That’s the trap. The longer you sit in it, the worse the problem gets.

What the gap actually looks like

Take a $1.5M trades business running on 22% net profit. That’s about $330,000 a year before the owner is paid. Now run a few things up the way they have actually run up over the last couple of years. Fuel and vehicle costs eating into every service call. Copper, PVC, ductwork, and fittings all coming in higher than they used to. Workers comp premiums climbing at the annual audit. A $25 an hour journeyman a couple years ago is closer to $30 now in most markets. Insurance renewals trending up year after year.

If your costs have crept up ten percent and your prices have held, that $330,000 is now closer to $220,000. A third of your profit is gone, and you can’t quite point to where it went, because it didn’t leave in one big check. It left a few hundred dollars at a time, on every job, for two years.

The money didn’t disappear. It got eaten by the gap.

How much to actually raise

This is where most owners freeze up. They’ve heard advice ranging from “raise prices 10% every year” to “match what the competition charges” to “just do it and see what happens.” None of that is useful when you’re sitting at the kitchen table trying to figure out what to send to your customers next week.

Here is what actually happens at different ranges.

Five to ten percent: most customers won’t blink. This is the range where you might get a grumble or two and lose almost nobody. For an owner who hasn’t raised prices in a couple of years, this is the minimum. If you have not raised prices in three or four years, ten percent does not even close the gap. It just slows the bleeding.

Ten to fifteen percent: you’ll get a couple of conversations. Some customers will ask why. A few might shop you against another contractor. Most will accept the new number, especially if you give them notice and frame it the right way.

Fifteen percent and above in a single move: now you’re in shock territory. This is where you start losing customers who would have stayed for a smaller increase. If the gap between where your prices are and where they should be is this big, you do not want to close it in one move.

Space it out. A twenty-five percent correction in one move reads as desperation. The same twenty-five percent done as ten percent now, another ten percent next year, and a smaller adjustment the year after that reads as normal business. Same destination. Very different customer reaction.

The harder truth is that if you skip annual increases, the correction you eventually have to make compounds. The owners who have the easiest time with pricing are the ones who built a small annual adjustment into the routine, so a four to six percent increase every year became something customers expected rather than something they reacted to. The owners with the hardest time are the ones who waited five years and then needed thirty percent.

The math on a reasonable increase is worth calculating. A $1.5M business raising prices ten percent and keeping ninety percent of its customers gains $135,000 in revenue with essentially no added cost. Almost all of that goes to the bottom line. The customers you “lose” in that scenario are mostly the ones who were already costing you money you did not realize you were losing.

How to make the underlying numbers work

Raising prices is the easier half of the conversation. The harder half is knowing what the new prices actually need to be.

Start with your real cost structure, not what the competition charges. What does a tech actually cost you fully loaded? It is wages plus employer taxes plus workers comp plus benefits. On a $25 an hour wage, the real number is closer to $36. If you have been pricing jobs off the $25 number, your gross margin has been fiction for years.

Decide what net profit you actually need to cover overhead and pay yourself what you want to take home. Net profit is what is left after everything is paid, including a real salary for you. Most trades businesses at this size are running on closer to eight to fifteen percent net profit, and a lot of owners cannot tell you which number is theirs. If you do not know yours, that is the place to start, not the rate sheet.

Charge different rates for different work. Service calls, scheduled maintenance, installs, emergency calls, after-hours. One rate across all of them is a sign that the pricing has not been thought through. Emergency work and after-hours calls should carry a premium that reflects what they actually cost you in overtime wages and disruption to scheduled work. Most owners under-price these because they are priced as a favor to the customer instead of as a service. The favor is costing you money.

Build the rate review into your operation. Pick a month every year, most trades use January or the start of your slow season, and review pricing then. Put it on the calendar. Make it a normal annual operating event, not a reaction to a bad quarter. The owners who do this have an easier time raising prices because the conversation has a structure to it. The owners who do not, end up raising prices only when they are already hurting, which is exactly when customers are most likely to push back.

How to deliver the increase to customers

Give meaningful notice. Thirty days for residential customers, sixty to ninety days for commercial accounts and long-running maintenance contracts. The runway is the difference between an irritated email and a cancelled account.

Frame it as a planned annual adjustment, not a reaction. This is the single biggest difference between increases that go smoothly and ones that do not. “We review our pricing every year, and effective [date] our rates will reflect the following changes” lands very differently than “I have to raise prices because I am struggling.” The first sounds like a business that knows what it is doing. The second sounds like one in trouble.

State the new rate. State the date. A short, clean notification works better than a long explanation. The shorter version reads like a business operating the way a business is supposed to operate.

For your best customers, the accounts you genuinely value, you can offer a phase-in if you want to. Lock the new rate in over two or three months instead of one jump. This is for the ones who have earned it, not for everyone.

If a customer pushes back, a calm and brief response is all that is needed. Most will not push back at all.

The actual words to use matter, so here are three examples you can pull from.

For a residential customer:

Hi [Name], we review our pricing every year to keep up with what it costs to run the business. Effective [date], our service call rate will be [new amount] and our hourly rate for work over the first hour will be [new amount]. Thanks for being a customer of [company name]. Please reach out if you have any questions about an upcoming job.

For a commercial customer or long-running maintenance account:

[Name], I want to give you advance notice of a pricing adjustment that will take effect on [date]. Effective that date, our rate for [scope of work] will be [new amount]. I wanted to get this to you well ahead of the change so you have time to plan around it on your end. I appreciate the work we do together and look forward to continuing it.

For a customer who pushes back directly after receiving the notice:

I understand. Our pricing reflects what it costs us to do the work well. The new rate takes effect [date]. If you would like to schedule any remaining work before then at the current rate, I can do that for you.

What these have in common is that they state the new number and the date. They do not apologize. They do not justify. They do not ask permission. They treat the increase as a normal annual operating event because that is what it is.

Closing

The owners who have the hardest time with pricing are the ones who set their rates once and then waited until the numbers stopped working to look at them again. The owners who have the easiest time are the ones who treat pricing as part of how the business runs, not as a difficult conversation they have to brace for. The gap between those two postures is the difference between an annual adjustment customers expect and a correction that costs you accounts.

If your prices haven’t kept up with your costs and you’re not sure what to do about it, that’s a conversation we can have. Book a discovery call here.

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It was not the missing piece.

The real problem was underneath everything: his systems could not keep up with the volume, his books were not giving him usable information, and his costs were outrunning his revenue in ways he could not see. More work was coming in, but the profit was not following. That is one of the more disorienting experiences a business owner can have, and it is more common than most people realize.

When I see this pattern, the cause is almost never a single thing. It tends to be a combination of the same problems showing up together. Here is what I usually find, and how to think through diagnosing it in your own business.

The systems cannot handle the volume.

When a business is small, manual processes work fine. Bills get paid from a stack of paper. Invoices go out when someone has time to send them. Job costs get tracked on a spreadsheet. It is inefficient but manageable when there are ten jobs a month.

At thirty jobs a month, or fifty, that same system does not bend. It breaks. The admin work scales linearly with the volume of work, which means every new job adds not just revenue but also hours of back-office time that nobody budgeted for. The billing slows down. Collections lag. Things fall through the cracks. And the business ends up spending more on admin labor, or on the owner’s own time, just to keep the business running.

This is where the contractor I mentioned ran into trouble. He was processing bills from stacks of paper, a system that worked when the volume was manageable and fell apart completely as work increased. What he actually needed was a billing process that could handle the volume without the manual work multiplying alongside it. Once that changed, including adding a third-party app that integrated with his accounting software and dramatically reduced the manual entry, the picture looked very different.

The owner becomes the bottleneck.

Related to the above, but worth separating out: sometimes the constraint is not the system itself but how dependent the business is on the owner to keep it moving. He is the one who knows which jobs are pending, which invoices need to go out, which subcontractor got paid and which did not. Nobody else can answer those questions because the knowledge lives entirely in his head.

These are not trivial tasks. Keeping billing current, tracking what is outstanding, managing vendor payments, these matter. But when important admin work is consuming the owner’s time, the thing that suffers first is business development. He is not out bidding new jobs because he is inside managing the back office. And without new jobs in the pipeline, growth stalls regardless of how well the existing work is running. Revenue flatlines not because the market dried up, but because the owner ran out of hours for the work that actually feeds the next phase of growth.

If you find yourself doing work that could be done by someone paid significantly less than your time is worth, that is the diagnosis. The fix is documentation and delegation, which requires the books and processes to be clear enough that someone else can actually follow them.

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The books are not structured to tell you anything useful.

This one is quiet. It does not announce itself the way a cash flow problem does. But it sits underneath almost every other problem on this list.

When the chart of accounts was set up using default QuickBooks options and nobody has touched it since, the reporting reflects that. Income gets lumped into broad categories. The products and services list often has the same problem: a handful of general entries all tied to a single revenue account, with no separation by service type. Cost of goods sold is either missing field labor entirely or has the wrong expenses flowing into it. Gross margin calculations are off because payroll was never mapped to split field wages from admin wages. The P&L gets generated every month, but nobody can actually use it to make a decision.

The owner of a service business who cannot answer the question “which of my service lines is most profitable?” does not have a strategic problem. He has a systems problem. And that same lack of detail hurts estimating too. If you cannot see what a particular type of job actually costs you, you cannot price it accurately. The data is not being tracked at the right level of detail, and because of that, it never makes it into the reports where it could actually be used. Once the system is structured correctly, those questions become answerable, and the business becomes more efficient.

The bids do not account for what bigger jobs actually cost.

This one is worth its own article, and I covered it in more depth last week [Link]. But it belongs in this diagnostic because it is a real and common contributor to the profit gap.

When a business is doing smaller, straightforward jobs, the estimating process is intuitive. The owner knows what materials cost, knows roughly how long the work takes, and builds in a margin that has worked before. As jobs get larger and more complex, new costs come in that were never part of the original estimating model. Additional coordination. More administrative paperwork. Longer collection cycles. Subcontractor management. These costs are real and they compress margin in ways that are hard to see until the job is complete and the profit is thinner than expected.

If revenue is growing because the business is landing bigger jobs, but net profit is not growing proportionately, the estimating process is worth a hard look.

The owner is still bootstrapping instead of spending strategically.

This one is the hardest to bring up because it can sound like a criticism. It is not. It is a pattern that makes complete sense given how most trades businesses are built.

When money was tight in the early years, every expense got scrutinized. Owners learned to run lean, to DIY before hiring, to delay purchases, to make do. Those habits kept the business alive. But at a million dollars or more in revenue, the same instincts can work against growth.

Spending strategically on the right software, the right hire, the right accounting structure, pays back in efficiency and margin. Deferring those investments to stay lean often means the owner stays the bottleneck, the systems stay unscalable, and the profit margin stays thin. The question shifts from “can I afford this?” to “what is this costing me not to have?”

If any of this sounds familiar, the good news is that it is diagnosable. This is not a problem with your market, your pricing, or your team. It is a systems problem, and systems can be rebuilt. The first step is usually getting clear on which of these is actually driving the gap in your business, because the fix looks different depending on what is found.

If your profits have stalled and you’d like your books reviewed by a professional who knows how to structure them for growth, book a discovery call here:

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Six weeks later the job was done. The invoice went out. And then Tom waited. Net 60 terms meant the payment wouldn’t arrive for two more months after he finished. On top of that, the GC held 10 percent retention until final project approval, which stretched another two months beyond that. Tom had priced the job the same way he priced every residential job. Labor, materials, markup. He got the number right. He just didn’t account for when the money would actually show up. By the time the final payment landed, Tom had covered two payroll cycles, restocked materials for the next job, and paid his overhead out of pocket for months. The job wasn’t a loss. But it wasn’t what he expected either.

Why Commercial Is Worth Pursuing

The instinct to go after commercial work is sound. Jobs are larger, which means fewer estimates to hit the same revenue target. Commercial clients tend to run on schedules, which makes planning easier. Property managers and GCs who like your work will call you back, sometimes repeatedly for years. The hours are predictable. Nights and weekends are rare. And the total dollar amounts on contracts are hard to ignore when you’ve been grinding through residential jobs one at a time.

None of that is wrong. Commercial work can absolutely be more profitable than residential. The catch is that profitability depends entirely on whether you’ve priced and planned for what commercial actually involves.

The Assumption That Gets Owners in Trouble

Most contractors who move into commercial for the first time price it the same way they price residential. The work doesn’t look all that different. You still have labor hours, materials, and markup. The job is just bigger and runs longer. So the process feels like it should be the same, just scaled up.

That assumption is where the problem starts. Commercial isn’t just a larger version of residential. It has a different payment structure, different contractual obligations, and different administrative requirements. If your estimate doesn’t account for all of it, you can win the job, do the work, and still come out behind.

Where Commercial Is a Different Animal

Payment Terms

Residential work pays fast. A deposit up front, final payment at completion, sometimes cash that day. Commercial doesn’t work that way. Net 30, net 60, and net 90 are standard. Larger projects often use progress billing, meaning you invoice at set milestones rather than at the end. Either way, there is a gap between when the work is done and when the money arrives.

That gap has a real cost. If you finish a $40,000 commercial job and the contract terms are net 60, that $40,000 doesn’t exist for two months. In the meantime, payroll runs. Materials for the next job need to be purchased. Overhead doesn’t pause. If you don’t have a cash buffer or a line of credit, you are either borrowing to cover the gap or making decisions you wouldn’t otherwise make. Either way, there is a cost. Financing costs on a line of credit belongs in your estimate.

Retainage

Retainage, sometimes called retention, is standard in commercial work and almost unheard of in residential. When you work under a general contractor, they will typically hold back 5 to 10 percent of the contract value until the project reaches final approval. This isn’t a penalty. It’s how commercial contracts are structured.

On a $60,000 job with 10 percent retainage, $6,000 of your contract doesn’t exist until the end. That end point might be a few weeks after you finish your scope, or it might be several months later depending on when the overall project wraps up and passes final inspection. Read the contract carefully to understand the release conditions. There are usually lien release forms that have to be signed before retainage is paid out.

Now run two or three commercial jobs at the same time. If each one has $6,000 or more sitting in retainage, you are carrying a significant amount of earned but unpaid revenue. That changes your cash position considerably compared to residential work where you collect what you’re owed at the end of each job.

Punch Lists

Residential callbacks are informal. A homeowner calls, you go fix something, you’re done.

Commercial punch lists are a formal process controlled by the GC or an inspector, and they are tied directly to your final payment and the release of retention.

As the project wraps up, the GC will compile a punch list of items that need to be addressed before sign-off. Commercial inspections are more thorough and held to a higher standard than residential. They take longer and they go deeper. Occasionally a punch list item turns out to be damage caused by another subcontractor. If that happens, get a change order before you touch it or you will not get paid for that work.

What matters financially is the timeline. If your job is complete in week eight but the punch list process drags through week ten, and retention isn’t released until week fourteen, you have been waiting six weeks past job completion for the last part of your payment. That delay wasn’t in your original estimate. Price it like it will happen, because it usually does.

Paperwork and Administrative Costs

Commercial contracts are longer and more detailed than residential agreements. If the legal language isn’t something you’re comfortable reading on your own, sit down with a business attorney before you sign. Change orders need to be submitted and tracked. Progress notes are standard. The administrative load per job is significantly higher than what you’re used to.

Two specific items catch a lot of contractors off guard.

The GC will require a Certificate of Insurance before work begins. This isn’t the generic insurance form you might hand a homeowner. The COI needs to be issued directly from your insurance agent, list the GC as the certificate holder, and often also name them as an additional insured. The required coverage limits on a commercial job are frequently higher than what a residential only contractor carries. If your policy needs to be increased to qualify for the job, that premium increase is a real cost that belongs in your estimate. It may also stay at the higher level at renewal if you continue doing commercial work.

Pre-liens are the other one. A preliminary lien notice is how you preserve your legal right to get paid if payment becomes a problem. It is not filed once at the start of the job. It has to be tracked across specific deadlines throughout the project timeline, and those deadlines vary by state. If you miss a step, you lose the leverage. On a $60,000 job with 10 percent retention, a missed pre-lien deadline means you have no legal tool to force the release of that $6,000 if a dispute comes up. The cost isn’t just paperwork. It’s the money you’ve already earned. The process is learnable, but it’s worth taking a class or working with someone who knows your state’s requirements before your first commercial job. There are also nominal filing costs to account for.

All of this takes time. If you are the one handling contracts, COIs, pre-lien filings, change order tracking, and progress invoicing, those hours are coming out of time you would otherwise spend estimating, selling, and running the business. For a project or two, that may be manageable. As commercial becomes a bigger part of your mix, that administrative load becomes its own line item in your overhead calculation.

How to Estimate Commercial Work

Residential estimating is straightforward. Price the work: labor, materials, markup. The job is short, payment is fast, and the risk is low.

Commercial estimating starts the same way and then adds a layer. You are pricing the work plus the cost of waiting.

Start with your standard labor and material costs. Then ask: when will I actually get paid, and what does it cost me to carry this job until then? Factor in the carrying cost of payment terms, whether that’s the interest on a line of credit or the cash buffer you’re tying up. Identify the full retention amount up front and treat it as money that won’t exist until the end of the job. Build a buffer for punch list time and the additional labor and materials that may come with it. Spread your overhead across the full job cycle rather than compressing it the way you would on a short residential job. Add your insurance cost increase if the job requires higher coverage. And account for the administrative hours the job will require, either as your own time or as a cost if you’re paying someone else to handle it.

Commercial doesn’t mean complicated. It means accounting for the full picture of the job, not just the field work.

Running Both at the Same Time

Most contractors don’t need to choose between residential and commercial. The two can run together in the same business. But they need to be managed as two separate cash flow profiles, not treated as interchangeable.

A month where most of your work is residential looks very different from a month where most of your work is commercial, even if the total revenue on paper is exactly the same. Residential brings cash in quickly. Commercial ties it up longer. If you’re planning payroll, purchasing materials, and managing overhead without accounting for that difference, a strong commercial month can still put you in a cash squeeze. Know which jobs are paying when, and plan accordingly.

If you know someone heading into their first commercial job, send this article their way!

The Bottom Line

Commercial work is worth pursuing. The jobs are larger, the schedules are steadier, and the repeat business potential is real. But worth it depends entirely on how you’ve priced it.

The owner who treats a $60,000 commercial job like a $60,000 residential job isn’t making more money. They’re waiting longer for the same margin, or less, while carrying costs they didn’t plan for. The owner who understands the payment structure, builds the full cost into the estimate, and manages the cash flow intentionally is running a more profitable business. Price it right and commercial can be one of the strongest decisions you make for your business.

If you're starting to take on commercial work and want to make sure your numbers are set up to support it, I'd be glad to talk through where you are. Visit masterplanaccounting.com to get started or book a call here.

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How? It’s not in the subscription costs or the hours spent adding data. It’s in the process that lets mistakes happen.

I worked with a company that paid commissions to employees. The workforce wasn’t huge, but the commission structure was complex, largely because it was so easy to add tiers and exceptions in a spreadsheet. They had a guy who was pretty good at spreadsheets. He built the formulas and was always on hand during payroll to nudge the process along.

I tried talking the owner into buying software designed for calculating and paying commissions. They balked at the monthly cost, which was a little more than their other accounting software. Their sales volume was robust. They could easily afford it.

Every pay period, a few hours went into copying sales data into the spreadsheet and making sure each line was attributed to the correct employee. The owner’s reasoning was simple. The labor cost of running the spreadsheet was less than the software cost.

Then, while I was digging into the spreadsheet, I found one error in one formula. That formula calculated commission for a single employee, and the decimal was in the wrong place. It was not obvious. It took me walking through the math a few times before anyone else saw it.

Over the past two years, that one employee had been overpaid by just over $10,000 in commissions. A small error, compounded faster than interest in a savings account. Ouch.

What the software offered wasn’t a time savings. It was accuracy, built in from several angles. The spreadsheet held sensitive payroll data, so only three people had access to it. Nobody was looking at the formulas. Their guy didn’t know how to lock cells to prevent changes, although this particular mistake looked more like a typo than an unintentional edit. The software, by design, would have shown employees their own rates and sales data, and given managers secured access to verify amounts for their teams. More eyeballs means more accuracy.

The built-in checks were another piece. It connected to their POS directly and synced sales data, so no copy-paste mistakes. Commission rates were entered once and assigned to employees. When a rate needed to change, you updated a field, not a number tucked inside a formula.

Spreadsheets earn their keep in the early bootstrapping days, when the math is simple and a careful eye watches every dollar. Somewhere along the way, that math flips. The cost of the tool you wouldn’t buy turns out to be smaller than the cost of the mistakes it would have caught. By the time anyone notices, you’ve usually been paying for it for years.

There’s no clear line for when a spreadsheet stops earning its keep, but there are milestones that point to it. You’ll know you’re there when more than one person needs to work in the numbers, when an update takes more than an hour, when a bank loan is on the horizon, or when sales volume has grown enough to give you breathing room for the right tools. At that point, software becomes strategic spending. What it buys you is protection from the kind of mistakes that quietly compound before anyone catches them. There are excellent third-party apps for almost any business scenario, most of them built around the work you already do. Finding the right one isn’t a painful expense at this stage. It’s how you protect what you’ve built.

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That factor is when the business owner challenges their own assumptions. About the company, the industry, the economy, and even themselves. This may sound simple, but it’s harder in real life to get there mentally.

Every one of us makes assumptions. We often don’t realize it. I’ve watched business owners cling to those assumptions, worried that to admit otherwise says something negative about them. Many business owners avoid their books because they “hate paperwork”. They assume that they can’t learn how it works and delegate that out. Or they check their bank balance daily and believe they know how their business is doing from that number. Or they assume that they can’t increase prices because their customers won’t pay more. Decisions are usually made more from gut feel rather than logic.

I’ve worked at companies who stated in the job interview that they want suggestions to improve operations and efficiency. And when I made suggestions, the answer comes back, “But we’ve always done it this way.” Or I hear “if it ain’t broke, don’t fix it.”

So what does it look like when an owner is challenging assumptions? They start asking specific questions. They consult real experts, not their brother-in-law. They listen to podcasts and hit up the library. They join groups with other professionals and people in their industry, and they ask other business owners how they overcame the same challenges. They dig into the data, into the numbers, and they talk to customers, employees, and vendors.

I get that changes are risky. Doing something different will change revenues or expenses, and that can be up or down. But business owners who are determined to not lose revenue will lose out on increasing revenue.

Here’s the thing: risks and changes always give you information. What makes the difference is that you have a way to document it, analyze it, and make course corrections. Understand what the data says, make a strategic plan, gather more data. That’s the pattern. When you pay attention to the data instead of gut feelings, your decisions shift from intuition to strategy.

Let’s take the example of a plumber who believes that a packed schedule of urgent calls means they are making maximum profits and that it can’t get any better. He’s booked six weeks out. The crew is running full-time. He’s doing calls on weekends. Revenue is up 20% from last year. So profit must be up too, right?

But looking at the numbers, the calls were all quick repairs with thin margins. These urgent calls crowded out the profitable remodels that didn’t require nights and weekends. He added an after-hours surcharge and raised his base pricing. Suddenly, he was booking bigger projects instead. Same hours, 30% more profit, fewer weekends.

Right now, there’s probably something in your business that ‘has always been done that way.’ A service you offer. A customer you keep. A process that’s stuck. You might not even know it’s there. But it is. And I’d bet money that if you looked at the actual numbers—not your gut, not what you assume, but the actual numbers—something would change. Pick one thing this week. One assumption. Ask for the data. That’s the shift.

If you would like help on your journey to grow, book a call with me.

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Your business made $2.3M. You paid yourself $95K. You’re profitable. But you’re not sure if you’re extracting the right amount—or if you should be paying yourself more.

Most owners I work with don’t have a calculation for this. They go by gut feel. They check the bank account at the end of the month after expenses clear and pull out whatever feels safe. That’s not a strategy. That’s wishful thinking with a dartboard.

The problem is that nobody teaches you this part. You learned your trade. You learned to run crews and close deals. But somewhere between $500K and $2M, the question changes from “Am I making money?” to “Am I extracting the right amount?” and you have no framework for answering it.

I see three patterns with owners at your level:

Pattern One: You underpay yourself because you’re terrified of what happens if you pull too much out. You watch the bank account like it’s a living thing. You tell yourself you’re being cautious. Really, you’re anxious.

Pattern Two: You pay yourself inconsistently. Some months you take a lot, some months you take a little. It depends on how the cash feels that week. Your tax accountant hates you because your W-2 is all over the place.

Pattern Three: You take what feels “right” based on what your office manager or your friend who owns a similar business told you, without any real math behind it. You’re operating on peer rumor, not data.

All three of these are actually the same problem: you don’t have a decision framework. So when someone asks “Should you be paying yourself more?” you have no way to answer.

Here’s the framework I use with clients to figure out what you should actually be paying yourself.

Start with your lifestyle.

What do you actually need to live on? Not what you want someday. Not what you think you should want. What you need right now.

House payment. Kids’ school. Healthcare. Retirement contributions. The vacation you take once a year. The things that actually matter to you and your family.

Write it down. Be honest about it. Don’t lowball it because you think you should be tougher than you are.

This number is your baseline. Everything else builds on top of it. If you can’t extract this much from your business, you have a deeper problem—your business model isn’t actually working yet, and you need to fix that before you do anything else.

Most owners skip this step. They think their salary should come from “whatever’s left.” That’s backwards. Your salary comes first—because you can’t run a business if you’re stressed about making your mortgage.

Look at your net profit.

Pull your last 12 months of financials. What percentage of revenue are you keeping after expenses? This is your net profit percentage.

For a service business running well, that should be 10–20%. If it’s lower, your salary problem is actually a cost problem, and we need to solve that first. You can’t extract more from a business that’s not actually profitable—or you’ll hollow it out.

If your net profit is 8%, you’re running too lean. Fix the COGS structure, tighten the overhead, or raise prices. Then come back to the salary question.

If your net profit is higher—say 18–22%—then you have room to pay yourself more than your baseline lifestyle number.

The IRS test.

Your salary needs to be “reasonable compensation” for the actual work you do. The IRS cares about this because it affects how much you can take as a distribution versus W-2 wages.

If you’re still in the field running jobs, managing crews, closing business, handling customer relationships—you are doing real work. You are worth more than $50K. Period.

If you have fully delegated operations and you’re purely a capital owner who shows up for quarterly meetings, the IRS will notice if you’re paying yourself $500K in a $2M business. Reasonableness matters for tax defense and audit survival.

The sweet spot for most owners at your revenue level is somewhere between your lifestyle baseline and 30–35% of net profit. If you’re taking $150K salary on a $2M business with $300K net profit, that’s reasonable. The IRS sees that and moves on.

If you’re taking $30K salary and $270K in distributions, the IRS is going to ask questions about why your W-2 is so low relative to your business size.

Reserve for growth.

Before you take the rest as a distribution, set aside what you need for the next phase. Equipment purchases? Hiring a new position? Software upgrades? Facility expansion?

You need to fund that from profits, not debt. Debt is expensive and it backs you into a corner.

If you want to scale from $2M to $3M, you need capital for that growth. If you want to weather a slow season without panic, you need reserves. If you want to stay flexible when an opportunity shows up, you need cash on hand.

The owners who build sustainable businesses don’t extract every penny of profit. They reserve intentionally. They might reserve 10–15% of net profit for growth and keep 5–10% as a safety cushion.

That means if your net profit is $300K, you might reserve $30K for growth, keep $15K as a cushion, and split the remaining $255K between your salary and distributions. That’s still real money. That still feels good. And you’re building a business that can actually grow.

The burnout test.

This is the most important one.

If paying yourself “enough” means you’re working 70-hour weeks and never taking a day off, your salary is a trap, not a win. You’ve just created a golden cage.

The whole point of building a business is supposed to be freedom—freedom to make more money than you could in a job, and freedom to actually enjoy your life while doing it.

If you’re extracting maximum dollars but you’re exhausted, you’ve missed the actual goal.

The question to ask yourself is: could I take a full week off right now without the business falling apart? If the answer is no, your salary isn’t the real problem. Your systems are. You’re personally woven into too much of the operation.

The owners who win are the ones who pay themselves well enough to have breathing room, and then they use that breathing room to build systems and delegate. They extract good income AND build a business that doesn’t require them to be in every decision.

That’s the difference between making money and building wealth.

How these five pieces fit together.

Your lifestyle baseline sets the floor. You need to hit that number, period.

Your net profit percentage tells you what’s actually available. If it’s too low, you need to fix cost structure before you adjust salary.

The IRS test keeps you reasonable and defensible. It’s not a ceiling—it’s a sanity check that says “this has to make sense to the government.”

Growth reserves keep you building instead of extracting. A business that reinvests is a business that compounds.

The burnout test keeps you honest about what “winning” actually means. If you’re miserable, you didn’t actually win.

All five of these have to work together. They’re not sequential—they’re simultaneous. You’re not solving for salary. You’re solving for a sustainable extraction rate that funds your life, pays reasonable taxes, builds the business, and leaves you with energy.

The conversation worth having.

If your salary conversation feels fuzzy right now—if you’re not sure whether you’re leaving money on the table or about to take too much out—that’s worth a conversation.

Most owners operate on assumption and instinct at this level. They think they know their numbers until they actually look. Then it gets interesting.

Book a free 30-minute discovery call and let’s look at what you should actually be paying yourself. You’ll leave with clarity on where your business stands and whether your current salary strategy is working or if it needs to change.

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But you probably know where this story is going.

The bookkeeper got old, had health issues, and needed to retire. Now they had to pull data out of a system that the rest of the world had left behind decades ago and import it into something a modern bookkeeper could actually use. It was a monumental task.

I came in, ran reports in text format, and organized the data into spreadsheets clean enough to import. There was so much cleanup required that I had to scrap the chart of accounts entirely and rebuild it from scratch. The import was not as clean as I would have liked. It was the best anyone was going to get out of that situation. The process took months. We charged premium prices, and we honestly should have charged more.

Here is what that situation actually cost them: months of transition time, premium consulting fees, and a window where their financials were unreliable. All of it was avoidable.

Making smaller changes on a regular basis keeps your books running well and keeps your business competitive. It is also much cheaper, faster, and easier than the alternative.

If your accounting setup is held together by one person and institutional memory, that is not a stable foundation. It is a liability waiting to surface at the worst possible moment.

If your books are held together with duct tape, that’s worth a conversation. Book a call today.

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The instinct is to focus on recruiting. Post more jobs, call the trade schools, ask around. That’s not wrong, but it’s only half the problem. The other half is what happens after you find someone worth keeping. And that comes down to your numbers.

Most HVAC owners I talk to don’t actually know what they can afford to pay their techs. They know what they’re paying now, and they have a general sense of whether the business is doing okay. But if a good tech came to them tomorrow and asked for a raise, they’d be guessing at the answer. That guess is costing them people.

You need to know your labor margins, not just your gross margin.

Gross margin tells you how much is left after all your direct costs. That matters. But in a labor-intensive business like HVAC, you need to go one level deeper. What is your labor margin specifically? What percentage of your revenue is going directly to field labor, and is that number moving in the right direction?

If wages in your market go up, and they have been, your pricing has to respond. But you can only make that call confidently if you know your baseline. Without it, you’re raising prices on instinct and hoping it’s enough, or you’re absorbing the cost and quietly watching your margins erode.

Field wages and office wages need to be tracked separately.

This is one of the most common structural problems I find when I start working with a new client. Admin wages, the office manager, the dispatcher, the person answering phones, belong in overhead. Your technicians’ wages belong in cost of goods sold. When those two categories get lumped together, your gross margin is wrong. Your labor cost per job is wrong. Every decision you make from those numbers is built on a bad foundation.

Separating them correctly is not complicated, but it has to be intentional. It doesn’t happen automatically in QuickBooks.

Know the fully loaded cost of every tech on your team.

The hourly wage is just the starting point. By the time you add payroll taxes, workers’ compensation insurance, health benefits, and any other employer-paid costs, a tech earning twenty-five dollars an hour is probably costing you thirty-two to thirty-six dollars an hour or more. That’s the number that matters for job costing and pricing decisions.

If you don’t know that number for each person on your team, you are almost certainly underpricing some of your work. And in a market where you need to pay competitively to keep good people, underpricing and underpaying are two problems that feed each other.

What this looks like when the books are right.

When your financials are structured correctly, you can answer the questions that actually matter. Can you afford to give this tech a raise and stay profitable, or do you need to adjust your pricing first? Is this tech generating enough billable revenue to justify what they cost you fully loaded? If you added another tech right now, what would that do to your margin?

These are not complicated questions. But they require clean, correctly structured books to answer. Without that structure, you’re making your most expensive people decisions on gut feel in one of the tightest labor markets Utah has seen.

The owners who retain the best techs are not always the ones with the deepest pockets. They’re the ones who know exactly where their money is going, what they can afford to offer, and what it costs them when a good person walks out the door.

If you’re not sure your books are giving you that clarity, that’s worth a conversation. Book a free 30-minute discovery call.

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So far, AI has delivered a lot of useful shortcuts for bookkeepers and accountants. Faster reconciliations, smarter categorization suggestions, better reporting tools. More are coming. None of it has been the seismic shift the headlines promised.

Until now.

The tool I am watching most closely is Claude Cowork. It is still in beta, and I would not recommend it for everyday business use yet — the security protocols are not fully buttoned up, and beta is beta. But what it is already doing is genuinely significant, and the direction it is heading should be on every business owner’s radar.

Here is what Cowork can do right now that matters.

It can prepare tax forms with a meaningful degree of accuracy. Not at the level of a seasoned tax professional who is focused on maximizing your tax savings or doing long-range tax planning — that expertise is not going anywhere. But it is making real inroads in the preparation side, and that gap is closing.

It can also operate inside QuickBooks. Not just analyze data from it. Actually open the program in a browser, navigate it, fill in fields, and complete tasks that require mouse clicks. It is clunky right now. But machine learning means it will not stay clunky. We are probably talking months before it handles a meaningful volume of basic bookkeeping tasks, not years.

So what does this mean for your business?

It depends on where you are.

If you are a small startup, within a year or two there will likely be AI bookkeepers capable of handling the routine work with your oversight. The economics of that will be hard to ignore.

If you are a business actively trying to grow — which is most of the people reading this — you still want an experienced bookkeeper who can structure your books correctly for where your business is going, not just where it is today. The structural work, the compliance gaps, the job costing setup — AI is not doing that well yet. But your bookkeeper probably does not need to be logging the same number of hours on routine monthly tasks as they do now. That ratio is shifting.

If you are running a larger operation, this is where I think business owners are leaving real money on the table right now. Specialized AI modules can run your financials through a deep analysis and surface recommendations that would take a human advisor significantly longer to produce. This is not a future capability. It exists today. If your competitors are already using it to identify where to cut costs, where margins are leaking, and where to push harder, they have an informational advantage over you. The advisory side of AI is improving faster than any other part of this, and waiting on it is a decision with a cost.

The businesses that come out ahead will be the ones who understand that distinction now, not after their competitor figures it out first.

If you are not sure whether your accounting system is set up to take advantage of where this is heading, that is worth a conversation. I offer a free 30-minute discovery call where we can take a look at your current setup and talk through what actually needs a human and what does not.

Book your call here.

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Most service business owners aren’t flying blind because they don’t care about their numbers. They’re flying blind because their accounting system was never built to show them the right ones.

There’s a version of running your business where you open your financials and actually understand what you’re looking at. Where you know — without calling your bookkeeper or staring at your bank balance — whether this month was good or just busy. Where you can sit across from a lender, a partner, or a potential buyer and hand over your numbers with confidence instead of apology.

That version exists. It just requires a different kind of accounting system than most service businesses have.

That’s what Scaling with Intention is about.

This free guide was written specifically for service and maintenance business owners who have built something real — and are ready for their accounting to reflect that.

Inside you’ll find:

A clear picture of whether your system is built for where you’re going. Most accounting setups are built on defaults — default chart of accounts, default categories, default everything. That works fine when you’re small. At your current size, those defaults are quietly distorting your numbers and hiding information you need to make good decisions.

The three numbers that actually run your business. Not a long list of ratios. Not a finance degree’s worth of metrics. Three numbers — gross margin, net profit, and overhead ratio — that tell you the real story of your business every single month. Once you know them and understand what healthy looks like, decisions that used to feel like guesses start to feel obvious.

A 20-question self-assessment that shows you exactly where your gaps are. Not vague suggestions — a structured look at your system, your processes, your controls, and your vision alignment. You’ll finish it knowing precisely what’s working, what isn’t, and where the real opportunities to grow your profits are hiding.

What changes when your accounting system actually works:

You stop making decisions on gut feel and start making them on real data. You stop dreading the end of the month and start using it as a planning tool. You know which services are actually profitable and which ones are quietly dragging your margins down. You can walk into a bank, an SBA conversation, or an acquisition discussion prepared — because your books can hold up under scrutiny.

Most of all, you get something that’s harder to put a price on: peace of mind. The kind that comes from knowing your numbers are right, your system is solid, and your financials are telling you the truth.

It’s free. It’s specific to service and maintenance businesses. And it’s the first step toward books that actually work as hard as you do.

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At Master Plan Accounting, we build accounting systems around your vision, not just your tax return. We believe the way your books are structured should be guided by where you're taking your business — not just what happened last quarter. That means building systems designed for decision-making, compliance, and long-term growth. We work with a small number of clients so that every engagement gets the attention it deserves.

Services

Every engagement begins with a one-time Accounting System Optimization — a full restructuring of your books before monthly services begin. Monthly bookkeeping packages are available at three tiers, each designed to match where your business is and what level of support you need. À la carte options are also available for lender packages, SBA loan preparation, sales tax filings, monthly advisory calls and more.

Not sure which tier fits? We offer a free discovery call. Book below.

Free Guide: Is Your Accounting System Built to Support Your Growth?

Scaling with Intention is a free guide for service and maintenance business owners doing $1M or more in annual revenue. It covers the structural problems in your books that most growing companies don’t know they have, how to read and use the metrics that matter most, and how to align your accounting system with the future you’re building toward. Includes a 20-question self-assessment so you can see exactly where your gaps are.

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Ready to see what your numbers are really telling you?

Book a free 30-minute discovery call. You’ll leave with clarity on where your accounting system stands and what it would take to get your financials working for you — not just for tax season.

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