Episode 29: Understanding Construction Financials With Andy Skarda

In episode 29 of the Professional Builders Secrets podcast, we’re joined by APB’s Head Coach, Andy Skarda. Throughout this episode, we get into the fundamentals of construction financials, and how much of a part financial awareness can play in a builder's success. 

During this episode, Andy discusses the reason builders fail when it comes to their financials, and how they can start to take action, analyse their financials, and come out on top in the end.

Its evident builders need to set targets, exceed benchmarks, and closely monitor their KPIs. Within episode 29, Andy goes into detail about why these aspects are so important, and how you can better implement them.

Andy also delves into the five key things you need to focus in on as a professional builder. Revenue, cost of sales, gross profit, fixed expenses and net profit/margin. 

Listen to the full episode to learn more about these key fundamentals and better understand your construction financials.

 

Andy Skarda - Head Coach 

Andy Skarda has owned and led businesses in South Africa, the United States, South-East Asia, and for the last decade, Australia. With 30+ years of business experience, Andy heads up the coaching team at the Association of Professional Builders (APB), helping business owners in the building industry identify and implement the skills and systems they need to be successful, without needing to go back to school or more importantly, without going bust.

Connect with Andy

 

Timeline

1:15 The fundamentals in construction financials.

4:37 How financial awareness plays part in a builder's success.

5:37 The financial framework for professional builders.

12:23 Setting targets and exceeding benchmarks.

25:48 KPIs builders must be monitoring.

31:10 How APB members efficiently monitor their numbers.

36:18 Why builders fail when it comes to financials.

38:36 How to take action after analysing your financials.

41:23 Financial trends affecting builders.

43:35 Where to start.

 

Links, Resources & More

APB Website

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APB on Facebook
APB on YouTube

Join the Professional Builders Secrets Facebook group for builders & connect with professional builders world-wide.

Bosco Anthony:

Hello and welcome to the Professional Builders Secrets podcast, a podcast by the Association of Professional Builders (APB) for building company owners, general managers, VPs and emerging leaders. Here, we discuss all things running a professional building company, from sales processes to financials, operations and marketing. Today I’m chatting with Andy Skarda, Head Coach for APB. Andy, thank you for being here today.

Andy Skarda:

It's good to be here, Bosco. Always good to see you and chat.

Bosco Anthony:

Well, Andy, let's get right into it. We've had so much learning in the last few seasons with the podcast, and we've learnt quite a bit about some of the types of reporting over the past few episodes. I really want to dig in deep on the financials, specifically in the construction space. What do you feel are some of those overarching financial principles, when it comes to the residential home builder space?

Andy Skarda:

Well, I think there's a fundamental fear of numbers. I think we've discussed in previous episodes that a lot of builders become businessmen almost by accident. They love construction; they love building. And I think most of them come into the industry from the perspective of, "I want to build houses," and there's almost naivety about, "Well, that's all I have to do. If I build good houses, everything will be fine." But the reality is that they very quickly get to a place where they realise, "I'm working really hard. I'm not making a lot of money. This isn't quite working the way that I thought it would." It's one of those things where understanding numbers and being comfortable with them is a fundamental reality of running a professional building business.

Andy Skarda:

We kind of gloss over the fact that we are the Association of Professional Builders and that's the thing that differentiates us and our members from other people. We are working with people who want to be professional. They want to offer a professional service. They want clients to have a great experience, and obviously they want to make enough money to achieve their financial and personal goals. Both of those things – giving people a great experience when they build, and the builder making enough money that he can do the things that he wants to for himself and his family – tie back directly to the fact that a building business, like every other business, must be profitable for that to happen.

Bosco Anthony:

This goes beyond just having a passion really, because at the end of the day, what you're talking about is upgrading the purpose that you have getting into the construction industry and starting to articulate where you are today and where you want to go.

Andy Skarda:

Yeah. And I think for a lot of young builders, they don't come into the industry thinking, "I want to retire at 55." They're 25 years old; they're bulletproof. It's just great to be doing something they love doing. But every person we talk to eventually gets to the point of thinking, "This isn't going to take me far enough. This isn't going to get me to where I really want to end up." At some point in every builder's evolution, they get to a place of realising, "I need to learn some more stuff." This particular subject that we're talking today, numbers, makes a lot of people nervous – in business generally, but very specifically within the building industry.

Andy Skarda:

They look at the fact that there's an accountant and he is generally somebody with a limited sense of humour and a tie. They look at that and think, "Well, that's not me. If that's what you have to be to understand numbers, then I'm never going to be able to understand numbers." The reality is you don't need to understand every number in a business. There are certain very specific numbers that are important. If you get your head around the story that those numbers tell you, you can run a very, very efficient, profitable, professional building business.

Bosco Anthony:

With the numbers, is the concept of knowing your numbers part of that success mindset? Is that a myth or is there really something about that financial awareness that plays a part in success?

Andy Skarda:

It's absolutely not a myth. It's a little bit like if you're driving your vehicle and your dashboard goes dead. Now what? Often in our early coaching sessions with our Private Mentoring program clients, I'll talk about the fact that if you don't know your numbers, you are a pilot flying a jet airliner in the dark, in a storm, in a cloud, upside down, with no instruments. I don't think anybody would get onto an aircraft if I told you we were flying into a storm, we would eventually be inverted, and the instrument panel would go dead. Nobody would get on that aircraft. Yet so many builders all over the world are quite happy to strap themselves into that cockpit every morning.

Bosco Anthony:

Right. Do you have a financial framework that builders can apply to their businesses? What does it look like typically when you're working with those builders to create that financial framework?

Andy Skarda:

Yeah. What we've done is distil it down to its fundamentals. We are not trying to turn builders into accountants. I often say to people when we have these kinds of discussions, most builders have a sense of humour and therefore they wouldn't make accountants. I'm bashing the accountants a little bit, but I'm saying that tongue in cheek. One of my best friends is an accountant, but let's not give them more kudos than they deserve. 

Andy Skarda:

But in all seriousness, as I said earlier, we don't expect or need builders to understand every number in the business, but there are certain key numbers that are critical. We've distilled the process back to those key numbers. Then in all of our training and development we give them the tools to, first of all, understand what those numbers are, understand the story that they tell about the business. Then we give them the necessary spreadsheets, worksheets and calculators, to be able to keep a handle on those numbers very easily.

Bosco Anthony:

Let's get into the coaching aspect, because again, this is part of that coaching journey that you take them on as well. How do you empower those home builders through the coaching to set those realistic annual financial goals? How does the framework come to life?

Andy Skarda:

Well, we don't start with numbers at all. I always start those conversations with, "What do you want to do this year? What do you want to do in the next three years? What do you want to do in the next five years?" The reality is that in all of our personal lives, if I was to get sight of your bank statement, I would see exactly what you do, because our entire lives eventually distil back into how we use our money. It's a resource. Essentially what we are trying to do is often reverse engineer it. We'll work with the builders on the outcomes that they're looking for. Once we've pegged the outcome, we know what it is they want to achieve. Then we work backwards through the practical realities of their capacity, their market, their level of skill, et cetera, until we eventually get to an agreed scenario that is achievable.

Andy Skarda:

As human beings, we are much more at ease in our comfort zone. Our goal with our builders is to stretch them slightly just to ease them gently out of that five out of 10 space into a six or a seven out 10, because if they're going to be growing, it's going to be slightly uncomfortable. If it's comfortable, you're not growing. We want to just push it that little bit. 

Andy Skarda:

The fundamental mentality behind that is if you want to do $1 million dollars this year, aim for $1.3 million. If you aim for $1.3 million and you don't hit it, you only hit $1.1 million, you still end up better off than where you wanted to end up. It's that kind of mentality. It eventually becomes: “What financial goal do you need to achieve in order to get to the outcome that you are after?” But the starting point is not how much money you want to make; it's much more holistic than that.

Bosco Anthony:

You mentioned that you're reviewing bank statements as well. Are you referencing the annual profit and loss statements (P&L)?

Andy Skarda:

All the time. We always do it in two fundamental phases in the planning, in that we look backwards. We want to start with something that's real. Virtually every builder we work with has had to submit a tax return in the previous 12 months. Now again, because we know that nobody from the IRS or the ATO would ever listen to one of these podcasts, we can quite openly acknowledge that accountants are going to present the best picture possible in order to work to the builder's advantage. 

Andy Skarda:

There's going to be some, let's call it creative accounting, maybe in those numbers, but they are going to fundamentally give a picture of what the business looked like the last time it was officially measured. It will start there: “What did your previous 12 month or previous financial year look like?” That gives us some fundamentals. 

Andy Skarda:

Let's go to a simple scenario. In every single business, for it to be a business, it must exceed its break-even point. The first thing you want to determine is what is the break-even point? That's going to be tied in the building industry primarily to fixed expenses and overheads. The reality is, if you’re building a home and the profit you’re making is not covering those things, then although you’re making a gross profit on that build, you’re not making sufficient profit to run your business. Step one is you must break even. And once you've worked the financial plan to the place that you know this level will help you to breakeven, then you can take it to the next level. That next level is going to be, “Okay, on top of that, how much profit do you want to be making?”

Andy Skarda:

The fundamental thing that we must anchor right here is that when I talk about profitability in a building business, I'm talking about net profit and net profit only exists when every single expense in the business has been taken care of. And that must include a market related salary package for the owner. 

Andy Skarda:

So many builders come to me and when we dig into their financials, we find that they are paying themselves $65,000 to $70,000 a year and they're paying their project manager $160,000. What they're saying is, "I made a profit last year." Actually, the profit was what they took out of the business. They actually made no profit. At the end of the day, if they could make more money working for another builder, why take all the stress and the real headache and the risk of running a building business and earn less money than you could working as a project manager? It doesn't make sense.

Bosco Anthony:

You're really combing through this like a fine toothed comb through all the different expenditures and the income because as well, you're looking at the percentages of how the revenue's being allocated. You are also then looking at the ratios between expenditure and revenue to make sure you hit that break-even point. Is it fair to say that that financial coaching and analysis is sort of a graduating step where let's get to that breakeven point and then let's move on to the next step and then the next step? It seems like it's not just a one size fits all concept.

Andy Skarda:

Absolutely. I think the concept is probably one size fits all in that we want to make sure that every one of our members is making at least 10% net profit all the time. That's the minimum level we aim for. But what we certainly do in the Private Mentoring program and in the Elite Mentoring program is tailor that to their particular place of evolution, size, market growth, et cetera. 

Andy Skarda:

We would certainly want to be in a place where every builder as early in the calendar year as possible knows exactly what his targets are in the revenue area, the gross profit or gross margin area and for fixed expenses, overheads and net profit. We want those four numbers very clear, very early. Then essentially what we are doing there is setting targets for the year. What I really want to do here is just differentiate very quickly between a target and a budget.

Andy Skarda:

A lot of people get confused between those two things. Our differentiation goes like this: budgets are usually, “What do you want to achieve in the next 12 months?” Then you divide that into 12 equal pieces. What we've seen in most building businesses is that a month is often not long enough to really see the trend. We tend to break the year down into four quarters. 

Andy Skarda:

The way I can always tell that a builder has done a budget is when they present me with these four beautifully round numbers, all zeros in every quarter, and they're all equal. And it's one of the reasons why we get them to look at their previous year's actuals. Because as soon as they look at their previous year's actuals, there are no zeros. There are no round numbers, and every quarter is different. What we want in a target is for it to be realistic.

Andy Skarda:

We want it to be aspirational and motivational. If I give you a target that is impossible for you to achieve, it's not a target. It's maybe a wish. It's definitely not even a dream, but as soon as we get to a place where I show you that if you build this many houses at that schedule, you will be able to generate that amount of money, that revenue becomes a target.

Andy Skarda:

It becomes a measuring stick by which you can measure not just your financial outcome, and I think this is another important principle. Revenue is a reflection of the construction work you have completed and invoiced, that's all it is. People paying you money is a certificate of appreciation for the work that you've done. Let's demystify revenue. All that revenue is showing you is how many invoices you have sent out. And you cannot send an invoice until you finish that amount of building.

Andy Skarda:

There you go. Really what we are saying is, as soon as you set the revenue target, you've also set the construction target. Then you can break that construction target down into the three months of that quarter. Then you can break each month down into the weeks of that month. Then you can actually break it down to what you need to build per day, per job in order to be able to put through the necessary invoices that will then get you to that revenue figure. Now it's a target. Now you can turn it into something tangible that says, "I need to build that much house in order to be able to invoice that much revenue."

Bosco Anthony:

How quickly do you get into pricing? I'm scared to ask this question, because I've had the pleasure of distinguishing with you the difference between markup and margin. At what point in the game do you start to say, "Let's re-evaluate your pricing and understand your margin and markup?"

Andy Skarda:

It's critical from the word go, quite simply because most builders who come to us are not pricing for profit. A lot of them are pricing to get the work. That's dangerous, because essentially what are they saying? If a client goes to 10 builders with exactly the same set of plans and gets them to cost the job, the builders are all going to come up with pretty much the same number because they're buying their materials from the same suppliers, they are getting their labour and their sub-trades from the same pool. 

Andy Skarda:

If a house is going to cost $500,000 to build, if that's the budget, it's going to cost $500,000. That's not really negotiable or flexible. The only piece of the price to the client that is negotiable is the amount that the builder makes out of doing the job. The problem is, when you start to get into that competitive arena of undercutting other people, you eventually undercut yourself completely out of business because you can't run your business on the skinny margins that you are adding in order to get the work.

Andy Skarda:

To be totally honest, you can't deliver the level of service that you've promised the client if you don't have the margin to support the rest of the infrastructure that you need to build around that. We look at pricing, we've spoken primarily so far about revenue target, but to be totally honest, revenue target is a step towards gross profit because gross profit is going to be revenue minus the cost of the build, or as we call it in financial terms, your cost of sales; revenue minus cost of sales equals gross profit. What we're now doing is we're saying you don't just want to build a million dollars’ worth of revenue. You want to build $1 million worth of revenue at no more than $750,000 cost. There's the next thing that the builder needs to be measuring.

Andy Skarda:

While he is building that particular house, he needs to be making sure that at every stage, his cost to build that stage was not more than 75% of what he's able to invoice. Now we're at a point of making sure that he's getting a 25% margin. Let's dig into that for a second. There's a lot of confusion around the difference between markup and margin.

Andy Skarda:

The simplest way to work out the difference is that markup is the profit expressed as a percentage of the cost to build, and margin is the profit expressed as a percentage of the cost to the client. Let's try to make a simple example for people to understand the difference. If I calculate the cost to build a home, it's $400,000, and I'm going to tell the client the cost for them is $500,000. I've got $400,000 in costs, plus $100,000 in profit, gives me $500,000 as a cost to the client.

Andy Skarda:

The profit will always be $100,000. That'll never change. But if I express that $100,000 as a percentage of $400,000, it's 25%. If I express it as a percentage of $500,000, it's 20%. One hundred out of 400 is a quarter, 100 out of 500 is a fifth. Where a lot of builders get into trouble is that they don't understand that difference. When we talk about a 25% margin, we mean 25% of the selling price to the client, which actually means you need to be marking up by 33.3% in order to get back to a 25% margin. 

Andy Skarda:

Then just while we've gone quite deep technically now, let me just run this through for anybody who's listening so that it makes sense. The reason APB ended up at 25% is that as we've analysed building businesses that have grown, the guys we've worked with over the last nearly decade, we've seen that a building business that is growing needs at least 15% in its overhead budget in order to be able to grow successfully and safely.

Andy Skarda:

As I said earlier, our goal is always for all of our members to be achieving at least a 10% net profit. Now we're back to simple arithmetic. If I want 10% left after I've spent 15% on my overheads, I need to start with 25%. If we come down the financial reporting structure, I've got revenue delivering 25% after I've covered my cost of sales. Out of that 25%, I spend 15% to run my business and then I have 10% left over as genuine net profit. There we go. We probably went a bit deeper technically than we intended to, but hopefully that has brought all of that together.

Bosco Anthony:

Yeah, it totally makes sense. When I learnt about the margin/markup concept it blew my mind, because you can tell the difference very quickly. Before I get into goals and KPIs, I've got curiosity. What is the general reaction when you do these analyses and your coaches do these analyses with the clients, the builders? Builders go to their accountants, and they have the safety net: "Oh, our taxes are filed. Everything's great." 

Bosco Anthony:

Then you go into the unpackaging and you're saying, "Hang on a minute. There's an issue here. There's an issue there. There's an issue there." All of a sudden that feeling of safety just vanishes because now they're sitting there and seeing the big picture and thinking, "Oh, we need to be charging more," or "We're not actually making a profit," or "We're underpaying ourselves." What is that reaction that comes through?

Andy Skarda:

It varies from disbelief; it varies from ostrich syndrome, stick their head in the sand, pretend it's not that way. We've got clients who I've worked with for the last three or four years, who in the early stages we had what bordered on stand-up fights over what was actually going on in their business versus what they thought was going on in their business. The danger in the building industry, which you and I have discussed a number of times, is turnover. Cash flow is not the same as profit. 

Andy Skarda:

Unfortunately, if you remember where we started this discussion, most builders are not financially adept. They aren't trained to understand the numbers. Therefore in most cases, where do they go? They look at their bank account. If the bank account looks healthy, they believe everything is fine. The danger in the building industry is that that's a hamster wheel, and as long as you keep that hamster wheel turning, you'll be okay.

Andy Skarda:

But the second that hamster wheel stops turning and the cashflow stops coming in, you're in deep trouble. Part of our concern at the moment in the current environment in the construction industry is with things like COVID and the interruptions to the material supply chain that will happen at a moment's notice, and you have no control over it. If you are not running your business in a way where you are making a genuine profit, where you do have some reserves that allow you to make it through two or three weeks without revenue coming in, if you are not in that position, I wouldn't be sleeping very well at the moment. I would be very concerned. To get back to your question, disbelief, anger, fear and eventually the light comes on.

Andy Skarda:

If for example you are ill and you don't know you are ill, you can't do anything to get a cure. But if you actually rip the Band-Aid off and realise that wound is not healing, you see that it needs additional attention. Although it's going to be painful, ripping the Band-Aid off first of all, and secondly, whatever that attention is may be more painful than the wound. The net result's a short bit of discomfort and pain, but we don't need to amputate your leg. We can actually save it. 

Andy Skarda:

What we try and do as coaches is to get builders to the place where they can see that outcome as quickly as possible. The beauty of the kind of problem we're sketching here is that it's relatively simple to fix. I'm careful with my choice of words there; it's not easy to fix, but it's relatively simple to fix. If you are not putting through enough markup to generate the margin you need, the way to fix it is to increase your markup. Build more efficiently.

Bosco Anthony:

I was reading an interesting fact on APB’s website. It was around a statistic from the Chartered Management Institute that said they came to the conclusion that 74% of businesses that monitor key performance indicators end up hitting all of their growth targets. I've got two questions. The first one obviously is what are some of these KPIs that you review through the coaching program with your residential home builders? But the other curious part of me wants to know what happened to the other 26% that aren't hitting their goals and why are they not hitting their goals as well? There's two sides to this question here.

Andy Skarda:

Okay. I think we've probably touched on some of it in the discussion about the difference between a budget and a target. As soon as you get to KPIs, you're into the target space, you're out of the budget space. You're in the targeting space because essentially that target is a performance indicator. As I said to you, what we've done is we've distilled and simplified the list of potential numbers down to basically the five that we've covered. 

Andy Skarda:

Revenue, cost of sales, gross profit, fixed expenses, net profit and net margin. Those are the five numbers that we focus in on. Amongst those numbers, we are constantly going to be reviewing ratios like a fixed expense cost as an expense of revenue, as a percentage of revenue. It's a little bit like you and I decide we're going to do a road trip. We don't get in our car, drive to the first traffic light, then look at each other and say, "Should we go left or right?"

Andy Skarda:

We know we are going to Townsville from Brisbane. Luckily these days we say, "Hey Siri," or "Hey Alexa." The reality is, if we know where we are going, we can work out the route to get there. And really, that's the thing here. When we talk about people who monitor KPIs, they can't be the monitoring a KPI unless they set it. They can't set it unless they have a target. If they have a target, they know exactly what they need to do to get there. They can work out a plan to get them from A to B.

Andy Skarda:

The people who are monitoring those – and you monitor them as a cascade – you aren't going to make the gross margin that you are after if you're not first invoicing enough revenue. The focus starts at the beginning. What's the foundation? The foundation is – are you building enough to be able to invoice enough, to be able to earn the revenue you need? Next stage is going to be: are you building efficiently enough to generate the 25% profit that you need, the margin that you need? Now you've got your 25%. Okay.

Andy Skarda:

Are you now able to run your business for 15% or less of your revenue number? It's a sequential cascade of efficiencies that you will zero in on. Now, anybody listening to this who's been in business for longer than 10 minutes is going to say, "Well, okay, but you're starting in the middle of the equation. You can't get that revenue unless you've got the contract signed."

Andy Skarda:

Guess what? The process works like this. Once you know what the revenue is that you are after, you can then set sales targets. Once you've set sales targets, you know how many leads you need in order to hit that number of contracts. Now you can set marketing targets. All of a sudden, out of this exercise that we started talking about looking at breakeven point, by doing that exercise correctly, you can now set up KPIs for every single discipline in your business. It's foundational. In the Private Mentoring program, the foundational thing we do is targets, and we start with profit and loss targets, so the revenue, cost of sales, et cetera. Once we've got those bedded down, then we move to sales targets and from sales targets into marketing targets.

Andy Skarda:

Then the rest of the year is spent measuring them. Peter Drucker is regarded as the father of modern management. He said, “If you can measure it, you can manage it.” Essentially, that's what the rest of the year becomes. We've spent the time at the beginning of the year making the plan, now execute that plan. The beauty is because we do that on at least a monthly basis, we have 12 points in time on which to check: are you on track or aren't you? I'm pretty certain most of our mentoring clients know this, but we are a lot harder on them at the beginning of the year, in terms of being very, very detailed in that analysis.

Andy Skarda:

Because if we can get on the front end of the process, it's much easier than chasing it. We really put a lot of emphasis on making sure that you are hitting the marks in that first quarter and into the second quarter. Generally, we find that if that happens, if people are on track at the end of the second quarter, the year is going to take care of itself. The first six months is the hard work.

Bosco Anthony:

I was just curious, because you talked about this amazing coaching program where you've got these touch points throughout the month. That way it's not like a wake-up call at the end of the year, like going to your accountant's office, right?

Andy Skarda:

Yeah.

Bosco Anthony:

I'm just curious, take me through the actual framework in the coaching. Do they come with their shoe boxes and their receipts and all this other stuff that comes through or do you guys actually have documentation or a dashboard where all that data lives in the coaching program? What does that look like in a coaching program?

Andy Skarda:

In both levels of the APB, whether people are members or whether they're in the Private Mentoring program, we give them the training and the tools to monitor everything we've spoken about today. They don't need to come into the Private Mentoring program to get the fundamentals, but obviously we've taken it to another level in the Private Mentoring program. We give everybody the training and the necessary calculators to be able to calculate and then monitor and manage those things. 

Andy Skarda:

The primary difference between the two would probably be that in the membership area, it's a lot more manual and separate. Whereas when people come into the mentoring program, we've built a far more sophisticated workbook that allows all of those tools to interact with each other automatically. Therefore, by entering information in one place, you can see its ripple effect through five or six other things as well.

Andy Skarda:

Generally, the document that we would look at most in the beginning stages is the P&L. Not a lot of shoe boxes full of credit card receipts get to us. Those tend to go to the bookkeeper or the accountant. Then once the P&L has been created, obviously we take that as being an accurate reflection of the business, and we start from that point. What we find often though, is that it's not accurate. 

Andy Skarda:

The point here is again, the only way that you can actually work that out is to be measuring what you think it's going to be, against what it actually is. To go back to your stat, the piece that we haven't covered yet in this discussion is after you've done the plan, you literally measure actual against target every month, every quarter throughout the year. And again, we are very, very specific in the early days to make sure that the information you started with is accurate.

Bosco Anthony:

Do you feel that the reason why the financials around a building company are so different from a lot of other businesses is because you have that ability to micro analyse those P&L statements? Most businesses go to an accountant at the end of the year. Most of them do it once a year or file their BAS statements quarterly. Then they end up doing away with it. But it sounds like in this particular case, you're holding them accountable through that entire process all throughout the year as well. Is that the biggest difference?

Andy Skarda:

Well, yeah.

Bosco Anthony:

Or are the other elements too that contribute to it?

Andy Skarda:

There are certainly things in the building industry that are unique. Let me just balance my earlier accountant bashing picture. Most accountants are not trained to run a building business's books. And unfortunately, if you try to run a building business's books the same way as most other businesses, you are always going to be presenting or coming up with a picture that is not accurate. We'll leave that for another podcast to go into why that is. 

Andy Skarda:

But the truth is, there are some unique elements in the building industry that if you don't take those into account, you're going to end up with a problem, but that's not because accountants are wicked evil people who are deliberately trying to mislead their clients. It’s similar to the builder; they don't know. And you can't hold them accountable for something that they don't know.

Bosco Anthony:

I found that out very quickly when we unpackaged the work in progress calculator.

Andy Skarda:

There you go.

Bosco Anthony:

I remember asking you questions about what happens when you have work through a new fiscal year and then I learnt that very quickly.

Andy Skarda:

Yeah. We often end up in a place where two or three months into working with a new coaching client, they will say, "My accountant says you're talking rubbish." I say, "Well then, let's get your accountant on our next coaching session and let's talk about it." What happens is we have two types of accountants who come to those meetings. One type is aggressive and defensive and the other type is coming in saying, "Well, maybe there's something here I can learn."

Andy Skarda:

I've never been in one of those conversations that there hasn't been a light bulb "Ah-ha" moment for the accountant. Now, what I love doing is teaching the principles to our builders in such a way that they can teach their accountants. What that does is give them an immense amount of confidence and puts them in a place where instead of them almost under a level of intimidation, where they just believe whatever their accountant tells them, they're actually able now to have a genuine understanding and grasp of their numbers. And that puts them in a much better position as a professional.

Bosco Anthony:

Where do you think builders fail when it comes to the holistic viewpoint of their financials? Is it based on the false narrative that they're living on? Is it a case of putting their heads in the sand and just going with the flow before they begin working with you? Obviously, there's a lot of accountability that you're pushing on them, but where do you think is that viewpoint for them where perhaps they have a blind spot?

Andy Skarda:

If you can live with the image, which will now be implanted in your brain for the rest of today, I was thinking about exactly this question in the shower this morning. It's the difference between a weekend golfer and a professional golfer. A weekend golfer goes out there and does the best he can. If you're anything like me, you get your money's worth; some guys only get 72 hits, while I get 140, usually. I get double the value on a golf game that they do. And I get to see the whole course and everything around it: the left side of the fairway, the right side of the fairway, I see all the water holes. Whereas all of these guys that go round perfectly on the short green stuff only hit the ball 72 times. They're always only on the fairway. They miss out on so much.

Andy Skarda:

But in all seriousness, the difference is the professional is measuring every part of his game, and what is he trying to do? He's trying to come up with the most efficient process and then repeat that over and over and over. He addresses the ball the same way. He sets up his stance, he uses the same club. He's constantly analysing and measuring data. The problem for most builders is they are very, very good at building – because they are builders. I have not yet met a builder who was in any way unable to understand the concepts when they were properly explained to them. It's not a question of they don't want to know, it's a question of they don't know what they don't know. As soon as somebody teaches them, bang, the lights come on. And all of a sudden, they're into a completely different world.

Bosco Anthony:

How does a builder take progressive action through the insights that come up from this financial analysis? You mentioned that there are two ways: there's that manual process, which is the membership side. Then you've got the coaching process, but when they're going through these elements and there's so much information coming at them, sometimes it can be overwhelming.

Andy Skarda:

Sure.

Bosco Anthony:

How do they hold themselves accountable and then take those progressive actions? Do you find that they have to actually take a step back and then reflect and then act on it? What works?

Andy Skarda:

What we try and get them to do is to make sure that they're running a profitable business first. Whether we’re talking about building businesses or businesses in general, the purpose of a business is to make a profit. Let's start with that fundamental. Are you actually making a profit? And that revolves around two things. One, your markup and margin, are you pricing jobs correctly and accurately, and two, are you putting through enough markup to achieve that 25% margin as a minimum? If that is correct, then we want to go and analyse your reporting structure on your profit, which is the Work in Progress Accounting Adjustment. Our member success coaches are trained to help builders sequence what needs to be done in the correct order. It's that old analogy: how do you eat an elephant? One bite at a time.

Andy Skarda:

The difference in this case though, and it's probably the primary difference between the Private Mentoring program and our membership level is in the mentoring program, the coaches help the builder to identify where the first bite needs to happen. Then they work with them to make sure that each bite happens correctly, sequentially in the right order, so that they get the biggest bang for their buck. 

Andy Skarda:

What we obviously don't want our members to do is to arrive at our training portal and see 47 action plans, or however many it is, and say, "Ah, I don't know where to start. I'll freeze and do nothing." If anybody ends up in that at place, the right thing to do is get hold of your membership success coach and say to him, "Where do I start?" They'll work you through a process to help you understand, "This is where I get going."

Andy Skarda:

It is progressive, the fact that you used that word I think is spot on, but we start with the fundamentals, get those right, then build on those as we go. If I think about the guys who I work with in the Elite Mentoring program, some of whom I've worked with for the last four years, their level of knowledge and understanding today, compared to where they were four years ago is chalk and cheese. They are businessmen. They build, that is the thing they do in their business and they all love building and that's never going to change, but they've now got this added dimension in their lives where they understand exactly how to do that in such a way that it creates the financial outcomes they are looking for.

Bosco Anthony:

This has been really insightful, Andy, as always. My final question for you is around trends. Are there any trends in the industry right now, obviously outside of the current times, but are there any trends that are forcing builders to act a certain way when it comes to their financial analysis? What are you seeing on front lines?

Andy Skarda:

The biggest problem at the moment that every builder is facing worldwide is supply chain and availability of subcontractors and good team members. What that's doing unfortunately is, as the market heats up and we don't have trained people coming in to fill those spots, people are having to take on other people who are not as skilled and therefore, because they're not as skilled, things take longer. The reality in the building industry is you've got to be having a consistent flow of cash through the business, or you end up in trouble. 

Andy Skarda:

To go back to part of what we discussed earlier on, even with all of the targeting and everything that we have been doing with our builders, a lot of them have ended up in a place where, because they couldn't get materials, or subcontractors didn't arrive on site on the day they were supposed to, that pushes out the completion of that stage, which pushes out their ability to invoice, which now means the money that they were expecting to cover the overheads of their business in this month doesn't arrive until next month.

Andy Skarda:

And now we're back to what I said to you earlier, the danger for so many builders out there who are not in touch with their numbers is when that cash flow hamster wheel stops spinning for even a week, or two weeks, literally their business can be upside down that quickly. The trend at the moment that we've got everybody focused on is being very agile in your construction schedule and applying your manpower and your material resources as they are available. 

Andy Skarda:

We're unfortunately not in a place where you can necessarily decide at the beginning of every week, "This is what I'm going to build this week." You have now got to look on Friday at, "What have I got to build with next week and how do I convert that into as much progress towards my next payment as I can?" It's that kind of agility and flexibility that the guys need to develop.

Bosco Anthony:

For listeners who aren't members or coaching program members, any final advice for them? I know there are amazing articles on the website around the financials, but what advice do you have for new builders who are not part of the APB framework?

Andy Skarda:

Well, obviously, and thank you for the opportunity, I'm going to say join APB, but look, it's not for everybody. We don't pretend that it is. You've got to be at the right place mentally, psychologically and – in some cases – at a point of desperation. There's a ton of stuff on our website. The quality of the blog articles that Russ puts out is world class. I would start there. I'd start reading those things. There's a lot of stuff that we give away for free. There are a lot of tools and calculators that we provide. We are genuinely committed to improving this industry. I know that's kind of the buzzword, but the truth is we absolutely want this industry to be better for both the consumer and the builder. There's a lot of stuff on the website that people can get for free.

Andy Skarda:

And generally what'll happen is that'll put them into a place where they start getting more targeted content from us. I would start that way and test it, taste and see whether it's of value to you. If it is, then obviously consider becoming a member, which I think at the price is an absolute steal. Then, if once you're in and you can actually see behind the curtain a little bit more, and you can see the depth of what we've got available in the training resources, if at that point you decide it's time to really step into the professional realm, obviously our Private Mentoring program would then be the next place to go. But we are not salesy. We are not pushy. We invite people into that journey. We don't force them into it. It's entirely up to them.

Bosco Anthony:

Yeah. You seem to have a format for all different levels of the builders and that's been a really comforting thing to see as I've spent the last few months working with you guys and seeing where the information and content hub is. I could see that you're generally trying to put out the right information to all consumers, regardless of what stage they’re at.

Andy Skarda:

Yeah. The big thing, if you haven't done it yet, is to buy Russ and Sky's [Co-founders Russ Stephens and Sky Stephens] book. Russ and Sky have written a book called Professional Builders Secrets, which is the manual. It is the high level executive summary of everything we teach. It’s where to start if somebody wanted to know, “What's one thing I can do that could turn my building business around tomorrow?” I think it's 160 pages. Given the right kind of morning, if it's raining outside, you could literally get through it in a day, but it is chock-a-block full of absolute gold. It really, really is. That might be the other way for somebody to start.

Bosco Anthony:

Well, Andy, another insightful interview, thank you so much for your time today and the information. As always, I truly appreciate the wisdom.

Andy Skarda:

It's always a pleasure working with you, Bosco. Have a great day.

Bosco Anthony:

Take care.