Quietly Re-Thinking Out Loud

Relative Income, It’s a great concept so what is so many of us don’t seem t get it.

As I was working today I was re-reading the The 4-Hour Workweek , by Timothy Ferriss by listening to the audio book edition as I was working today I was reminded of a passage I really enjoyed when I read it the first time through.

Two hard-working chaps are headed towards each other. Chap A moving at 80 hours per week and Chap B moving at 10 hours per week. They both make $50,000 per year. Who will be richer when the pass in the middle of the night? If you said B, you would be correct, and this is the difference between absolute and relative income.

Absolute income is measured using one holy and inalterable variable: the raw and almighty dollar. Jane Doe makes $100,000 per year and is thus twice as rich as John Doe, who makes $50,000 per year.

Relative income uses two variables: the dollar and time, usually hours. The whole “per year” concept is arbitrary and makes it easy to trick yourself. Let’s look at the real trade.

Jane Doe makes $100,000 per year, $2,000 for each of 50 weeks per year, and works 80 hours per week. Jane Doe thus makes $25 per hour.

John Doe makes $50,000 per year, $1,000 for each of 50 weeks per year, but works 10 hours per week and hence makes $100 per hour.

In relative income, John is four times richer.

… The top New Rich mavericks make at least $5,000 per hour.

The other day I was in one of the discussion forums and I heard one contractor telling another fellow that was getting set to start out on his own that he could expect to spend

"…65 hours working [in the field], another 20 for office crap"

…and I thought that was just insane. That’s not a life , it’s a self imposed prison sentence and in my estimation evidence of poor business design. To his credit the guy who was putting the pieces together and doing the planning to go out on his own wasn’t buying into any of that insanity. The insane guys who work that kind of schedule (and there are lot of them out there) are often the ones who don’t have a decent or respectable Net Profit margin in place and try to make up for that lack by doing it "in volume".

Generally speaking contractors need to work smarter learn to substitute that for working harder and longer.

Perhaps the key central premise of the booke The 4-Hour Workweek is that you are only “rich” if you have leisure time to enjoy yourself. It probably should go on the contractors required reading list.

Tags: getting a life, lifestyle, making a buck, net profit

by: Jerrald Hayes

My syllabus starts with The E-Myth Contractor: Why Most Contractors’ Businesses Don’t Work and What to Do About It.

However on further thinking it might be a good idea to read theThe E-myth Revisited first so that you get a better more thorough grasp about the importance of what the book is getting at.

What is The EMyth all about and what are the two books getting at? They’re teaching you that you have to approach designing and setting up your business operation as a "turnkey" business operation and can operate by itself without you in it. Seems nuts to even think about it that way when your setting out on your own for the first time but there is very good reasoning and logic behind that thinking.

The next two book on my list are all about the numbers. The basic understanding of finance and the nuts and bolts behind figuring out what you need to charge for your services. Where Did the Money Go $19.99 and How Much Should I Charge?: Pricing Basics for Making Money Doing What You Love also $19.99 were written by Ellen Rohr who is a well known writer and lecturer to readers of the roofing, electrical and HVAC trade magazines but the principles apply to any contracting business.

You can also order them through her Bare Bones Business web site and one of the great things about getting them than way is in addition to getting a paperback version of her books sent to you you wont have to wait for them to arrive in that right after purchasing the books she’ll send you an email with a URL where you can download a PDF version of the books and start in on reading them right away.

"Where Did the Money Go? will teach you the accounting basics you need to keep track of your business…and find out where the money goes!". In it you’ll follow a character Bob Bird as he sets out on his own as a first time business-owner-contractor and it will give you a basic overview of the accounting principles you absolutely need to know and understand. In the section of the book entitled If My Accounting System Is Computerized, Do I Need To Know This Stuff? she writes " You don’t need to know everything about accounting. You do need to know everything in this book…as a bare minimum!" and with that I wholeheartedly agree.

When you’re ready to get down to the actual work of setting you hourly rate there is an Excel spreadsheet I created that you can download from the Shareware section on my 360 Difference Software site. It’s called the "The Capacity Based Markup Worksheet (aka the PILAO Worksheet)" which is an acronym for PROOF/Indexed/Labor Allocated Overhead. It works right along with the principles that Ellen Rohr talks about in her books and Irv Chasen of PROOF Management Consultants talks about in his seminars. Thinking of that you’ll probably want to read an article Mr. Chasen wrote about this type of markup method in last January’s JLC called Allocating Overhead to Labor Makes Financial Sense.

I think the stuff I’ve mentioned up to this point while perhaps the most important stuff for someone just starting out is not necessarily what really interests them but BELIEVE me when I say IT IS THE MOST IMPORTANT STUFF TO GET DOWN AND UNDER YOUR BELT, it is!

Then you can move on to David Gerstels The Builders Guide to Running a Successful Construction Company. One of the really good things you’ll find in this book is in the first or second chapter he he presents a suggested step-by-step month-by-month plan for setting up a company with things to do and take care of before you really takeoff. I have a few changes and additions I would make to the order of things he presents but it pretty close to perfect for where you’re at as far as a getting a startup plan of action.

Look over and read The Contractor’s Legal Kit: The Complete User-Friendly Legal Guide for Home Builders and Remodelers by Gary Ransone. There are some excellent sample agreements in this book with instructions on how he suggests you should use them and after looking at them and thinking about them you can go to you attorney and talk to him or her intelligently about any modifications he or she thinks you should make with them. Do not just go out and literally use them without having an attorney look them over first though because different regions of the county have different laws that you will need to comply with.

And while we’re on it another good book on the legal aspect of contracting is Smart Business for Contractors: A Guide to Money and the Law by Jim Kramon. This has some really great information on insurance that doesn’t appear in any of the other books that I can think of in addition to it’s general content.

Managing the Small Construction Business is compilation of JLC articles with builders and remodelers describing the techniques that have worked for them. Just a general great resource. It could also very well be titled the best of The Journal of Light Construction Management Articles.

As an alternative to this book you might might want to consider a JLC Online Membership which give you access to all the article ever published by the Journal of Light Construction either though their website, or via a CD or DVD data disk, or both. With a JLC Membership you’ll have not only the selected business articles that are in Managing the Small Construction Business but all of them along with all the article on trade and construction techniques too.

Mastering the Business of Remodeling by Linda Case A good overview of the business of remodeling that will introduce you to marketing your services in addition to what it has to say about the general managing and operation of the business.

Linda Case also has another book entitled The Remodeler’s Guide To Making & Managing Money: A Common Sense Approach To Optimizing Compensation & Profit which I will group together on the end of this list with Michael C. Stone’s book Markup & Profit: A Contractor’s Guide.

While overall they are both good books I think the markup and pricing methodolgy that they describe and advocate which I often refer too as a Uniform Percentage Markup is tragically flawed and could be a silent but deadlykiller to a contractor just starting out. See my the QROL post The Potential Problem Using a Traditional Volume Based Markup to learn more about just what that problem is. (Instead consult Ellen Rohr’s How Much Should I Charge? and David Gerstel’s The Builders Guide to Running a Successful Construction Company for a markup and pricing methodolgy.)

Still the two books have a lot of good general information on all the other aspects of running a small building and or remodeling business so they’re worth the putting in your library.

by: admin