Ron (host):
Alright, good construction champions. It’s your host, Ron Nussbaum. And we’re here for another amazing episode of the Construction Champions Podcast, where we’re burning the damn house down. And I don’t know if anybody has been taking the vote, but I need to know what time this show needs to come out. According to YouTube, you guys are in bed at 8am. I know that’s not true. And you’re probably on a job site. So every Monday and Thursday, we release new episodes at 8am. I want to know, should I just make it like noon or 1 o’clock? That seems to be when people are happening, when stuff’s going on. I don’t know. This is only our 100 and like 50th episode, you think I would have figured some of this out by now. But you know, I haven’t. So we’re just here. Please just take that survey real quick so I know. And I’ll change the damn thing. If not, I’m leaving it at 8am because that’s just what I’ve always done. But that’s besides the point. We have another amazing guest today. It’s going to bring a lot of value to the construction industry and to your business. Kathy, it is great to have you here today.

Kathy (guest):
So great to be here, Ron. Thanks so much for inviting me. And I cannot wait to see what people say, 8am or 12pm. We’ll see, keep us in suspense.

Ron (host):
I don’t know. Yeah, it’s an amazing thing. I just like, according to YouTube, it is, between like 6am and noon, nobody in the Construction Champions Podcast audience is on YouTube. And that is when I release the new episodes. So I don’t know if that’s a good thing or a bad thing.

Kathy (guest):
You know the good thing is you always have that replay function. So you can get it whenever you want.

Ron (host):
Absolutely. That is 100% true. That’s why I really, I guess it doesn’t matter to me, and I’m leaving it up to everybody out there that’s listening. But before we dive in, why don’t you tell all the construction champions out there a little bit about yourself and what got you here today?

Kathy (guest):
So yeah, thanks. My name is Kathy Svetina, and I’m a fractional CFO for businesses that are growing. So what is a fractional CFO? It’s essentially someone that is taking care of the future of your business. Because by the time that you’ve grown so much, you have the bookkeeping done, you have the accounting on, but you need someone to help you figure out your profitability, your cash flow, where is your business going to be six months, a year from now, five years from now, three years from now. So having someone on your side that is able to distill that financial information into actionable insights, not just data, but actionable insights, it makes a huge, huge impact on the business. And that is essentially what I do. And I’ve been doing this for big businesses for 15 years, got tired of it. And I said, “You know what, I want to do this for small businesses.” And here I am.

Ron (host):
Awesome. Well, I’m excited to talk today. And I’m just gonna dive right in, I’m gonna ask the million dollar question. And that is what makes a construction champion?

Kathy (guest):
You know, I’m glad you’re asking this because I think what really makes a good champion, not just a construction champion, but a champion, is someone that sees what the industry is facing in terms of issues and is trying to make it better, trying to make it healthier, trying to make it more sustainable. And Ron, you do this so well, you’re a champion by fixing all those messy communication issues by simplifying the collaboration between the contractors, between the office and the clients. And I think that I am a construction champion by fixing their profitability and cash crunch issues and educating the owners about their finances and actually professionalizing their financial operations.

Ron (host):

Awesome. Well, let’s dive into forecasting because to be a champion, if we look at it from even just a sports perspective, the guys that are champions understand what’s coming ahead. They’re playing. I mean, if you talk to Michael Jordan or Kobe Bryant, they could tell you what that schedule looked like for the next month or two. Like they knew what nights they were really going to have to bring it and why. And for the guys like that, you bring it every night. But you have to have a better understanding. When Tom Brady used to sit back and look at the schedule for the season, he understood what mattered the most on that schedule and starts preparing for those moments. And businesses are no different, you have to have the ability to start to do that.

Kathy (guest):
Yeah, exactly. And you know, in the construction industry, what’s a little bit different than any of the other industries is that whole Work in Progress Report, which a lot of people use it to inform them about the past, but it really gives you a lot of information about the future, or where your jobs are going to be. So that is one of the very actionable tools that you can use in construction and remodeling to figure out where you’re going to be in the future financially.

Ron (host):
Can you dive into that a little bit for guys that don’t necessarily understand what you’re talking about? Maybe even myself included, I understand work in progress, but you’re talking about it in a different realm that I think most people think about work in progress.

Kathy (guest):
Yep. So that’s a good point. So the work in progress is essentially an operational and financial report that gives you a lot of information about where your jobs currently are. For example, it will tell you how much you have actually budgeted for specific jobs, meaning all the estimates, all the change orders that have come through, how much you have estimated in terms of cost, and in terms of actually money coming in. So that is one side of it. It’s going to tell you the gross profit margin on the jobs. And again, the gross profit margin is revenue minus cost, divided by revenue. So if you’re looking for that, you know how much the gross profit margin is going to be, that is actually going to be on your work-in-progress report.

Kathy (guest):

That’s one side of it. And the other side, it’s going to tell you how much you have actually billed, meaning how much money has gone through, and how much costs has come through. That is going to tell you where the job is at. How is this performing? Are you over budget? Are you under budget? And then also, the other thing is, it’s going to tell you about the future – how much do you still have to bill, meaning how much cash is going to come in, and how much costs is still going to happen? How much cost is actually going to happen, how much cash is going out. So that is really going to be important about your cash flow.

Kathy (guest):

And I’m going to stop here because I have given you a lot of information. And I know it’s very hard to visualize this. And I myself, I’m a visual person. So if you are lost right now on what I have said, I have actually created a video that walks you through how this looks and how you can use it for your business. So if you’re lost there, I’m actually going to share a link where you can get that at the end. So don’t worry. But I will tell you this, that it’s very, very important. And it’s going to change your profitability significantly and make your business significantly better if you use this tool.

Ron (host):
That’s awesome. Because I’m a visual person, I was trying to kind of put that together in my head while you were doing it. Because I’ve also heard like, this has major tax implications as well, because we’re, this is April 8th, taxes are on everybody’s mind right now. And it’s my understanding, like the work in progress and how that typically can be put together can cause some tax implications that could be negative, but it’s just because of how construction works. Is that on point there, would you say?

Kathy (guest):
Yeah, exactly. And it also depends on how your financials are set up for taxes. And that depends on the way how you’re doing your accounting, the way how your tax person is actually filing, so you’re going to have to talk to them about that. But I will tell you this, with the construction industry one of the interesting things is that we take a lot of cash upfront, because obviously people have to pay you so that you can pay your other contractors, you know, you can buy the materials, you can afford the labor. So, because you’re taking a lot of the cash upfront, if you don’t have a work in progress reporting done in your financial statements, what it’s going to look like is that you are significantly profitable. But when the costs start to come through, you’ll see that profitability going down, down, down, even more. And if you’re not making that adjustment, one of the things that you’ll notice is that you might actually pay more in taxes than what you truly owe because it looks like you’re more profitable than you really are. And it’s going to be super confusing because a job is supposed to be profitable, but it’s not. That’s because you have gotten a lot of cash upfront but the costs have come through in the next months. So your profit margins are like all over the place, it’s going to be more like a roller coaster. And that’s not good, you don’t want to have roller coaster financials.

Ron (host):
No, not at all. I believe that one of the key hires that you need to make or outsource to begin with is a controller or CFO, like you need to have somebody that understands it from a different perspective than just an accountant. Because that’s how you get your money working the right way within the business by doing that.

Ron (host):
So you work with construction companies, like how do you start forecasting? And I’ve done this, I used to do this, I got pretty good at it from just this perspective of like, I ran operations, we had a lot of moving pieces, you could kind of start to put together what things should look like. But there’s ebb and flows. There’s, I mean, shit hits the fan and happens in construction, like, how do you start to break that down and help guys forecast stuff, when, like you said, it’s a real roller coaster out there sometimes?

Kathy (guest):
Again, going back to the work in progress report, that is one piece of information that is going to give you a lot of data about the future. So if you know, for example, “I am supposed to get $100,000 for this job, I have billed them already $50,000. So I’ve already received $50,000 for this particular client.” That means that work in progress report is going to tell you “Hey, I still need to bill that $50,000.” So for that particular job that you’re currently working on, you’re going to get $50,000 in the future, sometimes in the future. And there, for example, if you have a specific schedule, like a draw schedule, when you combine that with the draw schedule, now you have a much better understanding of when the cash is going to come through for that particular job. So that’s going to help you with forecasting.

Kathy (guest):
The same thing on the expenses, if you know that for that $100,000 job, $30,000 has come through as expenses, and you still need about $20,000 for the expenses that are going to come through, you see that on your work in progress report. And you can say “Okay, that $20,000 is probably going to hit me in the next two to three months.” And then you can see based on historical data that you’ve had in the past, when do you think that that’s going to happen? Or maybe your operations people can tell you that. So for example, you might have contractual obligations, let’s say that you have a plumber that you know when they’re going to invoice you, you can put that in your schedule, in your cash flow schedule. So that work in progress report is so, so important for the construction industry. And I know I’m harping on this work in progress report because I truly believe that when you use that in the right way, it’s going to significantly impact your financials and your operations.

Ron (host):
Yeah, no, I would agree with that. Because having an understanding of what that flow looks like, like I think we try to forecast but we don’t even have an understanding on the reality right now. And that gets us into even more trouble. And we see that too much in construction, just running a business week to week and just basing it off of that is eventually something’s going to catch up with you.

Kathy (guest):
Yeah, yeah. And it’s essentially just looking at how many people are pounding you down for money, and then trying to scramble to figure out “Well, who do I bill out to cover those expenses?” It’s really when you take a step back, and you look at your entire operation from the financial front and from the operational front to see “What can we do to make it better?” And tools come in to help, like your tool for example, in the communication that really helps. And also, if you have a tool that is actually going to house all of that information, your estimates, your change orders, so that you don’t have to go and scramble.

Kathy (guest):
And another thing I will say about the change orders, which I see a lot of construction remodeling people truly struggling with, is when a client comes in, say “Oh, we need to put like, for example, a staircase in this house. We want to change it.” And then you tell them, “Okay, this is how much it’s going to be.” And they say “Okay, that’s fine. Just bill me.” And you don’t have that in writing, like in actual writing that they say, “Okay, I have agreed to pay you $30,000.” Do not do that to yourself, because that means in the future, you might have some very uncomfortable conversations about “Oh, why are you billing me this?” “Well because you agreed to it, but I thought it’s going to be $20, now it’s $30.” Don’t do that. Just have it in black and white somewhere when a person signs and says “Yes, I have agreed to it.”

Ron (host):
Yeah, I’m a firm believer in, no work happens and nothing changes without a detailed explanation and a signature with what the number is on that change by all parties involved. So whoever the one is saying “This is what’s going to change”, the homeowner or whoever the person is to approve that, like, if you want to start getting in some trouble, have no system around change orders and watch what happens to jobs and watch what happens to the amount of work you do that you don’t get paid for.

Kathy (guest):
Yeah. And that is exactly how you kill your cash flow and profitability. It takes companies down. So just don’t do that to yourself.

Ron (host):
Yeah, no, it absolutely does. Especially when, you know, you look at a lot of places and they’re running like “Yeah, the bank account’s got money in it, like, yeah, like, that’s how we’ll balance the books.” And we got to get away from that, like, that’s not how champions do it. That’s not how we take the construction industry to the next level. It’s about understanding this stuff, and then taking the appropriate precautions to get us where we want to go.

Kathy (guest):
And you’re so right, because if you’re operating based on how much money is in the bank, you might have a couple of million dollars in the bank right now because again, people have paid you in advance. But there are costs that are going to trickle down through the next couple of months, you need to make sure that you have enough money in the bank to reserve for those particular costs, and not buy some extra stuff and you know, have a celebration party and spend it, which is good, you know, that you got the money in, but we have to plan for it.

Ron (host):
I know, it’s the next thing, you’re buying some equipment, because your accountant’s telling you that you need to get rid of some of this money, when you don’t even have an understanding of what’s coming in, that’s going to get you off of that money without you getting off of that money. Like it can really, I mean, it’s a shame sometimes how it is. But it’s also why I do this here. And so like we can bring people like you on so we can have a conversation and start to create an understanding around this, of like, how can we do better? And it’s just by educating ourselves and educating the construction industry on “Just because that’s how it’s always been done doesn’t mean it’s how it has to be done now.”

Kathy (guest):
Yep, exactly. And, you know, if your accountant is telling you “You have to go and spend this money” without actually looking at the future and the future projection on the business, please go get yourself another accountant. That’s bad accounting, because I know what they’re doing, they’re trying to minimize the tax liability, which in one hand, it’s fine. But on the other hand, we need to make sure we have the money in place for all the costs that are going to come through. So they need to be able to take a look at the past and the future. Unfortunately, accountants generally don’t do that because that’s just not their job. So you need to find someone who is able to marry the past and look at the future of the business because you don’t live in the past, you’re gonna live in the future.

Ron (host):
Oh yeah, it’s – I used to, you know, or you don’t know, I say that. But I’d say you get a CPA, an accountant, and a CFO in the same room, trying to work some of this stuff out, and everybody has a different perspective on it. And the goal is to get to some kind of alignment, where it makes sense for your business financially. And you’re not going one way, way super far in either direction. But what we find ourselves is like, we’re either way too far in this direction, or way too far in this direction. And there’s nobody ever tries to get to just this common ground of what makes sense for the business and the continued growth of it.

Ron (host):
And that’s why these conversations have to happen with all your parties. Because if you just go talk to your CPA, you’re just gonna pay more in taxes. If you just go talk to your accountant, it could really go sideways dependent on your accountant. And if you don’t have any CFO in there helping control this or helping with the projections – because I’d have to think if you have your paperwork, the work in progress report and stuff, right? Like you’re not going to get eaten alive on taxes because you have your paperwork correct, is that correct?

Kathy (guest):
It depends on if your accountant is using the work in progress reporting to make adjustments in your financial statements, and then using those financial statements to file for the taxes. And I will tell you that a lot of times when people do the work in progress reporting, they just have it as a part of the report but they don’t actually make an adjustment in their financial statements. That is why their financial statements look like a roller coaster. So there are going to be certain months when you’re going to have negative gross profits. It’s going to be a loss and I will tell you, you can see if you go through your financial statements right now. And if you look in the last year, if you have a gross loss, meaning that revenue minus the cost of goods sold is negative, that means that you have no money left for your operational expenses, for your accounts, for your rent, for your marketing person, for your people, whatever it is. That means you’re essentially going bankrupt. However, the reason for that is most likely because a work in progress report is not done, meaning that you generally have probably not gotten enough money in to cover all those costs on your profit and loss statement. However, on your bank statement, you have more money because you have gotten all that cash upfront. So that’s how you will see that you do not have that work in progress adjustment. And that’s what I’m saying, your financial statements are going to be very confusing, you’re going to be struggling with them. And they’re just not going to make sense. It’s like, why are we constantly losing money when we’re actually making money? And that is why, because construction has this very specific problem when you don’t have a work in progress adjustment. This is how it’s going to look on your financial statements.

Ron (host):
I love it. I mean, it’s your that you’re speaking right to how we fix that problem. And I love that I love when people come with solutions, and actually break down stuff like we’ve spent this entire episode talking about these Work in Progress Report, like having an understanding around that. And like that matters, because people need to understand this kind of stuff. So thank you for doing that. And thank you for taking the time to be on the show.

Kathy (guest):
Yeah, thanks so much. And again, you know, if someone is visual, just like I am, and just like you are, you can go to NewCastleFinance.us/constructionchampions. And it’s going to have a video of this work in progress report, it’s going to tell you how the sections of the Work in Progress Report are, it’s going to tell you how to actually use it, how it’s going to look in your P&L if you don’t use it, if you do use it. And then there are also a couple of other videos about gross margins and markups, what happens when you mix them up and all that stuff. And please use that, it’s the resources for finances. I’m here to educate business owners, and find yourself a good finance person that can walk you through this. It can’t be me, but someone else. Just make sure that you have someone who understands these nuances in construction so that they can truly help you.

Ron (host):
Awesome, I love it. And is there anywhere else that the construction champions can find new follow you pick up on what you guys are doing and stuff.

Kathy (guest):
You can find me on LinkedIn, I live on LinkedIn, Kathy Svetina, I’m the only one there. And you could also look at my website, NewCastleFinance.us.

Ron (host):
Well, thank you, Kathy, for taking the time to be on the show today.

Kathy (guest):
Thanks so much, Ron, I truly appreciate it.

Ron (host):
I love it. I mean, you’re speaking right to how we fix that problem. And I love that, I love when people come with solutions and actually break down stuff like we’ve spent this entire episode talking about the Work in Progress Report, like having an understanding around that. And like that matters because people need to understand this kind of stuff. So thank you for doing that. And thank you for taking the time to be on the show.

Ron (host):
Awesome, already constructed champions. Looking at that, I don’t even have to give you a call to action. Go take a look at the video for the work in progress. Like let’s start figuring some of this stuff out. I got to say, if you’re a guy that’s out there, and you don’t know, week to week, what exactly is happening, this is how you start to get control of some of that stuff. Because none of the other stuff is ever going to fix without having an understanding of the CIO. Selling more projects doing more work. We’re never fix bad financials. I think I’ve said that on here before. And I know we’ve had the conversation around and just aimlessly scaling, because we feel like that’s the fix. That’s what will fix all revenue problems. That was that’s what we’ll fix are all money problems. And we never do any of the stuff to actually understand where we’re at right now. And what exactly is happening in our business? Is it profitable on the job is everything we’re doing make sense from a system perspective. And then we just go sell more jobs. And then we have the same problem at more mass scale. And what happens when the problems bigger. It falls down and it becomes a lot bigger over thing when it goes complot. And we don’t want to get there because if we handle this now, and you get it right, when you scale, you’re never going to have to worry about it. Because you have that foundation you’re looking you have that forecast you understand what’s happening on every job. So construction champions, if you have it. Go check out the blogs for the episode. It’s something new, it’s not even new. I’ve been doing it for Like for months now, but I’ve never talked about it on here every episode, blog that we put your other and go check out all of our great sponsors that keep this show rocking and rolling. And as always, go be the champion you will be.

Ron (host):
Hey, construction champions, it’s your host, Ron Nussbaum here. And I want to talk to you about how you can automate all of your marketing. We’ve had so many people on here talk about getting the systems in place. While we have partnered with Build12 on the Construction Champions Podcast, Les O’Hara, the founder, what really excites me is 30 years in the industry. And now he’s built a system to be able to nurture your leads and continue to utilize that. I personally use the system myself. Build12 is absolutely amazing. There’s a lot of value in there. And it’s a way to start getting away from Angie’s List and all that kind of stuff and start actually creating your own leads every day and have a system for them. So go on our website, check out the show notes, go check out Build12 and what it can do for the front end of your business today. It’s absolutely amazing. I highly recommend going in, meeting with Les and his son Devin, and talking to them about what they built for their own business so the rest of the industry can take benefit from that here on Construction Champions. We’re all about helping each other out, and what is better than contractors helping contractors? I say nothing. So let’s go take this to the next level. Go check out Build12. If you have any questions, feel free to reach out to me or Les or his son Devin. We’re here to help, we want to continue to grow the industry.