Speaker 1 (00:00):
Look, what if I told you that making money and having cash in business was two very different things? And that difference has claimed more businesses than any recession it ever will. Imagine this with me. You’re a successful business owner. Things are going great. Your clients love you, your margins are good, but all of a sudden, your best client can’t pay you for 90 days. Or maybe there was a cost in a cost spike in inventory, you didn’t have that in your bid, or just some other situation that happens a little bit outta your control. And you find yourself low on cash. That’s called the cash flow trap. All of a sudden, you can’t make your bills, you can’t make payroll, you can’t buy future inventory for other jobs, and you find yourself in a bad position. We’re gonna give you three ways to make sure you don’t land in a cash flow trap. On today’s show, you found the K-Cup. Let’s jump in.
Speaker 2 (01:08):
Hey, welcome back to the K-Cup episode 22 tghat includes all you general contractors Baton Rouge. Glad to be here, John. Glad you’re here. Hey, that was a great introduction by the way. Discussing, or, or you touched on the you know, the subject we’re gonna talk about today, the cash flow trap. Why profitable, profitable. Ah,
Speaker 1 (01:26):
That was good. That was good. Profitable. We understand that.
Speaker 2 (01:29):
Okay. Profitable. How many syllables is that, John <laugh>. Okay. So the cash flow trap and why profitable businesses still go broke. Right. So anyways, we’re gonna get into it. We, like we said, we in the introduction, we have three key points that we’re gonna share with those listening today, that if they use those these points that we’re gonna bring out today, hopefully they keep themselves from you know, finding themselves in a cash flow trap and you know, having difficulty in their business. So let’s dive into that first point. Understanding the cash flow distinction. There’s a distinction between cash flow and profit in the business. They, they move through your, your accounts differently and they get accounted for differently. So talk a little bit about that distinction and and how you guys go about tracking that for our company, and listen up all you general contractors Baton Rouge.
Speaker 1 (02:24):
Yeah, so I think when you think about it, you know, you get these big sums of money that’s coming in from, you know, jobs or whatever, and you know, if you just look at that in your bank account as this big lump sum of money and you just spending, you know, wherever you see fit or wherever you feel like you need without a real plan, yeah. That’s when you can find yourself, you know, in some trouble. And, and what we do here is we actually com compartmentalize and, and we do it with actual bank accounts. We have, we have five different bank accounts set up and you know, we have it for our operating, we have it for our subcontractors. Mm-Hmm <affirmative>. We have it for taxes, we have it for profit. And once we are paid on the job, we know historically, you know, going back over the last few years Yeah.
Speaker 1 (03:12):
What percentage needs to drop into each bucket in order to make it work? Yeah. So as we take a big lump sum of money, we drop a certain percentage in each bucket, and then we manage each of those smaller buckets separately. And what that does that allows us to realize, man, you know, we’re getting low in our subcontractor account, you know, what do we need to do? How do we adjust to make that happen? Rather than just trying to look at this one big lump sum of money. Yeah. And you would never recognize that you were getting low on a certain bucket of money. Yeah. so, so that’s how we do it. And it, and it works pretty well. We’re able to identify if any of those buckets get low way earlier than, than if we were just picking money from a big pot and was to realize we’re, we’re low money or we’re outta money or whatever, you know? Yeah. This is really important, especially if you are a general contractors Baton Rouge.
Speaker 2 (04:03):
<Laugh>, all of a sudden the the bucket’s empty and you’re like, ah, I’m not gonna pay this invoice or make payroll <laugh>.
Speaker 1 (04:09):
Yeah. Yeah. So, I mean, we think it works really good. Look, I’m not an expert. I’m not, I’m not telling anybody how to, you know, run their business, but this is something that works for us and it’s just a lot easier to manage a, a few smaller pots than than that big, that big cash flow pot, if you will.
Speaker 2 (04:25):
Yeah. One thing that you had mentioned before when we were talking about a little bit, getting ready for the show, you’d said that you try to identify what money belongs to you first right away, so that you separate that off and know that, look, this is what I have to work with to operate my business. All this other money don’t belong to me. It goes somewhere else. Again. please listen up all you general contractors Baton Rouge.
Speaker 1 (04:45):
Yeah. And that’s a little bit separate from, from what I was talking about there, but, you know, we do that in our, in our monthly projections. You know, once we’re assigned a job, we know roughly the amount of money that we’re gonna make on that job, and we break it up over the duration of the job. Yeah. And then, you know, even taking into account retainage and that coming, you know Yeah. A couple of months after the job’s finished. Yeah. but, but we do do that from a projection standpoint. You know, every job that we have going, we, we take that little bit of money that we think that’s going to be ours or whatever, and we kind, we kind of be, begin to break it up monthly so that we can understand what our revenue is. And, and it, it kind of assures us that, that we’re gonna make our numbers, if you will.
Speaker 2 (05:29):
Yeah. Gotcha. Alright. So the second bullet point under, under this first point of, of understanding the distinction between cash flow and profit, it talks about how, you know, you may have what looked like very profitable months on the books, but yet they could literally leave you cash strapp. What, how can that phenomenon happen? Like, starting with our industry, the construction
Speaker 1 (05:54):
Industry? I mean, the first thing that comes to mind on, on that is just, you know, it takes a while to get paid on projects. Yeah. so, you know, it may be profitable, but you may not get that money for a number of days. Yeah. you know, also it may be profitable, you know, very profitable, not considered retainage. Yeah. I mean, if it, you know, retainage on some jobs is up to 10%. So if you’re not getting 10% of your money for the duration of the project on paper it would look very profitable, but you wouldn’t actually realize that income until months down the road, or a year, it could be a year down the road. Yeah.
Speaker 2 (06:32):
So, yeah. That’s rough.
Speaker 1 (06:33):
That’s two of the quickest ways I can think of right off that you can have a very profitable month. Yeah. But and, and look profitable on paper, but, but not actually have the money in hand, if you will.
Speaker 2 (06:43):
Yeah. And those are very real phenomenons. Yes. They happen, particularly in the construction industry. You, you literally could land a great job, big job, and not see any money from it for the first 60 to 90 days. Right. Which is crazy. Like if you’re, if you’re not organized well prior to even getting that job, you’re, you’re not gonna make it to the 90 days Yeah. To get that first payday.
Speaker 1 (07:07):
And the other way if, if it was a job that pays a little quicker or something like that, you know, if you were behind, if you were behind, you know, earlier months and, and maybe just looking at your, you know, your books, you, you didn’t realize that, you know, you could be as far behind as you were that, you know, you could look really profitable one month, but you kind of take that money to catch up. Yeah. so a few, few scenarios there where that could kind of, kind of, you know, pop up, and this could happen to anyone, even general contractors Baton Rouge.
Speaker 2 (07:33):
For sure. So let’s talk about how to track the send. But like, you know, this, the whole, you know, thrust behind this first point is that you need to learn the distinction between the two things, cash, flow, profit, totally different animals. And so what can you use, what kind of dashboard can you use to track those separate things and see how they function in your business and how they affect your business differently so you can learn that and keep an eye on it and be, you know, on top of your business, so to speak.
Speaker 1 (08:05):
Yeah. I mean, we have a, you know, we’ve created a scorecard and, and basically, you know, whatever jobs we get, this kind of goes back to the point you’re discussing earlier. You know, we look at it per job and we, we, you know, realize that, you know, we’re gonna make x amount of dollars on this job. We stretch it out on our projection over a number of months looking at the retainage as well. Yeah. And we start to understand what kind of money monthly our company should be generating. Yeah. now we still, you know, we still may go drop all those of revenue into those different buckets that we were discussing earlier, but this projection gives us an idea and, and gives us confidence that we’re making our numbers Yeah. And that, you know, we’re gonna be fine. Yeah. so a scorecard that, that shows you what jobs you’re landing that shows you you know, what amount of money you’re gonna be making per job and, and what the timeframe that you’re gonna collect that job over is really helpful in, in kind of predicting what your cash flow is gonna be.
Speaker 1 (09:08):
Yeah. Over the course of, you know, a job or a few months or, or even the year.
Speaker 2 (09:13):
Yeah. And so you might have caught the word that he said, there’s scorecard, and it’s crazy how many businesses don’t have a scorecard. They may have a very archaic way of tracking their books, or maybe they’re just using QuickBooks or something, some version of that where they’re tracking, you know, generally speaking, tracking their, their revenue and expenses and things. But a scorecard tells the whole story of your business. And I, I would encourage anyone listening to, you know, Google Scorecard and see what it is, you can literally go into Google Sheets and create one. Yeah. And it is a great tool and it really, the numbers don’t lie. It is what it is. And it keeps you honest in your business, keeps you you know, working weekly to try to perform and, and do well with your business. So if you learned anything from this whole podcast, just the fact that you need a scorecard is a great point in addition to these other three points that we’re bringing out. So,
Speaker 1 (10:07):
And, and we have a lot of other metrics that we, you know, track on our scorecard. Yeah. But it really helps manage the cash flow and it really, it really paints the picture of, of where your business should be if everything’s kind of hitting on all cylinders and you’re executing, you know, like you, like you think you are. Yeah,
Speaker 2 (10:24):
Absolutely. So let’s go ahead and move into our second point then. And that’s creating some financial buffers for, you know, this phenomenon of irregular income. Whenever you’re working in an industry that is contract driven like ours, and, you know, who knows, there’s countless industries and businesses out there that run on contracts. You know, that income can be irregular, it can be sporadic up and down. So we know there’s things like taxes operating expenses, different things like that savings that you need to do to, to, you know, build up reserves. Let’s talk a little bit about those, those those three aspects of, you know, creating these financial buffers to kind of I guess hedge against or have a contingency for, you know, irregular income, irregular money. This is huge for any business but especially general contractors Baton Rouge.
Speaker 1 (11:16):
Yeah. I mean, I, I wanna go back to the five buckets. ’cause I think that that’s one way that we kind of buffer it here. Yeah. you know, it just makes it more apparent if you’re gonna run into a problem, you know, a lot sooner Yes. Than you would if you’re just managing a big you know, a big bucket of money. Yeah, for sure. So that’s one way that we try to buffer it is just through those five buckets that I was talking about. Yeah.
Speaker 2 (11:39):
Of course taxes would be part of that.
Speaker 1 (11:41):
Yeah. So we, we have a tax bucket and, and you know, every, every time we get paid, we dump a little money into that tax bucket. Yeah. and, and we do it with every bucket. Yeah. so, so that’s one way to, to kind of buffer and, you know, I guess see it for, you know, try to see it coming before it gets there. Yeah. you know, other things that you can do you know, like a line of credit, obviously something you can do to, to buffer that. If you’re doing a lot of public work, if you’re doing a lot of work where you’re, you know, you’re guaranteed to get paid Yeah. But it’s kind of a slow process. Yeah. you know, I would feel comfortable working off of a line of credit. I mean, I know line of credit is not ideally what a lot of people wanna do, but I think in that instance it’s, it’s probably safe.
Speaker 1 (12:29):
And if you know you’re getting paid that could help you with cash flow, you’re not putting all your money out in front of it. Yeah. different things. I mean, you know, you can negotiate terms if it’s a, if it’s a private deal, you know, you can get mobilization, you can get deposits, do things that, you know, you’re not putting all your money up front to run the project. Yeah. Where in a public project, you’re, you’re 30 to 60 days out, you, you’re going to use some of your money to keep this thing going. If you’re working with a private owner, you can kind of put that out there and, and use their money to finance their project, if you will. Yeah.
Speaker 2 (13:05):
So that our second point, talking about operating expenses, we know that you have a bucket for that. And you, you know, we had talked earlier about how you kind of don’t look at profit at all until all your other your buckets are full, including your operating expenses for a year, whatever you projected. So discuss that a little bit about you know, how you reserve that amount of money and, and what your process is for doing
Speaker 1 (13:30):
That. Okay. Real quick though, I thought of one other thing you can kind of buffer. Sure. You know, I know when I started my business early on, I wanted to buy everything up front. I never wanted to run into any problems where I owed somebody money and that kind of thing. Cash
Speaker 2 (13:44):
Only business.
Speaker 1 (13:44):
Yeah. But I also realized after a short time that that probably wasn’t very sustainable. Once
Speaker 2 (13:50):
You start getting bigger, it’s hard.
Speaker 1 (13:52):
So, you know, working with vendors, having vendor accounts now you have to be responsible. You have to pay your bills once you’re paying that kind of thing. Yeah. But having vendor accounts is another way that you can really help keep your cash flow positive. Yeah. and, and that’s just open up, you know, accounts 30 days or whatever. I mean, it’s a permanent account, it’s it’s due in 30 days. Yeah. So once you’re paid, you pay it and that kind of thing. Yeah. And that can be helpful too, as long as you can be responsible and, and pay those, you know, pay those vendor accounts.
Speaker 2 (14:21):
Yeah, absolutely. Vendor accounts are great for, for buffering the, you know, the hits to the cash flow if you’re starting a project. Yeah. And it allows you to, you know, have opportunity to get that first billing cycle in and start getting some revenue back from that work and Right. And then it, everything just kind of falls into place.
Speaker 1 (14:38):
Yeah. And so to your, to your question about the operating expense. Yeah. you know, I think the the way that we do it is we, we don’t recognize any profit. So we, we do have a, a profit bucket in our five in our five buckets if you will. Mm-Hmm. But and we may even contribute to that bucket as we’re going. Yeah. But we don’t technically recognize profit until we know that we’ve met, you know, everything that we need for the year to, to kind of break even. Yeah. So, you know, if we have a profitable month where, you know, we make way more money than we need it, we’re still not technically looking at that as profit. We’re not gonna go spend a bunch of that money and, and do a renovation or go buy a piece of equipment or do whatever. Yeah. Like, we’re gonna treat that money like we need it for the rest of the year. Yeah. And, you know, at whatever point we make enough revenue to break even, that’s when we kind of start recognizing profit, if you will. And and, and would start to do something with, with some of that money if, if we needed to.
Speaker 2 (15:40):
Yeah. Gotcha. Okay. Good. Well, let’s talk about that third point. And that’s like using percentages as, as a basis for separating revenue into those different buckets instead of just saying, I’m going a fixed amount, because as your projects and your income fluctuate up and down based on how your projects go up and down your businesses scales up and down accordingly. Right. So, explain just a little bit, again, you’ve kind of really gone over that, but just kind of emphasize how you wouldn’t want to just say, on this project, I’m taking a hundred thousand out, I’m putting it in this bucket, you
Speaker 1 (16:16):
Know? Yeah. So, I mean, we kind of know historically what our numbers are and all of our buckets have a certain percentage Yeah. Based on that historical data. Now if the company’s doing less revenue than we, than we typically are, or if we’re doing higher revenue than we typically do we might make an adjustment on that midyear. Yeah. But but basically we kind of know what those numbers are probably going to be. Yeah. And and, and we, we contribute to that, you know, basically every time revenue comes through the door
Speaker 2 (16:49):
Gotcha. According to those percentages. Yes. Okay. Great. Alright, so let’s go ahead and move into this third point. And that is finding ways of smoothing out the feast or famine cycle of this type of, you know, contractor driven irregular income type business. And one of those things that we do here is diversify, you know, our client base. Talk a little bit about how we do that, why we do that, and the effect that it has or can have on smoothing out you know, those ups and downs of the business.
Speaker 1 (17:24):
Yeah, I mean, I think we try to do different types of projects. You know, I mean, we do a fair amount of public bid. We do a fair amount of invited private bid and you have to do a combination of, of jobs to, to keep this cash flow kind of level, if you will. Yeah. you know, and then we also do some design bid stuff. I mean, public bid stuff, we know that, we know that we’re getting paid, so that’s a good thing. But it could also be 30, 45 days before you’re getting paid. Yeah. And then in private work, the terms can be more negotiable. You know, you can get money up front you could, you could set a pay, you know, you could actually set a, a more frequent pay deal where it’s not 30 days. And those kind of things can help balance out, you know, the income if you will.
Speaker 1 (18:17):
Yeah. and I think that we try to keep a few of those going for that reason. And then we also like design build stuff. And the cool thing about design build is once we’re under contract to do a design build, you know, we know that we have eight or 12 weeks of, of planning and design and that kind of thing. Yeah. And then that moves to construction. Well, that gives us a little bit of predictability. Like we know that in three months we’re gonna have a job that’s gonna be starting and it’s gonna produce as much revenue. Yeah. Where if we were solely waiting on, you know, a public bid job or a private bid job, you, you technically never know Yeah. When you’re going to be low. So if we have a combination of these jobs going, that really helps balance out the income part of it and it gives us some predictability. We’re not just waiting on, you know, just one job to, to be low and to, and to hope that it comes, you know? Yeah. so having a combination of different type jobs like that mm-hmm <affirmative>. Really helps, really helps balance out, you know, the irregular income, if you
Speaker 2 (19:23):
Will, a feast or famine situation. So another area that can really, you know, come back and bite you and affect cash flow and drop you right into that cash flow draft is not paying the proper attention to your contract payment terms. You know, being, again, in business for yourself, you really need to pay attention to the details of your contract and payment terms, because if the terms aren’t clearly defined, then, you know, your, your project owner or client may not necessarily be you know, felt compelled to pay you by a certain time. Yeah. And you may not have any recourse for that either, so that could really put you in a bad situation for cash flow. So talk a little bit just about how it’s, you know, the importance of getting that contract right. And, and payment terms and things like that.
Speaker 1 (20:15):
Yeah. And just thinking, you know, about the jobs that we just talked about. I mean, obviously the public world, there’s not a lot of room for negotiating those, those terms, so you’re kind of stuck with what they are. Yeah. But now what you can do is you can look at your backlog and if it’s, if it’s largely public, then you can try to negotiate your private jobs to, to make it fit better, to make it, you know, more in line with your projections so that you’re meeting your income and what’s required. So very important to, you know, to, to get that out in the beginning. Obviously have that in your contract on what the expectation for payment is, when that is. Yeah. You know, how does it look, you know, are, are you based on a percentage of complete, are you getting a certain amount of a fee every month? And then obviously retainage, you want to negotiate retainage and, and it’s really nice to be able to negotiate retainage there. There’s, there’s different avenues for that in the, in the in the private world. I mean,
Speaker 2 (21:16):
Yeah. Both percentage and term, yeah.
Speaker 1 (21:18):
Term because it’s, it is hard a lot of times specifically for like a contractor that works early on in the job. Yeah. Still have to wait the duration of the project for, you know, retainage. That’s right. But, but then even as a general just, you know, the amount and, and how long you have to wait as well there, there’s, there’s different terms that you can set up. So yeah, all that’s important and and, and really helps out a lot when, when it comes to, you know, cash flow and, and the expectation or the predictability. Like we need to know, like when we’re gonna have that money Yeah. To understand the cash flow part of it.
Speaker 2 (21:52):
Yeah. Are we gonna be all right, or, yeah. We need to do something else. Great. So the last point under this, this section then is really, you know, the idea of if you’re able to develop recurring monthly income to kind of smooth out those feast or famine times in this industry, it’s pretty common. Not common, but it is known that some contractors do so by trying to get maintenance contracts. Yeah. And we don’t, we don’t particularly do that here, but there are other ways that you kind of, you know, plan for this Yeah. Future family type stuff. You kind of touched on it a little bit, but just kind of reiterate kind of what we do or how we see our, you know, client diversification and all that kind of
Speaker 1 (22:39):
Yeah. I mean, one thing that we want to have is, is, and we’ve talked about this in other podcast, we, we wanna build relationships. We wanna work with people that have repetitive work. We wanna work with companies that are growing that, you know, are building new facilities or are constantly updating the facilities that they have. Yeah. Or even, you know, just a big facility that requires, you know, maintenance in a sense, but office renovations, new floors, new whatever, because high traffic and, and other things. Yeah. so we look for those clients that have that repetitive work. Yeah. so that, you know, we can start to realize some regular income. And it’s not always big jobs, it’s not always big glamorous stuff. Yeah. But it’s, it is income that you can, you know, count on. Yeah. and that’s something
Speaker 2 (23:27):
Build some of those ups and downs with Right.
Speaker 1 (23:29):
That’s something that as we grow, we continue to look for and can continually try to develop Yeah. Is those type of clients. And that’s the reason, just, just to try to create a consistent income that helps us, you know, in all in one time are slow, or one times when we’re super busy, we still have something that we can count on. Yeah.
Speaker 2 (23:49):
Great. All right. Well that covers our three points. You got any kind of closing, closing thoughts on these points we had Just to give you, you know, the rundown on the points, again, point number one, learning that distinction between cash flow and profit, totally two different animals. And in that section you mentioned how you can track those two things separately with a scorecard and and be able to, you know, see how those things function inside of your business. Second point was creating some financial buffers for irregular income, different ways that you talked about doing that. You know, having separate buckets that you put, you know, percentages in and working off percentages instead of flat rates, because that can get you into trouble. You know, your business doesn’t scale properly if you’re just going with this flat rate program instead of percentages of each project, whether it’s a small project or big project. And then our third point was smoothing out the feast or famine cycles and, and talking about diversifying your client base, you know, having private work mixed with public work for us, works good, things like that. So any kind of closing thoughts on any of those points?
Speaker 1 (24:59):
No, I mean, I think that, you know, you just want to know your numbers, understand them yeah. You know, try to make your pr your cash flow as predictable as possible. Yeah. even though I know that’s pretty hard to do. Yeah. but if you’re making some effort in and doing some tracking and some of the things that were talked about, you know, it, it can become a lot more predictable and, and at a minimum you understand it and, and, and know when you need to adjust and when you don’t need to adjust. So, yeah, just know your numbers, pay attention to pay to keep your, keep your, you know, your thumb on your cash flow and yeah. Good things will happen.
Speaker 2 (25:34):
Good deal. So just quickly one, one last point for, you know, if there’s someone listening that’s new to business and may not understand this, what is the frequency that you and Genevieve, how often do you guys scrutinize the cash flow and, and look at your scorecard? Yeah,
Speaker 1 (25:50):
So we, we look at it weekly.
Speaker 2 (25:53):
So no, no 30 days or months go by without you guys scrutinizing it.
Speaker 1 (25:57):
Yeah, no, we look at it weekly.
Speaker 2 (25:59):
Yeah. So that’s the point I wanted to make is that if, if you’re new to business and you’re trying to set this up and do it right and avoid the cash flow trap, this is something that you know, a business owner is being disciplined and diligent is on weekly, you know, that you have to look at the numbers have to know where you’re at in the stream of time and, and the stream of cash. So anyways, great. John, appreciate sharing your insight from all your years of experience with dealing with cash flow and you know, doing that weekly for what, over 17 years. So it’s, it’s just that aspect alone is a, is a full-time job. But we appreciate the insight to all these things. Hope you enjoyed this episode. Hope that you come back and see episode 23.
Speaker 2 (26:44):
We’re glad you’re here. We hope this, this information, I hope you, you find it valuable and that you can use this to improve your own business. And or maybe you can share it with somebody who you know it would help out that’s in business. And we hope that you’ll like and subscribe. Please subscribe. It takes about a second to hit that subscribe button, but please just take a second to do that. It helps the algorithm push the podcast out to more viewers. So the more viewers we get, obviously more people are gonna hear this information and you never know when you know the person really needing that. It’s going to hear it and it’s gonna hit home with them and help ’em out. Also, if you’re considering a project and you need some help with that, you need to be able to bounce some ideas off of somebody please go to the web, go to our website kelly construction group.com.
Speaker 2 (27:37):
Link will be in the show notes. You can go there. We have a web form you could fill out. We are offering some you know, complimentary pre-construction services that could literally save you thousands of dollars. So if you’re considering a, a project, please go there and check it out. Also, if you enjoy the podcast and you’re looking for a one stop place to view it you can actually go to our website and we have the podcast. Now. We have a podcast player that is embedded in the website from Buzz Sprout, and you can literally go on there and catch the latest episodes or any episodes that we’ve ever produced will be on there. Like I said, we’re up to episode. This will be episode 22. So we’re, we’re making progress in, in our catalog of information that can literally help you run your business a lot smoother. So again, hope you enjoyed the the show. Please like and subscribe and hit us up in the comments. If any of this resonates with you, hit us up in the comments and let us know. All right. That’s gonna be a cut ’cause I’m running out of voice.