#224 Top Cash Flow Mistakes in Home Services and How to Fix Them

Summary

Owned and Operated Podcast Summary Episode #: 224 Title: Top Cash Flow Mistakes in Home Services and How to Fix Them Release Date: July 17, 2025 Hosts: John Wilson and Jack Carr

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Introduction to Cash Flow Challenges

In Episode #224 of the Owned and Operated podcast, hosts John Wilson and Jack Carr delve into the critical topic of cash flow management within the home services industry. The episode underscores how cash flow issues can severely impact businesses, often more so than traditional profit metrics like EBITDA or gross profit.

John Wilson opens the discussion by posing a fundamental question:

“What's cash flow and why it's killing your business?”
(00:00)

Understanding Cash Flow vs. EBITDA and Net Profit

The conversation quickly differentiates between cash flow and other financial indicators. Mike emphasizes:

“Cash flow is not the same thing as EBITDA or Gross or anything like that. The money coming in is not the money you have to spend.”
(00:05)

Sarah and Mike reinforce this distinction, highlighting that while EBITDA reflects earnings before certain expenses, cash flow deals with the actual liquid funds available to operate the business.

John Wilson further clarifies their approach to financial transparency:

“We are Open Book Financial with our leadership team and something that we're trying to dial in with our team is the difference between net profit and cash.”
(02:14)

Real-World Examples and Personal Experiences

The hosts share personal anecdotes to illustrate the real-life implications of cash flow mismanagement. John recounts a recent training session with their leadership team, revealing unexpected cash flow challenges despite meeting EBITDA targets.

John Wilson states:

“May we had 187 [thousand] net and we should have done 350. Okay, so missed big on EBITDA. 170 grand. It's a big miss. So and we lost 13,000 in actual cash.”
(07:00)

He explains how capital expenditures, like onboarding new vehicles, and debt repayments can drain cash reserves without reflecting directly on the profit and loss statements.

Strategies for Managing Cash Flow

The episode offers actionable strategies to mitigate cash flow problems. John shares their system of automated transfers:

“Start an automatic transfer to a savings account... it's simple and dumb. But it works.”
(32:56)

This approach ensures that a portion of incoming revenue is systematically saved, providing a buffer for unexpected expenses.

Mike adds the importance of monitoring cash outflows meticulously:

“Lock the cash output and where it's going and when who's getting paid.”
(13:27)

Banking Challenges for Mid-Sized Businesses

A significant portion of the discussion addresses the difficulties businesses face when scaling. John describes the "gray zone" in banking for companies with EBITDA between $2 million and $7 million:

“There's a wide chasm... it's between around 2 million of EBITDA to 7 million of EBITDA. So if you're in that zone, you're in this gray zone of banking.”
(21:31)

This middle ground often leaves businesses without favorable banking products, leading to high fees and limited access to necessary financial services.

Importance of Accounting and Financial Visibility

The hosts stress the necessity of having a dedicated accounting team focused on cash flow. John highlights:

“Accurate and timely financials is important... they should be obsessed with the cash flow and cash in that account.”
(39:30)

A proficient controller or accountant can provide the financial oversight needed to navigate cash flow challenges effectively.

Practical Steps to Improve Cash Flow

Several practical steps are discussed to enhance cash flow management:

1. Automated Savings Transfers: Setting up automatic daily or weekly transfers to a separate savings or capital account.

2. Locking Funds in CDs: Preventing impulse spending by placing excess cash into Certificates of Deposit (CDs) that earn interest and are inaccessible for a set period.

3. Cash Flow Forecasting: Implementing cash flow forecasts to anticipate and plan for future financial needs and obligations.

4. Debt Management: Strategically paying down debt and understanding the impact of principal versus interest payments on cash reserves.

John Wilson advises:

“Spend less than you make. Make more money. Automatically transfer and lock that money.”
(33:59)

Lessons Learned and Moving Forward

The episode concludes with reflections on past mistakes and future plans. John emphasizes the shift from focusing solely on EBITDA to giving equal importance to cash flow. This balanced approach aims to ensure sustainable growth without jeopardizing the business’s financial health.

John Wilson shares:

“We're entering Q3, the healthiest one, the healthiest we've ever been as a business ever.”
(28:51)

He outlines their goal to refine cash flow strategies, including debt paydowns and optimizing capital expenditures, to maintain a robust financial standing.

Notable Quotes

• Mike: “Cash flow is not the same thing as EBITDA or Gross or anything like that. The money coming in is not the money you have to spend.”
  (00:05)

• John Wilson: “We are Open Book Financial with our leadership team and something that we're trying to dial in with our team is the difference between net profit and cash.”
  (02:14)

• John Wilson: “Start an automatic transfer to a savings account... it's simple and dumb. But it works.”
  (32:56)

• John Wilson: “Spend less than you make. Make more money. Automatically transfer and lock that money.”
  (33:59)

• John Wilson: “We're entering Q3, the healthiest one, the healthiest we've ever been as a business ever.”
  (28:51)

Conclusion

Episode #224 provides a comprehensive exploration of cash flow management tailored for home service businesses. Through candid discussions, personal experiences, and practical advice, John Wilson and Jack Carr offer valuable insights into avoiding common cash flow pitfalls and implementing effective strategies to ensure financial stability and growth.

For more detailed discussions and actionable tips, visit Owned and Operated.

Transcript

[John]

We're talking about cash flow. What's cash flow and why it's killing your business?

[Mike]

It almost killed my business. I think it almost kills everyone's business at one point before you realize how important it is. Because cash flow is not the same thing as EBITDA or Gross or anything like that. The money coming in is not the money you have to spend. You can't keep the lights on with credit. Well, I guess you can if you pay your credit, but it's not. Not the most ideal situation.

[John]

I really want to just re. Emphasize. This is Personal Finance 101.

[Mike]

Welcome back. Welcome back.

[John]

Welcome back to Owned and Operated. It's a podcast where we talk about home service stuff or whatever we want to talk about. So today we're talking about cash flow.

[Mike]

Cash flow.

[John]

What's cash flow and parentheses. Why it's killing your business.

[Mike]

It almost killed my business.

[John]

I think it almost kills everyone's business.

[Mike]

I think it almost kills everyone's business at one point before you realize how important it is.

[Sarah]

Yeah.

[Mike]

Because cash flow is not the same thing as EBITDA or Gross or anything like that. The money coming in is not the money you have to spend.

[Sarah]

Yeah.

[Mike]

Which is not the money that you have to walk away with.

[Sarah]

Yeah. Yeah.

[John]

100. If you've been listening to the show for a while, you know that we've been big fans of service scalers. One of the things that they just dropped that we are really excited about is a pay per lead program. So what they help you do is they help you directly gain access to leads and scale up your lead partner program. Go to service scalers.com and say we sent you. So I feel like this has actually been a good. This has been a big topic inside Wilson recently. So we are Open Book Financial with our leadership team and something that we're trying to dial in with our team is the difference between net profit and cash.

[David]

Yep.

[John]

And that's a big distinction. Big. Just like millions of dollars of difference of distinction.

[Sarah]

And.

[John]

I took that for granted.

[David]

Yeah.

[John]

When starting to go open Book Financials because on. On one hand, like, and the team knows this because we. We sort of did like a training on it yesterday. So this is pretty timely for that. We did this training at our SLT quarterly because we're at the tail end of Q2, we're going into Q3, we're setting our goals for next quarter. And some of the pain points that people had were cash flow pain points.

[Sarah]

So.

[John]

Right now we're in a period of investment in our marketing and we're in a period of investment in our fleet. We're in a period of debt pay down. So we have all three of these things happening. And we had a weaker May than we thought and gross margin was compressed for two months. So. And like, while all that's happening, we're also celebrating kind of big because, hey, we just hit our cash treasury goal. Like, we've had this goal for a long time where we have enough in this one account, like a specific dollar amount in this one account to be like, hell yeah, we hit this goal, we hit that goal. So, so they're confused because they're over here like, all right, I'm wanting to follow the plan. I'm wanting to follow the budget that we set out in October. I, I want to, I want to hire these team members that we said we would. I want to make the investments in marketing that we said we would. And we're being hesitant and they're like, John, we're, we don't understand. Yeah, like, we don't get it. This was the plan. We are open book financial. We see that we're profitable. Like, we see it. And then we also, we're getting held up here. So it came up as like IDS issues inside our L10. Are you guys EOs?

[David]

Not yet.

[Sarah]

Okay.

[John]

So it came up as IDS issues. And once two or three people brought it up, I was like, okay, I've just done a really poor job of explaining how cash works. And if you've never managed a P and L, and if you ever manage a balance sheet, like, it makes sense that you wouldn't understand.

[David]

Yeah.

[Mike]

So what for people listening who are like, what is John rambling about?

[Sarah]

Yeah.

[Mike]

What is the difference then between net and cash flow?

[Sarah]

Yeah.

[Mike]

I think that's like the really big question, right. Is like, why do my books say something but why is my account saying something else? So where does that come into play?

[Sarah]

Yeah, yeah.

[John]

So we present two numbers, open book. So if I'm looking at a P L, I'm just going to go through the whole piano. So we have revenue, labor, materials, gross profit, and that's the number that we care about the most. That's if you're running an efficient, well priced business, you know, you're running an effective gross profit. Underneath, that's overhead. It's your opex. So salaries, marketing, fleet, it. Yeah, Rent. So like we bucket that into like four, four or five, like total buckets. And under that you have operating net income. So that's how we break it out. I think There's a few ways to break it out. Yeah, but we, we track his operating net, which is ebitda. So we want to know ebitda. So when we're presenting numbers to our team, we are presenting EBITDA EBITDA numbers because an EBITDA is earnings before interest, taxes, depreciation and amortization. So the team has no input on the interest rates for loans or the depreciation of our vehicles. So we don't find it relevant. So what we do is we present ebitda, then we present net income under ebitda, which is inclusive of the itta. Yeah, so you can roughly think of the net income as true cash because that's going to have depreciation which like is kind of capex. It's going to have the interest, it's going to have taxes. But what it doesn't have is like very principal heavy debt. So the stuff that we did this instruction on yesterday we pulled up May specifically because May we had 187. It was a hard. Yeah, I'm centering myself here. So our target EBITDA per month is about $400,000. Budget for May was 350, something like that. We had a week May like 2.1 and a half, like should have been 2.4. So that obviously manifests on the bottom line. We did 187 net and like EBITDA and we should have done 350. Okay, so missed big on EBITDA. 170 grand. It's a big miss. So and we lost 13,000 in actual cash. So I had to walk them through that exercise. So the things that we did that spent that 187 plus was we onboarded six new vehicles and then that was $80,000 of capital expense which is cash that's out of my bank. But it is not profit and loss cash. So it will never show up in net profit. We paid down debt. We have a 12 month note with a vendor and that was like it's 20 some thousand dollars a month. So we paid that off or we made a payment on that and that's principal heavy. So there's the interest portion is inside our P and L, but the principal is not. So that's 27,000. So between those two I just had $113,000 of cash that left my account. That is not touching our P and L. On top of that we have our fleet which is loans. It's a capital lease, but we treat it as a loan. So that is not coming out of the P and L. So that's another 50 grand. So we're at 163. And then we had just our standard debt, like we bought businesses and we have debt from it, and that's another 40. So $203,000. So you know, on one hand, 200 grand a month. I know that sounds like a lot, but our debt plug every month is $80,000. Even getting rid of the CapEx and the one, you know, this like single use stuff, that's 85 grand. That just is out the door before we even see the dollar. So that was the training we did with our leadership team yesterday to really explain like, hey, the reason you're being held up over here and is because revenue was below what we expected. Gross margin also didn't hit. So EBITDA was half of what it should have been. And here was the things that we chose to invest in that you were a part of those decisions. Previous months brought on more vehicles. You didn't really have much control over the debt stuff. But like that's there. So we had to walk through that. And once we did, they understood.

[David]

Yeah.

[Mike]

And so with that, now they understand what the, the net is and, and how the cash flows. You know, cash flow at negative 13 on 80 or on 200 of goal or 300 of goal is not terrible, especially when paying off all that debt. But when looking at that, how are you. Right, because a lot of the issues actually stem with cash flow is they don't stem from cash flow because of, of a kind of a gross decision. Like they're not. I guess what I'm trying to say is, as you come upon those situations and you're a smaller company that doesn't have a large bank account or a reserve or treasury or whatever you want to call it.

[Sarah]

Yeah.

[Mike]

How are you dealing with that cash do you have. I know that there's other individuals who have like cash forecasts, cash flow modeling. Are you currently doing that to try and.

[John]

Yeah, we are now. But like, you know, growing up in this thing, we didn't have. I didn't have a cash flow forecast until this year.

[Mike]

That's wild.

[John]

Seriously, I made my own last year for the back half. But no, before that we had zero cash flow forecast. That's not because we didn't need one. It's because I didn't have an accounting department until late last year. Like, I didn't have a functional, talented accounting department. So like, yeah, we butchered our way up to 30 million bucks. You can do it apparently. But I mean, I don't recommend it, but you. You can do it. So. So yeah, we didn't have cash flow forecasts and we didn't have a heavy bank account. So the way our business worked, we were really healthy. And I ran this like, profit first thing. So if you. Have you ever read that book?

[David]

No.

[John]

It's good. It's literally. It's what it sounds like. So you could. I can summarize the book in like the next two sentences. Pay yourself first. And the way we opted to do that was pay the business first. So we set up automatic transfers just like you would personally do a savings account. And we're on year eight of that. So it now it's daily. It used to be like five grand a week, which, like, that's a lot. I think that's $250,000 a year. So we were doing five grand a week when we were a three, $4 million business. And that was a lot. And that was how we fueled acquisitions. So that was a big bank account for a $3 million business. Then we used.

[Mike]

I was just going to ask, what did you use it for?

[John]

Yeah, we bought three companies, went frigging nuts, and then we actually didn't really have a healthy bank balance until mid last year. Took us like three years to rebuild a healthy bank. Like, healthy to our standard of bank balance.

[Mike]

That's really interesting because, I mean, we went through it last year. We came out of summer, the end of summer last year, in all transparency. We came out of it in a really bad spot, like, because we didn't have our processes in place. We paid too much for failing marketing.

[David]

And it.

[Mike]

It just. We weren't in a strong position that we should have been on a hot summer.

[Sarah]

Yeah.

[Mike]

To convert. So this summer feels a lot better because we're already doing significantly better. But we came out of it under budget by quite a bit. Just nobody was watching technicians and they were fixing things. And it is what it is. That being said, we have scraped and struggled and fought to keep it, and one of the ways we were able to do that was focusing on cash flow, because that's how you pay your vendors. You can't keep the lights on with credit. Well, I guess you can if you pay your credit, but it's not. Not the most ideal situation. So.

[John]

Well, I think you have to be.

[Mike]

Locked the cash output and where it's going and when who's getting paid. So I actually reached out to Rich Jordan. Rich had. I think I reached out to the group and Rich had like a really good spreadshee. Where it was. And it's nothing. It's not rocket science. It's like, who's the vendor when they're getting paid, when they need to be paid versus and what's like, what do you need to pay them to keep that account open and run?

[Sarah]

Yeah.

[Mike]

And then what's the risk?

[John]

We roughly did that last year too, and that was our first cash flow forecast.

[David]

Yeah.

[John]

I called it a cash out sheet. So I would go into every month and we'd do the cash out. Now that's 13 weeks. But for the first six months of it, it was me updating it the last week of, of the month, the next month. And it's like, all right, hey, what we did was cash break evens. Like, I literally need X dollars of revenue for cash break even in this month.

[David]

Yeah.

[John]

And these are the bills I want to pay. And if we go over, then we'll pay this and yeah. But yeah, cash flow very. Can be very disassociated and it gets, I would say it gets even worse later on because the bills get bigger and they, they get bigger and there's a lot more prepaids. So that's been kind of confusing where like, like I have a, I have a prepaid right now that's like $40,000. And that prepaid is going to carry me through for a year, but I paid 40 grand.

[David]

Yeah.

[John]

Today for it. And like, that sucks. So granted it feels great right now, but like, yeah, that's $40,000. So it gets it. So when our. This is actually, I think where a CFO eventually starts coming in is the, the larger the business, the more complexity of cash. And I think that is where we will need a cfo. Whereas like, we're doing a great job with tight reporting, tight, close, accurate and timely financials. That's, that's the function of accounting department. But maximizing cash and like return on cash. That's cfo.

[David]

Yeah.

[John]

So that's where I think we'll break. But yeah, right now we're. And we're learning it. Fortunately not that hard of a way, but like, sort of the hard. We're not going bankrupt, but like, I wish I had more cash on hand, you know, so we're learning to operate at this size and scale with the amount of cash and like, the way that I made decisions five years ago on like, capital investments is no longer the way to make. Like, I should have put a lot more energy into planning out fleet acquisition than I did this year. And I'm feeling that. Yeah, like, that's a $250,000 cash out of bank account in a 45 day period that I should have been more thoughtful.

[David]

Yeah.

[Mike]

But I mean that's the point though. I mean is right the, that cash is king when it comes to these businesses in a different sense. In the sense that like that's what controls the business and how you pay and when you pay and what you can do and. Right. We're all about this growth, growth, growth, growth. But how do we get that growth? And a lot of it is through cash output and so not, you know, not having those, that data to make the good decisions on when you can actually afford to, to have a cash outlay.

[Sarah]

Yeah.

[Mike]

Or cash out situation is kind of a key because if you have to, if you want to expand, you need more vehicles, you need to go and either put money down, you need to purchase whatever your plan is, that's all cash out. And I don't think people understand that sometimes. I mean I didn't understand that. I, I look and say it's hard to imagine my, my business is healthy, my net is good, my gross is in there. But why don't I have anything in the bank?

[John]

And there's a couple big examples.

[David]

Yeah.

[John]

So recently. So I have two. So one is Chris Hoffman and I his. Fortunately ours isn't going to look like this but I actually don't think it's going to be far off when the year that he did 7 million of EBITDA he had like $50,000 of free cash.

[David]

Yep.

[John]

$7 million of paper profit, $50,000 of free cash.

[Mike]

I'm glad he posted that. It made me feel a lot better.

[Sarah]

Yeah, yeah.

[John]

But like that's real. We'll do 5 million of EBITDA this year and our free cash might be.

[Mike]

A million bucks but I mean that's 3%. Like 50 million out of or 50,000 out of 7 million is a 3% difference. Like if he messed up his cash forecasting by 3%.

[Sarah]

Yeah.

[Mike]

With that.

[Sarah]

Yeah. Like.

[John]

Yeah, well that's the other example. So the other example, I don't remember if this is on Twitter or in our, one of our group chats, but There was a 10 million EBITDA business losing $2 million a year and it was going to debt and capex. So buying vehicles, investing in the, in the property, like doing whatever but $12 million of debt and CapEx, 10 million to be. But 10 million is a lot of EBITDA. Yeah, like that's, they built enterprise value.

[Mike]

It's huge.

[John]

That business is worth a hundred million dollars.

[David]

Yeah.

[John]

But it's losing $2 million a year. It's like it's disassociated.

[David]

Yeah.

[Mike]

Luckily though, when you get to that size like Chris or somebody, there's options. I think that, that actually these guys.

[John]

Are running out of options.

[Mike]

Yeah.

[John]

Yeah. Which is kind of interesting because I think they're gonna have to fire sale because they can't. Who can support losing 2 million?

[Mike]

No, there's no way that's a turnaround.

[John]

$4,000 loss.

[Mike]

Tighten up like nobody's business.

[John]

That's $8,000.

[Mike]

But I do think that like more so on the Chris Hoffman situation. Like if you did miss and you needed to pull out 50,000 from the business, there's areas and there's loans that are not available to, to smaller businesses at that point. Like it's, it's extremely dangerous when you to not understand that this concept as a small business because what, what are your options? Your options are you have a line of credit.

[John]

I would actually argue it's easier the other way around as someone who is close enough to 5 million or 7 million of EBITDA.

[Mike]

So for your.

[John]

Now this is dangerous as hell. But nearly every payment provider in the world has some version of a short term loan thing.

[David]

Yeah.

[John]

So it's actually really easy for a small business to get liquidity. It's just dangerous because they are predatory interest rates.

[Mike]

Super predatory.

[John]

It's insane.

[David]

Yeah.

[John]

But, but because like if you had a cash problem.

[David]

Yeah.

[John]

You have two things working for you in your favor. One, your cash problem is probably not that much money. It's not like a $2 million problem. Realistically, it's probably more like 20 to 50.

[Mike]

I need to make payroll. It's 20,000 or 50,000 for big problem.

[John]

For the scope of the business. But it's not a million dollar issue. If I needed a million dollars like in a week and I didn't have that there, that would be a challenge.

[David]

Yeah.

[John]

But like a problem for $20,000, QuickBooks has a loan that you can just get almost overnight for 20 grand. So I think the bigger you get, it gets more complicated. You have to get. You have to cross the gulf into middle market banking which like we're not. We're in the process of bidding that right now, but we're not there yet.

[David]

Yeah.

[John]

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[Mike]

Yeah, there, there is a point where it crosses. I don't know what that point is in terms of like.

[John]

Yeah, I'll tell you.

[Mike]

Moving from like merchant service or merchant account loans, what it calls anyway, 30% loans over a year or whatever, to conventional, where you can get debt at market rates.

[John]

I'll tell you exactly what.

[Mike]

I'm excited. Let's hear it.

[John]

So there's a gulf, there's a wide chasm, huge of dangerous, like a business size that banks don't know what to do with because they're like too big for their small business banking and too small for their middle market banking. And there's really no great suite of products that fit that bubble. And that's between around 2 million of EBITDA to 7 million of EBITDA. So if you're in that zone, you're in this gray zone of banking, which is where I'm at.

[David]

Boom.

[John]

And it sucks.

[Mike]

Yeah, fair enough.

[John]

Sucks because we're not big enough to go get like, we're moving up to middle market banking right now, but the product, mainly for Treasury.

[Sarah]

Right.

[John]

And this gets. This matters more later. But it's crazy because there's treasury, there's debt.

[Mike]

Doesn't Chase consider. I thought Chase was 2 to 20 is like their small business banking, and then 20 to 100 is their next lump. So you're, you're with Chaser. You're not in their next tranche.

[John]

They're trying to move me up there now.

[Mike]

Okay.

[John]

But they didn't proactively do it, Chase.

[Sarah]

Yeah.

[John]

I mean, it cost me four grand a month of fees.

[David]

Yeah.

[Mike]

Get out of here. It's annoying.

[John]

Yeah, super annoying. But, yeah, I lose. What is that, $300 a day staying with Chase right now. So we're trying to move off as fast as we can. And the middle market banking option wasn't like, wasn't that attractive.

[Sarah]

So.

[David]

Yeah, but.

[John]

Yeah, but, but that's just treasury, like, debt is a whole nother ballgame. So we're like, what we're doing right now because we're in that bracket of dead zone. We're like, we. I don't want to lose $200 a day in fees, which is what's currently happening. So we're sliding out of Chase as fast as humanly possible. And then later this year we're bidding the whole thing, debt and Treasury. Because treasury is what all the banks want. Like they want sitting cash, they want the. Exactly two million dollar checking out. They want that. The debt they somewhat want.

[David]

Yeah.

[Mike]

Which brings us to the last episode of Weird Businesses I want to Own and one of them is a bank and.

[Sarah]

Oh yeah, yeah.

[Mike]

That, that problem could be a solution, a product could be a solution.

[John]

Could be. But yeah, so, so that, that's how.

[Mike]

That interesting.

[John]

That's how banking work.

[Mike]

Yeah.

[John]

So in between like the 2 million of EBITDA and 7, which essentially it's.

[Mike]

Like 20 million, which is what Chase was like, we just mentioned 20 million in top line to like 70 million in top line. If you're running 10%.

[Sarah]

Yeah, yeah.

[John]

And like, you know, if, like what's your. I know we're on cash flow, but cash in the bank is not equal to cash flow. You can have an amazing balance sheet or you can have an amazing P L or you can have neither. Like for a couple years we had a terrible balance sheet and a terrible piece P and L, which was not an exciting place to be because you have, it's a double turnaround. Like if you have a terrible P L but you've got cash in the bank, that is a solvable problem. But if you, if you have a terrible B L, a lot of debt and no cash in the bank solvable. But you will get gray hair.

[David]

Yes.

[Sarah]

Oh, yeah.

[Mike]

Banking stuff is fun.

[Sarah]

Yeah.

[John]

So cash flow disconnected from net profit. You want to be thoughtful about timing of vehicles. When's the right time? Are your processes dialed to cash flow? Does your team care about cash flow? Like are people's bonuses dependent on. Is that money received yet? How often do you talk about it? Are you starting jobs without down payments? Are you paying tax if we didn't get paid? Are commissions going out if we didn't get paid? Are you starting jobs without notices to proceed? Who's responsible and how fast are they completing financing? It is a, it's a thing. About a year and a half ago.

[Mike]

The one thing that keeps me up at night quite a bit. What is that? It's like cash in. Making sure we get our cash in for the healthy cash flow.

[Sarah]

Yeah.

[Mike]

Because I mean, we talked about it, you know, on a different episode recently was like last year you ran 5%.

[Sarah]

Yeah.

[Mike]

When you run a 5% net business.

[Sarah]

Yeah.

[Mike]

Understanding that like you miss anything.

[Sarah]

Yeah.

[John]

Well, is your debt 5%? Because that might be break even. Like for us, our debt is okay. So you lost.

[David]

Yeah.

[Sarah]

Yeah.

[John]

So I think that's the important distinction already because you were like, I'm a 5% business, but no, you weren't because you have debt. So what we've started to try to talk to our team about is when we present overhead, we've started presenting overhead plus debt.

[Mike]

That makes sense.

[John]

So, hey, our, our break even if I'm just going off of overhead is like $1.4 million, but actual cash break even is like 1.6 because of the debt.

[David]

Yeah.

[Mike]

That's probably a better way to design it too, so that you can see it without having to jump into.

[John]

Yeah, we didn't want this fake bullshit rigmarole.

[David]

Yeah.

[John]

Our monthly debt plug is X. Here's how we cover it now.

[Mike]

Yeah. So we accidentally get to that. We get to that on our cash outlay. Yeah, like our cash or, you know, 14 day cash out cycle paper that we're talking about because that's obviously, you know, we pay out debt once a month on this. We pay a debt once a month on that for vehicles and then the SBA loan. And so like we see that, so we know what our cash flow actually is. But from a P L standpoint, that's actually pretty genius to actually know. Like, hey, we want the team to know break even.

[David]

Yeah.

[John]

I mean, well, because for 2023 we made the mistake of talking about net where we talked about break even, but hey, shocker, it wasn't break even. We have debt.

[David]

Yeah.

[John]

So like we lost and it took us a while to learn. Like, hey, we really have to talk the real number here because otherwise we think we're doing great, but we're not.

[David]

Yeah.

[Mike]

And that's bad decision making because you make bad decisions on the back end of that. It's like, oh, I can do branding now.

[John]

I can do it. I can make investments, I can do this thing.

[David]

Yeah, shouldn't be.

[Mike]

Yeah, yeah, should be tightening up.

[John]

Yeah, we've been, we really started honing in on EBITDA about a year ago. We're like 15, 16 months into it and like tightening the P and L, adding more automation, more offshore, raising gross margin. Like, we have been focusing on it. We have not been as deliberate about cash flow. So now we're a year into like, hey, EBIT is healthy, like trailing twelve, like, we feel really good about that. I think we're in the threes, which is amazing. Next we're, we'll finish year to date on pace for the, you know, high fours five. So we're like pumped about the work we've done on ebitda, we're now getting ready to really hit cash flow. So that's going to be okay. How are we thinking about debt pay down? How are we thinking about freeing up lines of credit?

[Sarah]

How.

[John]

How are we thinking about prepays or non prepays? When should capex happen? And like how do we think about that? So that's like, that's our current quarter. Three Rock is like me figure out our stance on cash flow because we've really been dialed in on ebitda. So now we have like a good, healthy EBITDA business, which is a great.

[Mike]

Place to start to like then dump, jump into cash flow. Like that's like a huge stepping stone.

[John]

Well, and we fixed the balance sheet. We like cashed up the balance sheet. So now we're like, we're entering Q3, the healthiest one, the healthiest we've ever been as a business ever. But two, the healthiest we've ever exited a quarter. Two. Because usually like we're typically cleaning up the mess from Q1 in June.

[David]

Yep.

[John]

And we didn't have to this year.

[David]

Yeah.

[Mike]

H vac. Well, I mean, did you. I have so many questions quickly in plumbing, did you have that issue too? Or was that mostly once you took on H vac?

[Sarah]

What do you mean?

[Mike]

Like you're cleaning up Q1 and Q2. Was that an H vac specific problem when you brought H vac on or is that a trade specific?

[John]

That's been my whole career.

[Mike]

Okay, so that's even in plumbing. Good to know. And then back to the. That you talked about truing up, getting your EBITDA correctly and focusing heavily on we need to know our EBITDA numbers and that kind of visibility and like.

[John]

And getting it to the number we wanted.

[David]

Yeah.

[John]

Because we.

[Mike]

Okay.

[John]

Like I think it was like if profit happened, we were excited and. And now it's like, no, 15 is the target. Like we gotta hit 15.

[David]

Got it.

[John]

So if we miss 15, like May was like 8% or something. And that sucked.

[David]

Yeah.

[Mike]

And so, so with that though, like, so there's two sides I see to this. Like one side is the visibility side and actually creating. Because you don't know if you're winning unless you've created that visibility and then you can go and actually try to drive to that with your team. And we're going to try this function and this function and hence the quick turnaround of visibility. Right. I tried this lever. Didn't do anything. Try this knob. Did a little bit. Try this Knob. It worked.

[David]

Boom.

[Mike]

But you can't get there without good visibility. So not to turn this into a. Who did you hire for your accounting team to get that correct? But who did you hire for your accounting team to get that correct?

[John]

I mean, our controller's done an amazing job.

[Mike]

Okay. So it was, it was the controller hire who was able to really drive the value in that.

[John]

So I, I designed all the processes.

[Sarah]

That we now run.

[John]

My controller perfected them.

[David]

Okay.

[John]

So like our initial cash flow forecast. I don't know what a proper accounting cash flow forecast. I know what the one is. I designed at 4:30 in the morning when I was drinking coffee on my treadmill was. And that's currently the process we use. We just extended it out to 13 weeks from four. So all of our current cash modeling, which I don't think is great because clearly I would have been able to make better cash decisions than I did in the last 90 days.

[David]

Yeah.

[Mike]

Because that's what we're trying to get. Because we made a, we made a big one recently where we paid off too much debt kind of.

[John]

Oh yeah.

[Mike]

Like yourself, dangerous. I thought that we were doing well and so we paid off a ton of debt that I was like, oh, yes, good. We have this, we have this killer may and we paid off debt and.

[David]

Then.

[Mike]

This other bills came along that we thought we had an extra 50k in the account for and we didn't have an extra 50k in the account.

[Sarah]

Yeah.

[Mike]

So then it was very. We'll put it this way. At one point we were down to our last thousand in cash in the account.

[Sarah]

Yeah.

[Mike]

And scraped by payroll and like just got everything through there by the skin on our teeth. But like that's the kind of if you don't have the good data, you make the bad decisions and then you can start driving towards those good decisions and good processes.

[John]

That's what we're trying to hit now. So like, hey, we have this acquisition debt from three, four years ago. We've been faithfully, you know, doing our thing, paying, paying it. Our cash position now feels really healthy.

[David]

Yeah.

[John]

Like we're good, which is awesome. So now we're okay. How much should we pay off at what cadence? Because we will have tax. We have to deal with that. We do have some more capex. So it's just a different level of cash planning than I'm used to. Fortunately. Like probably a couple podcasts and like a few articles will help like solve this for me.

[David]

Yeah.

[John]

But that's the current like step we're in on cash flow.

[Mike]

Yeah, sorry. I'm trying to like, I'm thinking about like, like where, where's the, where's the actual.

[David]

Right.

[Mike]

So from.

[John]

From the tactical stuff.

[Mike]

So that's what I was going.

[John]

I really think, like tactical. I think the easiest thing that everyone can and should do right now is start an automatic transfer to a savings account. It sounds so simple and it sounds so dumb. And I don't care because it is simple and dumb. But it works like we have a transfer every single day. It's $8100 goes from our operating account to what we call our capital account we pull. That's both a profit account or capex. So if I'm doing a big fleet investment, then I'm going to pull out of that. But we've used that account for acquisitions over the years. We've used that accounts for whatever. Sometimes it's excess liquidity if we need it. But it's a savings account, like that's it. It's a simple concept. So I think like, don't over complicate it. Set up an automatic transfer, same as you do personally.

[Mike]

What do you think about. I mean.

[John]

And then spend less money. So what we've started doing and this genuinely is helpful.

[David]

Yeah.

[John]

Again, this sounds so dumb. This is like Personal Finance 101. That's kind of why I like it. It's like the bigger the business or like the more money. It's like at the end of the day, finance concepts are simple and I think we want to over complicate them. But like spend less. Spend less than you make.

[Mike]

Spend less money and make more money.

[John]

Yeah, make more money. Spend less than you make and like automatically transfer and hide that money.

[David]

Yeah.

[John]

So like some of the stuff we do, like we lock up money in CDs. So I'm a entrepreneurial person and I like to look for new opportunities. So if I leave too much cash sitting in an account, my brain is going to start being like, oh, maybe we should go do some real estate. Maybe we should go buy this magic the gathering business. You know, maybe we should go do this random thing. So we've started locking up money in CDs.

[David]

Yeah.

[John]

So the bank still gives me credit for having it. So like I get reduction of fees or I get. You need minimum balances as you. As the banking relationship grows. So I still get to keep that cash. It's locked up, so I can't touch it. I get 4 or 5% interest on it. And my brain's no longer like, oh, Man, I gotta spend this money. I gotta spend this money. So. So that has been a huge win. Again, very personal finance 101. But like, hey, anytime you have excess money, lock it up.

[David]

Yeah.

[John]

Today's break is brought to you by Owned and Operated newsletter. Go to owned and operated.com and sign up for a twice weekly drop that we send to 40,000 contractors with actionable tips on marketing, hiring and growing your business. Join the 40,000 other Home Service contractors already signed up and learning. Enjoy the rest of the episode.

[Mike]

I think that it's difficult sometimes too though, because right on one hand, like growth and growth initiatives are naturally a spending.

[David]

Right.

[Mike]

It's like spend, spend, spend, spend. And then I think there's moments.

[David]

Yeah.

[Mike]

There's definitely steps.

[John]

So we're in a moment right now and I'm really trying to get it right. We're in this moment where we, we have like a year. I think I said this earlier, but we're knocking out record months in most departments.

[David]

Yeah.

[John]

And it doesn't feel Herculean.

[David]

Yeah.

[John]

Like I'm sitting over here and just chilling with you and it's fine. I'm pretty sure, like sales are great and it. So it. Like we turned it into a machine.

[David]

Yeah.

[John]

And in every department we're like working on processes to continue to scale. And like we're in this stage where we have to be thoughtful about how we approach growth. Because if I come in and fucking cowboy this thing.

[Sarah]

Hell yeah.

[Mike]

In. In the style of John.

[Sarah]

Yeah.

[John]

Well, my, my director of sales, he said it best when we sort of like had a conversation about this. He said, look, if all you want to do is get to 100 million of sales, we can get you there. I can't promise what state the business is going to be in when you get there. And when I think about some of the biggest fail. Public failures.

[David]

Yeah.

[John]

In our industry in the last couple of years, businesses that went way high and then went way low, they hit that number and then they bounced right back like it was not sustainable. And I think it's because they didn't put in the work that we're putting in right now to build processes to make sure we're developing future leaders. Like, we are building the infrastructure from 30 to 100 million today. And because we're. We're still growing like we're 25 or 30% year over year, but we are intentionally not like going freaking balls to the walls this year because we're trying to focus on our infrastructure. Is our platform secure? Are we good to Go, can we scale all the different things we're doing? Is our sales structure good? Is our marketing structure good? Is our call center built to scale? And while we're doing that, is our balance sheet built to scale? So we've been able to take a breath this year.

[David]

Yeah.

[John]

And like get ourselves set up for success.

[Mike]

I mean that makes a ton of sense. Especially as you get bigger and you start to be able to actually optimize certain items or you start optimizing efficiencies and operations. You're starting to grow the amount of cash you have and you could easily take that and just dump that back into the wrong spot in the business. And then all of a sudden you're like, oh shit, I just ruined something.

[Sarah]

Yeah.

[Mike]

Like it's, it's the idea of like, I think a lot of small operators go, oh, there's no such thing as too many leads. But like there is, there's no such thing as too much of this or too much of good stuff. And there is if you're not ready for, you don't have the infrastructure behind it. So I'm with you on that one. That one sounds good. If there is a takeaway today because I think this is a great, extremely granular episode where I want to leave everybody with like, if you do one thing like what is that one thing other than the one squirrel some money away.

[Sarah]

Yeah, yeah.

[Mike]

Well, because like how do you. I guess what I'm thinking is like I could go to tonight and I could set up that and pull 2,000 bucks off the account a day and call it a, call that a win. But that's not the win. Like it helps with. Dude, it helps with cash in like a savings account. But like at the same time I still don't have good numbers. I don't know if I can afford to K a day. You know what I mean? I don't have anybody in my business.

[John]

So I would start slow.

[Mike]

Like where do the systems come from that help you understand the what's going on and then where's the systems? I actually don't think we should do operational systems just because like the hire doesn't matter unless the hire is specifically going to build those operational systems. So like what, what does that look like?

[John]

Well, I mean, accurate, accurate and timely financials is important. So if that's a staff account, if that's a controller, if you're a 10 million dollar business, like I'm sure I've said this differently in the past, but like John today would say controller, 10.

[Mike]

Million is a great investment focusing on quick and timely financials and cash flow.

[John]

Like your controller or whoever is in your accounting seat should be fanatically obsessed with the cash flow and cash in that account. Like they should be obsessed. Like my controller and I talk a lot all day about cash flow. Like that's it. And if you don't have someone that is that freaking worked up about cash flow, you have the wrong person.

[Mike]

And so that's the thing is like, that's me and there's only me in the business. We are, you know, only.

[John]

Yes.

[Mike]

Half that size. But that's my next wonder is like, hey, is there somebody that could own this and then really get those financials to the T so that we can then start actually really focusing on this.

[Sarah]

Yeah.

[Mike]

Probably not a controller level, but maybe a really good senior staff accountant or a staff accountant who is young and hungry. So if you're a young and hungry staff account who wants. Loves cash flow. DM owned and operated.

[Sarah]

Yeah.

[Mike]

And work with Jack.

[Sarah]

Yeah.

[Mike]

It's fun.

[Sarah]

Yeah.

[Mike]

I promise.

[John]

Could be.

[Mike]

No, so.

[John]

So, yeah. Ouch. I. I do want to.

[David]

So, yeah.

[John]

Getting tight financials, it. I mean, it could be like an agency type thing. Those like bookkeeping agencies. Like, I feel like those are fair game. It's whatever gets you tight financials.

[David]

Yeah.

[John]

Timely. Because you need to be able to make decisions. You need to understand the game.

[David]

Yeah.

[Mike]

I do think there's some strategy behind it that those, those agencies won't do.

[John]

No, they.

[Mike]

So like apple tree business. Who sponsors Jack positions? Patrick's amazing. Like, we are extremely happy with him utilizing him. But there is going to at some point be somebody that needs to be in your business who's working on kind of strategy and it's less so. Well, maybe it's almost like analysts, you know, maybe you pair.

[John]

What could be. But I think. Don't overcomplicate it. I would just like bring on an accountant on top of a bookkeeping agency.

[David]

Yeah.

[Mike]

Which gives you less. Gives the accountant less lift. So it could be. Maybe they could focus more strategic on strategic.

[John]

My controller right now is pretty day to day because we're like in the middle of a lot of projects.

[David]

Yeah.

[Sarah]

Yep.

[Mike]

I love it.

[David]

Sweet.

[Sarah]

But yeah.

[John]

And I, I do. I really want to just reemphasize. This is Personal Finance 101. Spend less than you make. Make more money. Automatically transfer and lock it away. Like it's personal finance 101. And if like I have friends who've been consistently squirreling away for longer than I have and like not pulling it out the way I have for investing in new stuff. And they're sitting on like a cash hoard five times the size of mine. Like literally five times and similar size business.

[Mike]

So it talk about good retirement account.

[John]

It's. Well, they're, they're large. Like the cash.

[Mike]

What do you do with it when it gets that large?

[John]

It's becoming like the cash itself is becoming its own business. Like the returns off it are spitting off like a third or 40% of the core businesses net cash. It's crazy.

[David]

Yeah.

[John]

Yeah. And he can, you know, he can take some swings. Swings that I can't take.

[David]

Yeah.

[John]

So I, I do think the squirreling away and locking it up is like really important. So we've really been working on this automated CD thing. Every time this one account hits a certain dollar amount, we immediately yeet 200 grand into a CD. Yeah, just lock it up.

[Mike]

Lock it up. I mean, I like that. And then if you know it's going away as well from like a cash flow perspective and planning, you just plan it out and then somehow. I don't say somehow. You always make it. But like, if you know what's coming up, if you know it's coming up and you're expecting it, like you make it work. That's what you plan to, to hit and win for, like. Yeah, I think it's great.

[Sarah]

Yeah.

[John]

Same.

[Mike]

Sweet.

[John]

This is great. If you've learned something about cash flow, make sure you leave in the comments. I would love to, to hear it. Besides that, like sub and check out owned and operated dot com. We have a workshop coming up in August and it's going to be a ton of fun. If you're trying to break 5 million bucks.