going to look different for everybody. We talked about remaining nimble as very important with that. Granted I’m a CPA, so I’m a bit of a nerd, but I see people are like, “I do my budget in December, I do it in January, and we just stick with it.” A budget should be a living document. You may be hitting your projections ten times by June. That budget that you created in December or January isn’t going to work for you. Every quarter, it is not just looking at that budget, but looking at the budget to actual.
“How am I doing? Am I having a lot more leftovers? Maybe I can increase my profit percentage or my owner’s pay percentage and put away more. Maybe my gross margins are getting tighter as I’m looking at this. Maybe my cost of construction as a percentage of my total revenue is growing compared to what it was a few years ago or even last quarter because now I’m able to detect inflation when that’s happening.” Doing that budget to actual, looking at those common-sized percentages, looking at how those percentages were changing, and adjusting to that is extremely important.
Why do you say to look at this quarterly as opposed to monthly?
Monthly is even better if you can squeeze that into your time. I would say quarterly is a bare minimum.
Let’s move a little bit. You have those four boxes, the profit, the owner, pay, taxes, and operating expenses. How much should I pay myself as an owner?
I would start with the percentages with that. There are some tax strategies that you can employ, too, because, at some point, you start to get hit with that Social Security and Medicare. Maybe your account might want to do a reasonable salary study for you, but it depends on the size of the business and where you’re at with it. I would start, from a cash payout standpoint, by looking at the percentages.
You mentioned tax strategies. I know many of the audience to this show are high-income individuals. They’re entrepreneurs, they’ve built killer businesses, so they’re making a lot of money. What are some top tax strategies for high-income folks that they need to be employing? Don’t necessarily dive into the obvious ones that they may know, but what are some of the ones that they miss that if they took advantage of them would have the biggest positive impact?
First of all, it starts with your goals. There are too many accountants that come to their employees, and construction is probably notorious for this. The first thing the accountant says is to buy more vehicles or buy more equipment at the end of the year. Unless you need that vehicle or you need that equipment, I would say never ever do that. At the end of the day, you’re cutting taxes, but you’re also hurting yourself to get that deduction, especially if you’re financing those vehicles, that type of thing.Unless you need a vehicle or equipment, never buy them. You may be cutting taxes but you’re also hurting yourself. Click To Tweet
First of all, start with your goals. A lot of times with my clients, I’ll look at them like, “What’s your long-term goal?” I want to keep my employees longer because the longer they’re with me, the more efficient they get, the better they are at their job, they start to have more ideas, and they speak up about those ideas. Longevity is important to me. I’ll say, “Why don’t we do something that will potentially encourage longevity, at the same time give you a tax write-out?” What this might look like is let’s create a 401(k) plan.
In that 401(k) plan, it’s not just going to be a simple safe harbor plan where you’re immediately vested. We might create a vesting schedule that you might have to be with me for five years before you fully vest. If you leave before you’re fully vested, what might happen is you’re going to forfeit those contributions that I made to you as an employer. Now I’m competing against the bigger construction companies. I’m offering an amazing benefit, but my employee benefits by staying with me. If they leave me, then suddenly I’m growing my own net worth.
These monies that have been forfeited, they’re going to be there for me when I retire. That’s another thing that I would do. If you’re a closely held company, meaning husband and wife and you’re just using a contract, you can put away even more. You can put away almost $66,000 each into that, which is an amazing saving when you’re in that 37% tax bracket. I love that gift of apprenticeship. My dad hired me when I was fourteen to be his bookkeeper at his accounting firm. Look at me now, I’m a CPA. For my dad, that was an amazing tax write-off and a good experience for me. Again, it’s another way of creating generational wealth. You can hire your children.
If you’re in the right tax entity, if your tax is a sole proprietorship, they’re paid, and your children are making less than a standard deduction, it may be a completely tax-free transaction to hire your children. They could even put that money away in their Roth IRAs, which is an after-tax vehicle, even though their taxes were zero. Now you’re creating generational wealth. These children can either use it for their house when they buy their first house, use it to pay for their university when they go to college, or even when retire on this money that they’ve never paid taxes on. You’re getting tax deductions without necessarily buying vehicles or buying equipment.
What are some of the biggest mistakes that people make when it comes to the tax strategies that would make them vulnerable to an audit? How can they avoid those?
When I see that, one of the things that trigger an audit is unusual, skewed items. You got excessive meals and entertainment, you’re stopping at a Taco Bell every time you go do a job. That’s going to be a problem. Separating personal from the business is important with that. That’s probably one of the biggest mistakes that I see. The other big mistake that I see is companies are growing without the right level of support. They’re crossing into several million and they still have a bookkeeper, or they don’t have a system for keeping their receipts. They’re not organized.
They may be at a point where QuickBooks just isn’t good enough for them. It’s not allowing them to be able to not analyze data but be able to produce the reports or they don’t have systems in place to even save those invoices. If you’re going into an audit and you don’t have invoices, you’re in big trouble. Making sure that you have the support level for the place that you are and that you separate your business from your personal are some key things that are important for protecting yourself against an audit.
Let me back to this idea of recession strategies. One strategy that a lot of contractors use is when the commercial side of business starts to go down a little bit, they get into government contracting a little bit more. If I’m going to expand my business into government contracting, what works, and what can lead to disaster?
One of the key things to keep in mind when you’re dealing with government contracts is it’s a request for proposal process. What that means ultimately is it can be a race towards zero. It’s the best value or the least expensive one that wins. It’s very important to know when you’re getting into government contracting that you hold your ground. Sometimes better to walk away from a project than to accept a project. I know you can do change orders and things like that, but now you’re getting into having to renegotiate and ask, “Why were these things factored in the beginning?”
It’s important to get those budgets in place for that construction project and make sure that it’s a fair bed for you, that it is something that you want to do, not that just be the best value. When I see successful contracts, the closer you can get to the sole source and the closer you can be to being the only one that can provide this type of area or this type of service, the better off you’re going to be because it’s going to become a less competitive and less bid towards the bottom type of ordeal.
As we’re wrapping up here, if I’m a contractor and I want to start to get my house in order in terms of maximizing my profitability and I’m recession-proofing my business and taking advantage of some good tax strategies, give us 2 or 3 takeaways that we can lay hold of and implement in our businesses immediately.
The first thing I would say is to start with why. I love Simon Sinek. Start with what was important to you and everything else just follows. In this case, profitability is important to you. It’s about having an everyday system in place that can get you where you want to go. The one that I’ve chosen is Profit First. I’m a major fan of it. I recommend it to everybody. The next thing is to have the right level of support is important for you. If you’ve got an accountant that you’re meeting with once a year, that’s not doing you any good any longer. You want an accountant that you’re meeting with monthly, at least quarterly, and that you’re looking at that budget to actual. They’re helping you on the business side as well as combining it with the tax side is going to be extremely important.
Tell us a little bit more about your business and how people can get in touch with you.
My background is I am a Certified Public Accountant. I’m with a company called the Mariga Group. We provide fractional CFO services to 7 to 8-figure companies. We’re specifically implementing the Profit First strategy with those companies to help them be profitable. I always tell people, “We will never tell you to go out and buy a truck unless you need a truck.” We help you implement those processes that increase your profit as well as the tax strategy.
How can people get in touch with you?
The best way to get in touch with me would be through MarigaGroup.com.
Susanne, thanks for joining us here.
Thanks, Eric for having me. It was fun.
Thank you for reading this interview with Susanne. Please give the show a rating and a review wherever you get the platform. In fact, I’m going out to Apple Podcasts now. We have 4.8 out of 5 stars and we have 140 ratings. By the end of this year, I’d like to get up to 200 ratings. Whatever rating you think we’ve earned, please give us that rating between 1 and 5 stars. That helps us to get seen throughout the internet and it gets people to have the opportunity to read. If you’re reading at this point of the show, I know you like the show, so please give it a rating or a review and more people can read as well. Thanks a lot.
- Susanne Mariga
- Construction Genius: Effective Hands-on, Practical, Simple, No-BS, Leadership, Strategy, Sales, and Marketing Advice for Construction Companies
- [email protected]
About Susanne Mariga