← Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast
You’re Growing Fast… So Why Are You Still Broke?
00:51:48
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- [00:00]
A
We're talking about accounting inside a growing home service business.
- [00:04]
B
I have clarity around gross margin. I have clarity around cash flow, and then it really becomes like an asset and a competitive advantage.
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A
Yeah. You can make real decisions and we can make them much faster.
- [00:14]
B
It's amazing how much cash a service business can eat. Even if you're doing a lot of things right, people are like, where's my money? Part of it is not having visibility on, like, better accrual based financials.
- [00:24]
A
So the North Star is, I need cash. It could be for whatever. But you do need to set aside cash.
- [00:30]
B
Accounts receivable is a full contact sport. You know, like, you got to be on it. You got to be diligent, you got to be aggressive.
- [00:41]
A
Welcome back to Owned and Operated. I'm your host, John Wilson. During the day, I run a $30 million home service company in Ohio. And for fun, I run this podcast helping others figure out how to grow their home service business. Today, I'm joined on the show by Patrick Dichter from Apple Tree Business Services. Today we're going to be just exploring how good accounting can help you drive your business forward and how important financial clarity is as you scale. It's an awesome conversation and I know you'll enjoy it. Patrick, welcome to the show.
- [01:12]
B
John, thanks for having me. I'm excited to be here.
- [01:14]
A
Yeah, this will be. This will be good. This will be good. Man, I feel like I've known you for like four or five. I met you right before you bought Apple Tree.
- [01:21]
B
Yeah.
- [01:23]
A
Which was 21, 22.
- [01:25]
B
Yes.
- [01:26]
A
You bought Apple Tree. And it's grown a bunch under your watch. And you're doing accounting services for a bunch of different industries, I would assume, but like a lot of home service, correct?
- [01:37]
B
Yeah. So home services, probably our biggest category. So work a lot of H Vac, plumbing, electrical, flooring. Tree services, folks.
- [01:45]
A
Is any specific industry, like, overrepresented? The tree service is kind of interesting. Like, how many of those Three?
- [01:52]
B
I would say. Yeah. H Vac plumbing. If you were to combine those two, that's probably our biggest category.
- [01:57]
A
Yeah. Cool. What we're talking about today, we're talking about accounting inside a growing home service business. And this is like, to me, a funny conversation. I've said this on the show before. I didn't get my first clean close, like closed end of the month books until.
- [02:18]
About a year ago. Wow. Like, it was like last August. I remember it and I'm like, oh, my God. This is what? This is like, that is wild.
- [02:27]
B
That is.
- [02:28]
A
No, it is wild. And, and as I'm saying this, that's not me bragging or advocating for it. That's me being like, hey, you should not do that. Like it, it. I made my life way harder.
- [02:39]
B
Yeah.
- [02:41]
A
Than I should have. And something that was kind of funny when, you know, I bought the business like 10 years ago and I bought it from my dad and we had an internal bookkeeper. She, she was great. She was, you know, awesome. But she was also like, like I just said, I've never had a clean month end clothes. Like she didn't know how to do all of this stuff. I actually, until I got on like Twitter and joined the sort of SMB community, I had no idea that there was such a thing as an external bookkeeper to even do this. Otherwise I probably should have and would have done this at like a million or $2 million right when. And I bought the business and it was a million dollars. So I had a full time bookkeeper that didn't know how to close the books. She was great. She could deposit checks and do all that stuff. But it was sort of like, dang, that would have made my life a lot easier for the first like nine years of my career.
- [03:33]
B
Yeah. Might have had more, more clarity and you know, but you're there now, so that's good.
- [03:40]
A
Well, I wanted to sort of start off with that. Before we got on the show, we were talking a little bit about like stages and what you're seeing across these different operations. So I want to, I want to open up the hood a little bit. So for, for a lot of the home service clients you're dealing with, like what, what's the normal size? I. Well, maybe you start us off like.
- [04:02]
B
Yeah.
- [04:03]
A
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- [04:40]
B
Yeah, I think, you know, if we're talking about somebody who starts from scratch. Right. Typically what I see is from call it 0 to 500K.
- [04:49]
A
There's yeah.
- [04:50]
B
No accounting. Right. This is like, yeah, Checkbook Charlie, who's, you know, Charlie's just looking at balance and he's like, how am I doing? And then maybe he pulls in his wife or pulls in an admin and then that person is inside QuickBooks Online. So they become the bookkeeper.
- [05:10]
A
And from whether or not they're qualified.
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B
Right.
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A
Like they just start doing the books.
- [05:16]
B
Yeah. And so from 500k to 2 million, typically you'll see bookkeeping air quotes is being done, but it's really not, it's really not accurate. And so the common issues you'd see there is you don't have gross profit margin clarity. You don't have.
- [05:34]
You know, a tight month end close.
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A
Yeah.
- [05:37]
B
You don't have, you know, good depreciation schedules for trucks and equipment that you're buying, which translates to bad tax planning.
- [05:44]
A
Yeah.
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B
You, you probably have a P and L that is directionally accurate.
- [05:50]
A
Yeah. Usable ish. Yeah, yeah, like usable ish.
- [05:54]
B
Yeah, usable ish. But the, the balance sheet is, is not. And then usually what happens, this is often where we work with people, they have a bad tax surprise and then they decide to upgrade bookkeeping or they want to go buy a building or they join a coaching group or, you know.
- [06:12]
A
Yeah.
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B
A peer group. And they're like, your, your books aren't, you know, cutting it, you need it, you need to upgrade. So that's often where we'll work with somebody where they, they'll start using an outsourced firm like ours to have really trained accountants do quality bookkeeping. You know, usually from like 2 to 10 million in revenue is the range where a lot of people have outsourced it. And then beyond that, they, you know, when they grow past 10 million, they tend to hire in house full time employees, you know, maybe a controller and a staff accountant or staff accountant and a fractional cfo.
- [06:49]
A
We had a bunch of. Well, yeah, the, the clarity part I think is just kind of funny because as you're saying this, I'm like thinking back through my own, like life, I'm just like, yeah, that would have been great.
- [07:00]
B
The perceived value is a big evolution too. You're like, oh, my books are just something to get my taxes done. I've got it. Yeah. And then you're like, oh my gosh, I have clarity around gross margin. I have clarity around cash flow.
- [07:13]
A
Yeah.
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B
And then it really becomes like an asset and a competitive advantage. And.
- [07:17]
A
Yes.
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And you can make real decisions.
- [07:21]
B
You can pull those levers.
- [07:22]
A
Yeah, yeah, you can make real decisions. And I think that's what's been interesting. So again, you know, we got our first set of month end closes. Yeah. 15 months ago, 14 months ago. And.
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And so most of my career I made decisions without clear financials. I mean depending on the some it was always like directionally accurate, but the balance sheet was usually what was messed up or it wasn't organized in a way that I could make impactful decisions. So you know, now we've organized it differently. So hey, what's my marketing and like how do we think about that compared to my overhead? Are they different? Are they the same?
- [08:01]
Just like tighter close process? So we can actually get a better handle on what's real labor by month, but we can make just actually better decisions and we can make them much faster than we used to be able to make them. As an example, there was a time when we were like really growing from like.
- [08:26]
3 to 10 or like I think it was like 10 to 15 and we didn't have, we, we thought we were operating a break even and that was on purpose. So we were like, okay, we're gonna operate at break even and we're just gonna like go crazy and go grow a bunch. But the problem is if you're running a tight budget in an industry that has tight margins and you think you're running a break even, turns out you were actually losing 20% which is what happened to us. We found out later, like a year later, like actually that whole time that you thought you were running break even, you were running like kind of at a significant deficit either with cash or on P and L, you know, depending on the month, which was, you know, I would have made decisions differently.
- [09:08]
B
Where were the leaky buckets? You didn't realize was this like your AR was not as tight as you thought or.
- [09:18]
A
So the leaky bucket, how accruals would for payroll would get managed was a really big difference. I was, I thought we were having an amazing month and then this month was terrible. And it's like, oh, three payrolls versus two is a pretty big distinction.
- [09:31]
B
Yeah.
- [09:32]
A
So how do you manage that accrual? How do you manage work in process? Like if I have a, if I have a twenty thousand dollar job and it starts on the last day of the month but finishes on the first day of the next month, how do you handle that? Because there's labor in both and if it's $20,000, there's probably six or $8,000 of material. Which month did that material go in? So like being able to manage all of These different things. Like, you know, now we do our end of month whip process work in process. Whip process adds like $200,000 of revenue which like, that's a lot of EBITDA. That's a big swing because if it's not there then like, yeah, sort of rolls forward and like, that's a lot of like net profit that would, would have shown a bad month.
- [10:18]
B
Yes.
- [10:19]
A
So I think it's a lot of that stuff where like if we didn't do a good wip, like a good work in process, a good month end close, we would be making cost cutting decisions that might not even be necessary because the month actually could have been better, but we just didn't know because we were bookkeeping badly.
- [10:36]
B
Yeah, totally makes sense. And it's also, you know, it's amazing how much cash or service business can eat. You know, even if you're doing a lot of things right, it just, it just eats cash. And I think that's another common area where people are like, where's my money? You know, like, commonly when people are growing from like, call it 1 to 4 million and you start to hire a PM or you start to have, you know, bigger jobs or the owner steps out and you're like, okay, sales are cranking. I feel like we're pricing things right. Where's all my cash? You know?
- [11:13]
A
Yeah.
- [11:13]
B
And part of it is cash flow conversion cycles and part of it is not having visibility on better accrual based financials depending on the industry or the job size that you have.
- [11:26]
A
Yeah. I mean, cash. Even today. I think there's this sort of funny. I was laughing at this when you said Checkbook Charlie, which I think is really good. I think there's a funny evolution in these businesses where you start off living out of your checking account and then you start getting like better accounting and reporting and all that stuff. And you know, all of, all of the stuff that I've been reading.
- [11:53]
Like I, I subscribe to what's his name? Secret cfo.
- [11:58]
B
Yeah.
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A
And I, I love his, I love his newsletters. It's just really good. And so if you're really like, want to nerd out? It's a good newsletter. And it's kind of funny because it seems like the pendulum swings like back the other way where you become Checkbook Charlie again. And like we noticed that. But it's because like cash is so sacred as you're growing and like knowing where it's at at all times gets really, really important.
- [12:24]
B
Yeah. And the, the bigger you get, it becomes Even more important to look more forward looking. I think that's the other trend that I see is like when you are smaller checkbook Charlie, you can, you can weather a small storm or you don't have a big payroll, or you don't have like a huge monthly overhead that you're committed to. But.
- [12:42]
The bigger you are, you really have to be able to look further ahead and try to have some more clarity. And then yeah, it is sort of like, okay, the accounting's gotten more complicated, but was it the cash picture show? Can we survive our shoulder season? Can we.
- [12:59]
Survive a downturn.
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And weather the storm?
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A
Yeah. As you, as you think about that, like what do you see across other businesses? What are the type of things that companies are doing or should be doing.
- [13:12]
B
That they're not to really get their bookkeeping and accounting time?
- [13:17]
A
Like exactly that problem, like 2025 is a challenging year. Curious if you've seen that for most of your clients. But most people in home service that I talk to, including us, like 2025 was tough.
- [13:28]
B
Yeah, I think it's a hard year for a lot of people. I'm seeing, especially in B2B industries, sales cycles are longer or vendors are just waiting until the last minute to decide to kick off a project. They're stretching people out on ar, you know, they're, they're slower to pay. Yeah, their vendors. And so that, that just has a, you know, effect on everybody when you're not able to predict your sales cycle or cash is coming in slower.
- [13:59]
Also seeing continued labor and material costs going up, but more pricing sensitivity from consumers. So yeah, there's a lot of people who are, they're just not doing as well this year versus prior years. And we do a lot of work with people that are buying businesses and we see it in the financial due diligence and the quality of earnings. 25 is not trending as well as, you know, prior, you know, one, two, three years.
- [14:26]
A
So as, as folks are coming in like cash flow forecast, what were, what was the other example you gave? Like we're forecasting out to help drive success.
- [14:38]
B
Oh, just being able to look more forward. And I think, I think the other thing that I see is when you start to understand your numbers, you realize that you can pull the levers more than you thought. You know, you can. Yeah, you can say, okay, how do we dial in our pricing to be the margin that we thought, how do we collect more upfront or collect bigger deposits? How do we eliminate the punch list stuff or eliminate the callbacks that drag Collections longer.
- [15:10]
And a lot of this ties into operational decisions too. Right. Where do we really make better margin? How do we create production pay or commissions to drive those things?
- [15:22]
And.
- [15:24]
I also think the time period gets shorter when you're looking at it. Right. Like, Checkbook Charlie might just look at his year as you get more sophisticated with this. Like, you're. You're looking at quarters, months, and then weeks where you're like, okay, how are we trending data, I guess, for you? Right. Yeah, you said that before our call. Like, there's only so many working days this month, right?
- [15:45]
A
Yeah, yeah, I was. Well, I was complaining because, like, there's technically 19, but, like, black Friday and today feels like partial days. So, like, we're at 18 working days, and that's less than February.
- [15:55]
B
Yeah.
- [15:56]
A
Like, yeah, November's gonna be rough. Yeah. Very low. Yeah. But, yeah, working days matters a lot. And, like, daily budget and, like, are we achieving daily gross margin? And I think what I want to emphasize is we. We can track a lot, and we probably talk a lot about on this show of, like, yeah, we know our gross margin by the day, like, month to date trailing 30. We know our marketing spend by the day. Like, we know everything. But it's also, like, none of that could have happened without a clean close.
- [16:29]
B
Yes.
- [16:29]
A
And effective forecasting dialed in on that too. Yeah. And forecasting was really hard. I'd love to hear how you, like, if someone today was like, how do I.
- [16:41]
Do this? I'd love to hear how you would talk about doing it. Like, our version of it was very simple. We pulled up the bills that we tend to pay recurring, and it's about 25 or 30 lines long. We put the due dates and then we put it by week. And, like, that's it. It's a rolling 13 week. You know, like. And honestly, we pushed it out even Farther. It's like six to 12 months now. We just. We have all of next year's. The majority of the cash planned based off, like, a bunch of assumptions. But, like, the next two months is really the most valuable. That's what we have the most date on, because that's our ap. This is due then.
- [17:15]
B
Got it. Yeah. If somebody is new to this, I think I've said, like, here's how you create a cash flow forecast, like, quick and dirty in under an hour. Assuming you have decent books. Right. You would take your P and l out of QuickBooks Online, you'd put it in Excel format. So, you know, if I was to do this for next year, I'D take my, my P and L from like October, I'd open up a new Excel file and then I would just drag this across for, for months. Do it on a monthly basis for 20, 26. And then I would look at seasonality, I'd start with revenue, I'd just start with the big items. To say, does this feel directionally accurate of, you know, okay, I think we can grow a little bit here. We're going to be up 10% or 15%. Let's factor in the seasonality. And then, you know, if you're, if your cogs are pretty consistent, you could just drag those across on a percentage basis. And then you'd look for your big one time expenses. Right? Like, okay, we know our big insurance renewal hits here or I need to, you know, buy this other piece of equipment there. And then the real magic, you know, you take a first draft of that. This is never going to be perfect. But then.
- [18:25]
Monthly, if you can look at budgeted versus actual, it's like muscle memory. You'll start to get better and better at getting this thing dialed right. So when January finishes, you'll say, gosh, I thought we were going to do 300k revenue and like.
- [18:40]
40K of cash net profit. Was I right or was I off? You know, and then you'll start to see like where those things land. And that's how I would do it if I hadn't done it the first time. And then if you're in a cash crunch or you really want to get more granular, you do it on a weekly basis and you're looking at job deposits, cash in versus materials, labor going out. And then weekly you're looking at.
- [19:09]
Budget versus actual.
- [19:13]
A
What we did is the sheet was called cash out and that was it. So it's literally just cash out. And we started with what's the next month's cash out. So all I need to know, today's November 25th or something. So all I need to know is what's December's like cash out requirements, when's my debt due, when's my rent due? Like I know that I owe this vendor because I'm on 30 or 60 day terms or whatever, so I know exactly what I'm going to owe them.
- [19:41]
B
Yep.
- [19:43]
A
So that's how we started. And I think I did it like over some coffee on a treadmill at 5:15 in the morning. Like it was like it was done before I got off the treadmill. It gave us a ton of clarity. And we were in a cash crunch at the time this was like two years ago that I first started this process and it gave us a bunch of clarity and we resolved our cash crunch and got out of it.
- [20:04]
B
Nice. That's great. And you know, this is possible if you have decent bookkeeping. Right. But we could also talk about some of the common blunders for bookkeeping. Right.
- [20:15]
A
Yeah.
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B
We see a lot of people still on QuickBooks Desktop.
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A
What makes that a blunder?
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B
That product is going away and it just doesn't integrate with as many things. And if you're going to use an outsourced bookkeeper or accounting firm, it makes it really hard.
- [20:33]
And QuickBooks Online is just a better product now know, ask Jack Carr about it. I think he's lived in both worlds, but we helped him get.
- [20:41]
A
Oh, really?
- [20:42]
B
Yeah. QuickBooks Online.
- [20:43]
A
That's funny.
- [20:44]
B
So another common blunder is like botch CRM integrations. Right. So you. Yeah, Housecall pro service tie in. You know, all of them will say, oh, yeah, we integrate easily with QuickBooks Online. And if you don't map that properly, you're gonna.
- [20:57]
A
Oh, it's a shit show.
- [20:58]
B
Total shit show. And it's really. It's almost impossible to unwind. But you're gonna have revenue double booked or you're gonna have like invoices showing his revenue that didn't turn into jobs.
- [21:10]
Yeah, it gets.
- [21:10]
A
Yeah. We just moved over to Sage intact and that. That took like. So we actually had to disconnect because we, we got on Service Titan. We got on QuickBooks Online in 2016 and Service Titan in 2017. And we are a very small business and like I said, our bookkeeping could not close the books, so we had no idea what we were doing. So a couple years ago we actually had to disconnect them fully and do what's called a summary journal entry, a listener, where we actually didn't make them integrate at all.
- [21:41]
B
Yeah.
- [21:41]
A
And we would just go in and every day manually say, hey, this is how much went to ar, this is how much cash we received. This was our revenue for the day. So we did these summary daily journal entries because the connection was so broken and we were dumping too much data into QuickBooks Online. Like it didn't really react very well to how much information we were giving it. Yep. But yeah, so as we moved to Sage, like we were really excited to get that back, but it took like a long time to map it properly. I mean, it was down to like the price book items, which I don't. That's not how we did it. The Last time. And that's probably why it was an issue.
- [22:14]
B
Yeah, yeah. It gets really messy. Another common blunder is your payroll isn't integrated properly so you don't have, you know like your technicians or people who should truly be in cogs. Map to map to cogs. Or when you do your tax return, your book books don't match your tax return after year end.
- [22:31]
A
Yeah.
- [22:32]
B
So anyways, those are some of the big ones that we see.
- [22:37]
A
A lot of the people that you're working with are buyers of businesses and I think it's because the Twitter sphere, that's the nature of it. Are most of them first time buyers or are they continuing to be acquisitive or what are you seeing?
- [22:53]
B
Most are first time buyers. Yeah. So most are probably buying a business between 1 to 7 million purchase price.
- [23:02]
A
Have you seen or participated in a lot of add on acquisitions?
- [23:05]
B
Yeah, we've definitely done quality of earnings and financial due diligence for tuck ins.
- [23:11]
A
When do you think it starts to make sense? When do you feel like, hey, this business has their stuff together, it's time to do an add on, they can grow this way. This makes sense from an accounting perspective.
- [23:23]
B
It really comes down to their, their goals and preferences. Right. Like if somebody. I'll give him a shout out. Rob Brooks is a guy that bought an H VAC business in Florida. Yeah, he bought a small one. He's grown it really well. He's improved a lot of things.
- [23:38]
A
I tried to get Rob on the show.
- [23:39]
B
What's that?
- [23:40]
A
I tried to get Rob on the show. Rob, I know you're listening. Come on, Rob.
- [23:44]
B
Come on. He strikes me as somebody that wants to run that business for 20 years and hold it. Right. So he might not be in a rush to go do more. And if he has his organic growth dialed like Right. Versus. Yeah, you know, somebody who, you know, we're doing a roofing quality of earnings right now. Like I know that guy wants to buy multiple and like sell within five years. So I think part of it is people's appetite for.
- [24:11]
The brain damage that additional tuck ins are. And it's also like their, their time horizon, their goals. Um, you know, from, from an accounting perspective, I think.
- [24:24]
You want to make sure you're settled in with the first one and you have like, you know, decent margin, you have a decent cash position and.
- [24:34]
You'Re, you're ready for that stair step of growth, you know. Yeah, that, that's what I would see.
- [24:40]
A
But I think something that we didn't do a good job of and it's become more, more important, larger. We've gotten is like cash planning around balance sheet. So. And we're still like active learning. Right? Like, I don't think I have this figured out at all. But there's investment, like OPEX investment, and how do you think about that? And what's the ROI on that? Which. That last line is the line that I never thought that much about.
- [25:09]
And then there's balance sheet investment. And yes, it could be acquisitions, but it also could be like mainly the debt from acquisitions or vehicles or the debt from those vehicles. And this year, 2025, it really like, bit me in the ass, to be honest. So we.
- [25:34]
I just wasn't thinking about it. I wasn't thinking about the non P and L cat. And you know, you'd think I would have learned by now, but I, I haven't. So, like, I made capex investments or how we thought about debt.
- [25:49]
B
Like, what, the new building or what?
- [25:51]
A
Yeah, no, yeah, I'll give some examples. But it like, it ended up being kind of a pain point. So we, we had it. We brought on inventory, which there was good and bad. So it was a P and L win. So we, we bought like inventory really cheap. So my gross margin jumped. But I had to, I had to bring on an inventory loan to do that, and I had to front load the cash to pay off that inventory loan faster than it took me to.
- [26:16]
Actually sell the inventory, which on intellectually I knew that. I knew it would take me X amount of months to do it. I didn't really think about that from like cash, which I should have. Another example was like vehicles forever. Like through our sort of our whole, like, growth journey. I've really thought of vehicles as like the cash down. Like, what's my upfront on that vehicle? Like, that's what's going to impact cash today and a little bit on the debt or like the ongoing payments. But now I'm like, you know, next year we're talking about. I was, okay, I want 15 vehicles and each one cost $10,000 down. So in my head I was like, okay, there's $150,000 of CapEx. I'm like, no, there's like a million three of CapEx. Like, what are you talking. Yeah, so.
- [27:02]
And like acquisitions are similar. So would. It's, it's like our EBITDA can support it. Our EBITDA this year is like $4 million. But what ended up happening as I made these different decisions was our like cash out went from like 50,000amonth. Of debt service to like 130.
- [27:21]
B
Wow.
- [27:22]
A
Now some of it's like very short term. Like the inventory was paid off. So like now it's down to 100 and the other stuff's paid off too. So I think we're going to get back down to like 60, 70, but for like four or five months. It was 130 grand when my cash position was used to 50.
- [27:35]
B
Yeah.
- [27:36]
A
And like that was a big shock to the system.
- [27:41]
Which I think was just like. Okay. So I think all that to say my stance on when you're ready for acquisitions is when you have like when you can really look at a balance sheet holistically. And we really drove our business off the P and L. Once we got a clean month end close, we, we drove the business off the PNL for two or three years and now we're running, driving the business way more. Got it off the balance sheet than the P and L. Got it.
- [28:07]
B
Yeah. Makes sense that the evolution for these, these smaller guys that are like, you know, 1 to 5 million revenue. Do you have any rules of thumb in terms of like, have three months of cash on hand or six months of cash on hand or like, you know, don't, don't take on X amount of debt or you have any rules of thumb that you give people in your workshops?
- [28:29]
A
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- [28:57]
I think that's like 1 to 10. What level of risk are you playing at? Yeah, and also what year is it? Like how we think about cash and like balance sheet strength in 2025 is very different than 2021.
- [29:14]
So yeah, we, we approach that pretty differently. We're pretty close to risk off at this point. So like if one is like, I'm doing absolutely no risk at all. Like we're like a 3 to 4, whereas, you know, four years ago we were like a 9, 10. But debt was way cheaper. Liquidity was super easy to get. Lines of credits were just thrown at you. But like, that's just different in 2025. So I definitely think you need more cash on hand.
- [29:40]
Some companies do live with three months. I don't Know of anyone very fast growing that runs it of with three months. And when I say three months, that's three months of overhead, not three months of revenue. Yeah, but I don't know anyone, like, crazy fast growing that is actually running at three months of cash that is, like, independently owned, not P backed or something.
- [30:00]
B
Meaning they have less than that.
- [30:03]
A
Less. Less. Yeah. I know a few guys that are pretty big that have built like, a big nest egg over time. Um, but even them, like, they might have 4 million on hand, but that's, you know, that's not three months. Yeah, like, their overhead might be a million and a half or something. Or two in a month.
- [30:22]
B
Got it.
- [30:24]
A
So, yeah, I. I think like, a month or two is conservative. I think having extra liquidity around is helpful. Like, do you have an open line of credit? Do you have available credit facilities, like credit cards or whatever? Um, you know, we had some really interesting. One of the downsides of being in this industry is we share an N A I C S code, which is how the federal government, like, classifies plumbing, H vac electric with construction. So as your business grows that if you're in home service and you share that code, it ends up being kind of a problem. So why.
- [31:04]
B
Because banks throw you in the same bucket or what?
- [31:06]
A
Yeah, banks throwing in the same bucket. So we had an instance in 2022 where we shared an NA ICS code and interest rates went from, you know, 1% to 9 or something in like, six months. And all these construction companies went bankrupt. And because we shared this code are, like, the bank's desire for risk with that code went down to zero. So our credit facilities got, like, cut in half. Or like, one of them got cut by, like, 80%. It was our fuel cards. We went from like an $80,000 limit to 20, and we had 60 vans on the road. And we're like, what do we even do here? So the ability to have, like, extra cards on hand is needed because you have to be able to still do something even when something's totally out of your control.
- [31:53]
B
Yeah. Yikes. That's kind of scary.
- [31:57]
A
Yeah, we haven't. That happened with two vendors in 2022, but we haven't had any happen since. Cause these days we can submit clean and just like, hey, you got to, you know, you know, you got to work with us on this. Yeah.
- [32:06]
B
I think you have a big relationship given the size that you are. That's interesting that wild people don't need more cash on hand. The one other thing I don't know if it's worth talking about for your listeners is we were talking pre show about the Profit first framework.
- [32:18]
A
Oh, I'd love. Yeah, I'd love it because I think that's the. How do you get cash on hand? I think is a big question that people have in mind. Like, okay, even if I wanted to have three months of cash on hand, how do I get there? So I'm curious what your take is and happy to share mine.
- [32:32]
B
I have strong opinions about Profit First. I love the book. I love the framework. I hate it in application. When it comes to accounting, if you're not familiar with Profit first, there's a, There's a book that basically says if you get a dollar in a revenue, you should have like seven bank accounts. And you, you spread it right away so that you can see where the money goes. So you give like, you know, 15% to overhead and 15% to taxes and like 20% to payroll and X percent to.
- [33:00]
Owner comp. And I'm forgetting the other buckets, but you basically have seven bank accounts and you force each dollar to be moved there. And then that way you can know what your numbers are and save properly for taxes and make sure that you're actually profitable rather than just see what happens at the end of the month and then get your profit. So love the framework, love the idea. But what I typically see in application is like 90% of people read the book, they get really excited, they go open seven bank accounts, they stick with it for like a month, and then they don't keep up with it, and then they miss a loan payment or they bounce a payroll because they forgot to transfer money in. And then we're trying to clean up the books, and it's a train wreck. And I do see 10% of people that, they stick with it and they're religious about it and they, they swear by it. But I'm not, I'm not a huge fan of it.
- [33:53]
A
But, you know, one, One of the funny things I'm, I read the book a long time ago.
- [34:00]
And I'm just like, I'm thinking about this, like looking at you because I'm pretty sure in the first page or two, it's just like, your accountant will hate this.
- [34:08]
B
Your accountant's gonna hate.
- [34:11]
A
Yeah. So it's funny that you do have us have such a strong opinion about it. Yeah. So my opinion, I think.
- [34:18]
I think, you know, what's the North Star? So the North Star is I need cash, right? Like, we have to put cash somewhere to set aside, and that cash could be for distributions. That cash could be for owner comp, it could be for capital investment. It could be to weather the storm, it could be for whatever. But you do need to set aside cash.
- [34:41]
The other stuff, maybe. I think, I mean, I really think it's kind of.
- [34:47]
I've. I've peaked under the hood of a lot of businesses outside of industry. And if it was like, like I've seen, I saw executive recruitment business that ran at like 90% net margin. Wow. Profit first makes total sense.
- [35:05]
B
Yeah.
- [35:06]
A
You have zero cogs, you have zero vendors. It is a cash machine. Like that makes total sense to me. I think when you have the dynamics of seasonality and all these other dynamics, it's really important. It's even more important to save up for cash. But I think it can, to your point, cause.
- [35:27]
Unnecessary cash crises. So what we did is we sort of adopted our own version of it is we created one account, not seven. And we created an automatic transfer. When we first started doing it, you know, it was five grand a week or two grand a week. It was something like that. And we were a small business, like 2 or 3 million bucks a year. So like, you know, 2 grand a week is a lot of money. That's $100,000 on a. For a business that probably had 200,000 of like net if that. So that was a lot of money and it was a sacrifice, but it did help us build a nest egg. So today what that looks like now is it's a daily transfer. I don't remember how much it is, to be honest, but it's like a few thousand dollars. So every day a few thousand dollars gets transferred to capital account is what we've called it for nine years. And that capital account is used in all the ways I just said. Is it weathering the storm during like a cash flow shortage? Like, do we need it? Like November is a 18 working day months. So like we pulled from our capital account because we required excess cash. So do you use it for that? Do you use it for capital investment use for owner distributions? Do you use it to go buy a company? So that. I definitely believe in it for that. But I think like just the North Star is how do we set aside. How do we set aside and grow our cash position?
- [36:54]
B
Yeah, that's a good way to think about it. And I like the idea of just some for savings along the way. So.
- [36:59]
A
Yeah, I think it helps. I do think it was confusing the.
- [37:04]
All the different, like tax accounts, owner accounts. I can see that being. Yeah.
- [37:11]
B
The one other Comment I'll say is like, if you're growing quickly, it's, it's. I see it break very fast there because again, you're, you need the cash.
- [37:21]
A
Cash gets consumed so fast.
- [37:23]
B
Yep.
- [37:24]
A
How do you think owners should manage cash as they're like scaling quickly? What do you think, like, some golden rules are?
- [37:29]
B
I think making sure you have your pricing dialed in for like your, your ideal gross. Gross margin is thing one, you know, like, yeah, pricing's accurately.
- [37:43]
And you know better than me what their, what their margin should be. If it's like, you know, aim for 40 or 50% gross margin. But I think the other rule of thumb is, yeah, try to have two to three months of.
- [37:58]
Cash for rainy day fund. Pay your quarterly tax estimates. The other thing I see a lot of home services guys is like, you know, winter might slow down and then, you know, a lot of them are paying taxes in March, April, May, and it's just like the double whammy of like shoulder season and taxes due. So, yeah, paying quarterly estimates, I think definitely goes a long way. So you don't have a huge tax bill surprise having a line of credit available. Yeah, I mean, those are, those are the big ones that jump out of me right away.
- [38:33]
A
I think the only one I would add is a culture of collections.
- [38:40]
So if you, if growth consumes cash.
- [38:45]
How do you produce your own cash? I think that should always be the, the measurement for success. Is, Is my growth consuming or growing my cash? Yeah, and this is not me saying that. I've done this perfectly. There's been plenty of times I've done this totally wrong.
- [39:03]
But I have a good friend right now who's growing significantly this year despite headwind. I think like 40%, 50%. He's in the 20, 30 million range and his growth is actually growing his cash position because they have a culture of collections. So between down payments and 100 cash on delivery, like the more they grow, the more their cash grows. Which is unusual.
- [39:30]
B
Yes.
- [39:31]
A
When, you know, versus, like if I had 30 day terms, the more I grow, the more my deficit of people owing me money grows and then the bigger that problem's going to be.
- [39:41]
B
Yeah.
- [39:41]
A
So you almost get like, the shorter your days to pay or days to receive pay, the healthier you are by a long shot. It really ends up limiting your growth or, or accelerating your growth, depending on which side of the bucket you're on.
- [39:53]
B
Yeah. One of the main reasons everyone probably prefers resi versus commercial, right?
- [39:59]
A
Oh, yeah, yeah.
- [40:00]
B
I, I've tweeted this out before. But I've said accounts receivable is a full contact sport. You know, like, you got to be on it, you got to be diligent, you got to be aggressive.
- [40:08]
A
Yes.
- [40:08]
B
I remember before I bought Apple Tree, I worked with a cabinetry company doing consulting and coaching, and they would, they would work a lot of builders, and if they didn't submit their invoices by a certain time of the month, I don't know if it was the first or the 15th, they wouldn't get paid till the whole next month by a lot of the controllers in the. You know, by these home builders. And I remember just forcing them to, like, meet every week to just get their invoices out and, like, chase down ar. And it was. Yeah. That culture of collections goes a long way to solve a lot of problems.
- [40:39]
A
Yeah. Yeah. I mean, even now, what we found is the ebbs and flows. Like, we'll go through really great periods and then, like, we'll let up the gas a little bit and then we'll be like, oh, we got. Hey, our culture of collections. Like, what, what happened? And we're in one of those right now. Which is kind of funny because it's like, man, we've learned this like seven times. Like, how do we. You know, fortunately, it's like muscle memory to kick it back into place. But it's important, like, you know, if in a 10 or 15% net profit business, there's not enough room to play to, like, not get your cash. Yes.
- [41:13]
B
Related to that, I see a lot of people debate, like, credit card payment fees and like, oh, man, I should just take checks from people.
- [41:19]
A
Oh, yeah, yeah. And the cost of cash. No, no, like, we don't debate it at all. Like, pay us money.
- [41:24]
B
I'm with you. I'm like, eat the credit card fee because you're going to get paid faster by so many homeowners or they're going to finance jobs, bigger jobs that they wouldn't have. And it's easy. It's not. It's not just apples to apples to say, if I would have gotten checks from everyone, that I would have saved 3%. Like, no, you would have sold it.
- [41:41]
A
Well, and what's the, what's the cost of capital? Like, if, if, because you missed, you had to draw on your line of credit, and my line of credit is 7% interest right now. So, like, okay, so I saved 3% to pay 7. Like, how did that math work out? Like, it didn't. I think a better way to attack it is aggressively attack your cost of Merchant services. And even when someone tells you they can't negotiate, you can usually still negotiate it. Like Service Titan. We've negotiated very hard on our merchant services and we, we pay the same dollar amount comes out of my account as when we were a $10 million business. Like monthly. Yeah, yeah, it's like $21,000 a month in merchant and that's like roughly what it was when I was a third of the size because of how much we've negotiated our merchant fees.
- [42:31]
B
All right, I'm gonna have to go negotiate with my, the equivalent of my Service Titan is called Canopy. It's like a, it's a ERP for accounting firms.
- [42:39]
A
Yeah, you can, you can, you can hit that thing really hard. Yeah, really hard. And even now we have another vendor that we're negotiating with and against Service Titan where like we can save another seven grand a month, which, that's $84,082,000. $84,084,000. That's a lot of money.
- [42:56]
B
Goes a long way.
- [42:57]
A
Goes a long way. Yeah, that's a lot of money. I want that. Yeah. In the trades, every wasted minute costs you. Supply House makes it easy with over 280,000 products from 500 plus trusted brands. Plus they have exclusive perks through their TradeMaster program, like better pricing, free shipping and priority support. Get 5% off your first order@supplockhouse.com with code code OOF. Supply House. Real people, real service. If people are wanting to like prep their business for sale, like how do you think they can, how do you think they can get there? What do the books have to look like?
- [43:35]
B
Yeah, I think this is a area where people kind of get, you know, penny, penny short, pound foolish or whatever the saying is. Yeah, I would say messy financials are probably the number one deal killer, whether you're selling to strategic buyer or a single person. So really having, you know, good clean financials for a one to two year period.
- [44:01]
File your tax return as soon as you can. You know a lot of people are going to do an SBA loan. The lender is looking to the most recent tax return. So you know, if you're extending and like not filing until October 15th, that's likely going to delay a deal that's mid year. The other thing I would say is.
- [44:20]
Just be ready that it's a part time job to go sell the business. So having those financials ready, trying to have a data room like a Dropbox or Google Drive where you have all that information and all your prior tax returns, those are probably the biggest ones. And.
- [44:41]
You know, if you're using a broker, just know that it's. It's a long process. But clean financials are going to solve a lot of your problems, keeping keeping them current during the sales process.
- [44:53]
A
Something I've noticed this year specifically, there's more people raising their hands than ever to like, hey, I'm ready to sell. And I suspect it's because it's, hey, it's been a hard year. It's been a hard year. And like, next year doesn't look like, much brighter. It's not like, oh, yeah, it's totally going to get amazing. It's more like, oh, yeah, we're probably heading into a recession.
- [45:17]
So I think I see more and more people starting to tap out. And some of the mistakes that I see is like, if you're going to go and sell your business, are you speaking the same language as the buyer? Like, what's an add back? And, like, can you talk about it intelligently? Do you know the difference between a balance sheet transaction and a P and L transaction? I was working on something like a year ago, and someone was claiming balance sheet transactions as an ad back. It's like, that's cash. Like, I can't do anything with your down payment on a vehicle. Like, that's irrelevant to, you know, your P and L. Yeah. And it's not that that slowed it down. It's just that it's like, okay, if you don't understand that, what else don't you understand? Yeah, like what? What else are we going to miss? What else am I going to find? If you don't understand, like, the difference between a cash, like a cash payment and an expense? Like, that's kind of a big distinction. Clean financials for sure. Or financials at all. Like, you know, like, Jack's looking at businesses, too. And like, he and I, like, once a month it'll be like, oh, yeah, we got another one. And it's like, you know, someone gives me, yeah, we did $600,000 last year, and they give me a shoebox of paper receipts. And it's like, I cannot do anything with this. Like, I'll give you a dollar for your business. Like, I don't know. Like, do you have a business? Is it real? Like, I have nothing to buy.
- [46:40]
B
Yeah. I think another thing I thought of is just, you know, not being too aggressive or committing tax fraud. You know, like, oh, yeah, if. Yeah, if, you know, you're like, oh, yeah, we did 1.1 million of sellers discretionary earnings, but our tax return shows like 100k that we pay taxes on usually means that you're writing off way too much and things that aren't legitimate. And so for somebody who's getting bank financing, they're not going to be able to underwrite based on what the profitability was. And also if you get hyper aggressive, you'll turn off a lot of buyers.
- [47:21]
A
So I have an interesting note on this that I think is kind of funny.
- [47:27]
That was totally true for us up to a certain point. Not of like us committing fraud, but of like banks looking at us the way that you just described. We pay our taxes. What was really interesting is about two years ago and it must have been when we crossed a certain EBITDA threshold, but they actually stopped giving a shit. Like they care about free cash, but like we are underwritten on ebitda, period. And it is, it was a very interesting transition because it just like switched one day where we were talking to somebody, I don't even remember who it was, and they were like, yeah, we don't care about your net profit, like what's your ebitda? And I'm like, what?
- [48:08]
B
That's wild.
- [48:09]
A
It was wild.
- [48:11]
B
I'm always surprised that, you know, banks have very different stances, you know, on different things.
- [48:17]
A
Well, yeah, that we learned. But yeah, that was. Well, it came up more and more where like vendors started. Like we have to. Because our credit lines are so large, we submit financials to a lot of our vendors.
- [48:28]
B
I see.
- [48:29]
A
So it's like quarterly, we have to submit these or like our enterprise, we have to submit quarterly financials or. Yeah, just a lot of our day to day vendors now and almost nobody gives a, at all about anything under ebitda. And it's because it's interest, depreciation, which like sort of cash, sort of not so, you know, they're trying to get their sense of like what is free cash minus the debt. Yeah, yeah, it was a really interesting transition and I think it happened around 2 million of EBITDAs when that like switch happened. Or Maybe it was 1 million of EBITDA, but there was some point where they did go from like not really caring about anything other than ebitda. And I don't really know why, but it was an interesting switch. Reframed a lot of the conversations.
- [49:15]
B
Yeah, yeah, yeah, those are, those are interesting. I think the other couple of small comments I'll give is, you know, if you're getting ready to sell business, just know that you're going to have a big tax bill and like.
- [49:31]
And also know that working capital is a big landmine, you know, so what I commonly see the buyers, they'll send an loi, the people assign an loi, they think they understand it and they don't. Then four to six weeks later, there's, there's some obscure language around working capital of like seller to leave working capital. It's usually right around the same time when the sellers learns how much they're going to pay in taxes that they also learn like how much working capital the, the buyer is going to ask them, right? So they're like, wait, I got to leave 450k working capital in the business and I'm going to have a tax bill of 1.1. Like, why would I sell this thing? You know, and so just being able to wrap your head around that or just know early and upfront like if you're going to leave working capital or not and where those calculations come from.
- [50:23]
And you know, if you get that loi, I would try to understand the tax impact quickly and do what you can. But also like, if you, if you get a huge windfall, there's only so much tax planning you can do, depending on the deal structure.
- [50:37]
A
Yeah, agreed. Good. Comments. I've got a quick fire question for you. What is one thing that you wish operators would pay attention to sooner?
- [50:47]
B
Hire a professional bookkeeper sooner.
- [50:51]
A
Yeah, Well, I think my example is like a great one of one, I just didn't even know that you could do that. And two, it set us back, set us back a long time. How much further would we have been if we had better data? And we're making decisions now in the last two years, year and a half, with like very clear data. And it's allowed us to go from like surface level of did we make money this month to hey, did we make money in the last hour and how much? And like, but it started with did we make money?
- [51:21]
B
Yeah.
- [51:21]
A
And we couldn't even understand that. So. Yeah, I totally agree. Yeah, good comment. Thanks for coming on today. This was, this was awesome. If people want to hear more about you, like, where can they find you?
- [51:32]
B
Yeah, thanks for having me on. You can check us out. Apple Tree Business Services, our website, appletreebusiness. Com. I'm pretty active online. Patrick dichter on Twitter, LinkedIn or wherever else you want to find us. And yeah, I appreciate you having me on, John. It's been great.
- [51:47]
A
Awesome, thanks, Patrick.