What Should My Profit Margins Be in 2026? Contractor Cash Flow Q&A

0:00 Hey everyone, welcome back to Contractor Revolution, the podcast by Breakthrough Academy. It's the end of the year and it's been a wild one for a lot of us. I'm sure there's a lot going on in the world right now and as entrepreneurs, I'm sure you've experienced this year over year, but owning a business isn't exactly an easy one to navigate. We're having a lot of good chats with a lot of our members and coaches right now. And we've kind of identified the number one issue that a lot of us have faced this year was cash flow. We've been doing some research as well and we've discovered that 45% of contractors don't really have a financial plan beyond paying the bills and sending out invoices. So, in today's episode, I'm going to answer some of the financial questions that we've heard from you guys over and over again. I hope you walk away with a fresh perspective and an actual plan so you can stay cash positive and crush your goals for 2026.

0:44 And if you've ever felt like you're just drowning under like 2 in of water this year, well, this episode's for you. Now, let's get started. You're watching Contractor Revolution, the podcast by Breakthrough Academy, where we systemize contracting businesses for growth. Keep watching to learn how the world's top contractors scale their companies, build killer teams, and make more while working less. Okay, so the first question that came in that's pretty obvious is, how do I improve my cash flow for 2026? Well, there's things you can do on the revenue side and there's things you can do on the overhead side. But let's just start with revenue. The first most obvious thing is you need to actually track it.

1:23 Not just what's happened in the business the last few months, but project out month by month what's going to happen over the next 3 to 6 months. And this is going to be cash accounting, not acural accounting, which basically means you're going to be looking at the real hard cash when it actually comes in and hits the bank account and when it's actually going to leave the bank account. Right? In doing that, you're going to start to see gaps and you're going to have time now to actually adjust whether it's when revenue comes in, certain spends you have, and make sure you're never in the red. and the off chance you actually are in the red and you can see that coming out 3 or 4 months from now, you can make sure you secure a proper line of credit to actually cover those dips effectively. Another hot tip for you is to make sure you align your deposits with your progress payments, right? You need to stay ahead of the spend you have going on in production. So, your labor, your subs, your material, those all things cost you money. Now, are you spending that out of the profit you've made from previous months in your business, or is your customer paying for it ahead of time? So, this really comes down to how you understand what your production schedule is and when your costs are actually going to go out. Make sure you collect deposits and your progress payments ahead of the costs you're spending on those jobs. To go along with this, where I watch a lot of people get in danger is they actually grow too quickly. This is especially true in insurance work or commercial work where progress payments are spaced out by 30, 60, 90 days or more. It's very important that you sit down and actually line up your schedule with your cash flow projections, right? You don't want to take on more work than you can actually physically float and as an organization. Now, the nice thing is is these terms should be easily referenceable. So, you can start to actually plan out and project when you're going to be spending the money and when you're going to be getting the money in, and you'll start to really see how much work you can take on at a given time. All right, so we've talked a lot about revenue best practices. Now, let's talk about what you can do with your overhead. So, the first thing I see for a lot of us as business owners is when we make a lot of money in the business, we pay ourselves a lot of money. And when we have a bad month, we maybe don't pay ourselves much, if anything at all.

3:13 This doesn't make sense. This isn't something that a business should have to contend with, let alone you in your own personal life. I can only imagine the amount of stress that this puts on you. So, what I would recommend instead is pick a salary for your year and start to pay yourself a consistent salary month in month out. That way, at least on the personal side, you've got some consistent predictability. And on the business side, this forces you to problem solve all the other variables you have involved to make sure that you, just like all the rest of your employees, are paid on time within a budget that makes sense. Another mistake I would see a lot of people make is they go and buy a brand new truck or machine with cash. Look, I get it might be cool to do that because you're going to save a little bit on interest, but you're killing your business's ability to have cash flow for other investments in the organization, whether that's new people, new marketing ideas, or different growth strategies that are required. The reality is, if this is an asset, it can likely be financed through bank financing. And you might want to consider that as an option before just using your company's cash to do it.

4:07 Another thing not to forget about is the fact that our biggest business partner, whether we like it or not, is the tax man. And those tax installments are due whether we like it or not. So, I recommend best practice is on a month-to-month basis to stow away a certain amount for tax installments, whether you have to pay them that month or not. This keeps you honest and make sure that you don't hit a year-end scenario where you're actually in debt to the government. My final point in all this is to stop buying shiny objects for the business. Look, there are things that actually produce an ROI for the organization and help drive it forward.

4:36 And there are things that are just dead weight, but they look cool. If you really need to get those things, don't just buy them willy-nilly to make you feel good. Make sure you earn them, that they're actually saved for, and they're a part of the actual company strategic plan. So, the next big question we get from a lot of people is just, how do I go about making an annual budget? Well, I'll walk you through this step by step.

4:54 So, step one is you need to actually input last year's financials. You're going to organize your revenue, your variable expenses, how much profit you made off those jobs, so gross profit, how much you spent on fixed expenses, and then finally, your net profit, which leads us to step two. You need to review that data. Once you've gone and put all your numbers in, what I recommend you do is start to look at the story that actually played out. This gives you an idea of where you probably overspent, where you may have underspent, and really where all the money actually went. Okay, finally, we're actually ready to look forward a little bit. So, step three, we want to set our net profit goal first for the fiscal year.

5:28 Right? I'm sure a lot of you heard this at this point, but revenue is vanity and profit is sanity. Let go of your ego and start to really think through how much do I actually want to make next year. It doesn't matter how much revenue that requires. All that matters is you have a clear goal for what's important to you and the organization set ahead of time. So step four finally is to actually build this next fiscal year's plan. So we'll start with revenue. Best practice I recommend here is to separate the revenue sources. So that could be by commercial, service, residential, whatever it is, but it's going to help you actually see how much revenue you want to get from different areas of the organization. Next thing I you want to do is allocate a 3 to 5% increase on all your contracts and make sure that it's reflected in the revenue projected for the next year. The next thing is actually my favorite thing to do, which is to play around with our variable expenses. This is like your labor, your subs, and your material. The exercise I always look at is how do I optimize this by one to even 5%. Because the money saved in this usually goes right down to the bottom line. And so some ways to do this, well, if you haven't already, you might want to look at incentive based pay with your people. Where is it working? Where is it not? And do you even have it introduced properly? The other thing I do on an annual basis is I'm going to be negotiating my high material uses with my key suppliers, right? What are the things where you spend a lot on all the time and could you get a better price on it? And then finally, another thing I find a lot of us miss on is having proper subcontractor agreements. There's so much leakage and costs when we work with our subs when things aren't clear. The final thing to look at is fixed expenses. One thing I'd recommend behind this is to see this less as money and more as energy. Right? You as an entrepreneur need to allocate certain things to certain costs in the company that should ultimately provide value to the organization. So give it an actual critical thought. What actually drives value in your organization and what is just dead weight? and then start to reallocate those costs based on your learning from the last fiscal year. A quick recap on this one. We're going to gather last year's data. We're then going to review and learn from last year's data. We're then going to set a goal on how much profit we want to make and then build a plan backwards to actually make sure we get there. So, the next big thing we get often is just like, what is job costing and how often do I actually need to do this? Well, I would recommend doing job costing while the project is still going on, right?

7:34 This is the process of calculating the actual cost of a job versus the estimate that you originally set out to go after. So what I would put in is your revenue against all your variable expenses and start to look at where labor, subs, and material is coming in against the actual plan. Now, why is this so important? Because I'm a true believer that gross profit, which is the profit made off the job specifically, is the lifeblood or like the pulse of the entire organization. I would not be growing revenue or trying to grow your organization overall if gross profit is struggling. And when you do it on the job, especially while it's still going on, that is your highest likelihood and ability to make a change on the project itself, right? You're starting to watch labor come in way over budget, and you can start to problem solve it mid- project versus waiting till afterwards.

8:16 So, once you've got some of the basics down, here's a few extra things I really recommend you do. Start to look at your projects by service type or by crew that produces it or by salesperson that booked it. When you start to clump jobs together and start to see patterns, you'll see certain salespeople that book jobs that are more profitable than other salespeople or certain crews that produce work more profitably than other crews or certain types of work, whether it be your service work or your commercial or residential that is generally has a higher gross profit than the rest of the work you do. This will shift decision-making and where you should actually allocate time, effort, and resources. And this is ultimately where profit is made and lost for the entire organization. My final tip on this, as you'll see in the sheet that we have for download, is something called gross profit per hour. This essentially tells you how much gross profit was made for every hour worked by one of your people on the projects. Look, at the end of the day, this is a game of 1%s, and it's your job as an owner, as an entrepreneur to understand where these 1%s are made and where they're lost.

9:12 This literally can double the profitability of your company overnight if you truly understand the pattern behind it. The next question we had come in is, "How do I get my customers to actually pay me on time?" Well, there's a few things you can do, right? The first thing, I think, is to make sure you've set clear expectations both at the sales stage and at the job start. So, the customer actually knows when they're supposed to be paying you. The next big one that a lot of people miss on that's so simple is make sure you are invoicing them on time, right? They're not going to pay you if you don't invoice them. This next one is really powerful. If you have small or medium-sized jobs, you need to collect the check during the final job close out and walkound day with the customer.

9:48 You're live there with them. If there's any touch-ups to do or final things to get done, make sure those are done and collect the check before you get you and your crews off site. The next thing to make sure if you are getting paid post job is you offer a small incentive for the customer to pay within a week of the job close out. A small carrot can go a long way. And the last thing here is to have a clear list of who actually owes you money, right? A clear list of your AR. You need a clear standard operating procedure of how to collect that AR. And probably the most powerful thing is clearly defined roles in your company of whose responsibility it is to collect that money. because if that's not clear, everybody avoids it and nobody goes and collects it. So, to recap, make sure you're setting proper expectations, you're invoicing on time, and you're always collecting payment as soon as possible. Another question I get a lot is, can I actually afford a new hire? A lot of people are stuck on this, right?

10:34 Especially if it's an overhead role where there's just going to be more cash out and no real production happening from it. So, this is like office administrators, production managers, or even sales managers. Well, the first thing you want to do is put it into your budget, right? put it in the annual budget that you built for yourself and see how that affects overall profit. The next step is to probably put it into your cash flow projections. Can you afford the month-to-month added new cost? Now, to make sure you don't look at this as just added new cost, but an actual opportunity, you need to understand what is the expected ROI of this person. If this is a new sales manager, I would expect sales to go up next month. If this is a new production manager, I'd expect production to go up.

11:09 And if this is a new office admin, I'd expect my capacity as an entrepreneur to go up. So don't just see these overhead costs as just straight overhead, but there should be an opportunity within each role that you're bringing into the company. So those are some best practices when you're looking at overhead positions, but then there's also just people that need to produce the work itself. This is actually a calculation you can figure out ahead of time. Look at how much revenue you produce in a month and how many physical hours your people work. Divide one into the other and you're going to figure out how much revenue you produce per physical hour worked. That's going to really help you understand how many people you need for the next month or two or six coming up. Once you've got your schedule down and you know how much work you have backlogged, you can start to actually calculate how many people you need to produce that backlog. I would recommend you hire 3 months in advance so you have adequate time to prepare and train that person appropriately. Overall, what am I saying in all this? Well, you should see people as an opportunity, not a cost. So whether it's an overhead position or a producer role, you should see some level of an ROI by role and make sure as an entrepreneur you know how to drive that forward within your organization. So the final question we get asked a lot is what should my profit margins actually be? And as much as I would love to answer this, it's really hard to do on a podcast where everybody's business is a little bit different. But I will tell you what we have done is we've got an industry benchmark report based on all of our members over many years where we can start to tell you by industry what specifically margins should be for gross profit and for net. So make sure you check out that in the link below. All right, that was the last question. So, for all of you listening, what questions do you actually have around cash flow or budgeting? Let us know below, and I'll make sure I read every single comment.

12:43 If you want some of the tools or resources that we mentioned in this episode, they're all down in the description below, so you can grab them there. In the meantime, congrats on making it through another year. Now, let's go crush 2026 together. Thanks so much for watching. If you thought today's episode was awesome, it probably means you should subscribe. You're going to get more Contract Revolution episodes in your feed, and I'll see you next week.