Finance Friday: How Do I Get Out Of This Cash Flow Crisis?

May 11, 2022

Everyone has experienced negative cash flow . If you have a troublesome rental property, you may experience negative cash flow. If you have a low income but an appetite for expensive eateries, you may also experience negative cash flow. But, more common than most, if you’re in the early stages of building your small business, negative cash flow may be a harsh but hard to mitigate reality.

Chris is feeling the sting of sinking purse strings every month. At the start of 2020, Chris left his old job as an engineer to start working for himself. He hired a couple of employees and started taking on more and more work. But, he’s spending too much time training his junior engineers and not enough time locking down high-value contracts, leaving him in the red every month. Surprisingly, more business owners face this problem than you would think.

Scott puts on his CEO hat to dive deep into the finances of Chris’ business and gives some challenging, yet reasonable, advice on how he can immediately improve his financial situation . With suggestions from both Mindy and Scott, Chris may have a better picture of how he can go from cash flow negative to very comfortable with highly positive cash flow in the near future. You may not be in Chris’ position now, but if you ever plan on starting a business, or have already, this episode is a MUST.

Mindy: Welcome to the BiggerPockets Money Podcast, show number 296 Finance Friday Edition, where we talked to Chris about the sometimes harsh realities of running your own business.

Chris: Well, when I was putting together my little summary for you guys today, this is the first time I’ve sat down and looked at my business financials in a while, because I’ve been working 60 or 70 hours a week without doing the financials, and I was coming to the same conclusion that obviously what I’m doing is not working the way I’m running it right now.

Mindy: Hello. Hello. Hello. My name is Mindy Jensen and joining me today is my smart cookie cohost, Scott Trench.

Scott: What a fully baked introduction as always Mindy.

Mindy: Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott: That’s right. Whether you want to retire early and travel the world, go to make big time investments in assets like real estate, or start or reset your own business, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards your dreams.

Mindy: Scott, today, we are going to speak with Chris, a man who lives up in Canada, but all the information still applies to anybody, no matter what area of the world you’re in. He lives up in Canada. He would like to be financially independent within the next 10 years, but he’s got some interesting curve balls being thrown at him right now. Most of them stem from the fact that he owns his own business.

Scott: Yeah, we’ll get into this, but Chris is upside down. His business is not bringing in enough income to support his lifestyle, and he’s got several employees and some real problems there, and I think this was a particularly interesting Finance Friday, a situation we have not come across before, and I think we had some tough, unfortunate advice that I think we hope we’re wrong on, but think probably might need maybe to be implemented by Chris.

Mindy: Strongly considered. We’ll get to that in just a moment. I do want to stress that this is advice specific to Chris, but not really specific to Chris because he’s running his own business, and I think there’s a lot of business owners, who will listen to this show today and say, “Ooh, I feel seen.” We gave Chris several options. We didn’t just give him one option. This is what you have to do, and that’s the only path to success. There are a lot of things to consider, and I hope that if you’re listening and this is making you feel seen, you think of the different options that we’ve given Chris and see if those can apply to your situation as well.

Scott: Absolutely. Well, should we bring them in?

Mindy: No. We have to tell about the contents of this podcast. We have to talk about our attorney saying the contents of this podcast are informational nature and neither Scott or I nor BiggerPockets is engaged in the provision of legal tax or any other advice you should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and vice financial implications of any financial decision you contemplate. Chris and his wife are looking to hit FI within the next 10 years, but they have incredibly variable income, anywhere from $1,000 a month to $7,000 a month. His most burning question is, how do I plan for expenses when money is so unpredictable. Chris, welcome to the BiggerPockets Money Podcast.

Chris: Thank you very much Mindy. I’m happy to be here.

Mindy: I am excited to talk to you. You have a lot of interesting aspects to your financial situation, so let’s jump right into it. What is your income and where’s it going? I already answered that question. Your income is whatever and where does it go?

Chris: Precisely, whatever. That’s a very good way of putting it, actually. I’m running my own business, so it is very variable and it has been a ride for the last six months. Plus my wife is currently on medical leave, so all told I’ve got two rental properties bringing in about $850 a month. My wife’s employment insurance is bringing in about $2,000 a month. Canada has this baby bonus basically, that’s bringing in about $300 a month, and then my business, generally most months it’s mildly profitable, but it averages out to maybe $1,000 to $3,000 dollars a month. All told, I’ve got income at around 5,700 bucks a month, Canadian. You can translate that to American, if you really want to.

Mindy: We’ll just go with a dollar for dollar and call it, because it’s the same. The math still works. Canadian math is the same as American math.

Scott: What does your business look like six months to a year from now?

Chris: Ideally, I really need to stabilize. I just hired on a new employee about two weeks ago, my first employee came on just longer than six months ago, so right now I’m looking to stabilize and bring it up to a steady. I’m bringing in $5,000 to $7,000 a month after expenses, and then I can look to grow again, so that would be the six month ish plan.

Scott: What would you expect annual revenue for your business to be?

Chris: Revenue? I’m really aiming for somewhere in the $190,000 to $210,000 range sometime in the next year. That pretty much sums it up. It is obviously very variable.

Scott: Your annual revenue is $200,000, what is an employee cost?

Chris: Sorry. I’m hoping my annual revenue is going to be $200,000 in the next six months. Right now, I’m bringing in somewhere in the range of $120,000 annual. I’ve got a couple of bigger projects lined up, so hopefully they bring me up to 200 grand and my employees are costing me roughly 50K a year each, roughly.

Scott: In base salary or base bonus?

Chris: That includes everything, taxes, everything.

Scott: Okay, great. We’ll come back to the business in a little bit here for sure. We’re bringing in $5,700 a month, where on average very variable, where is that money going?

Chris: About half of it goes towards my housing. That includes mortgage, insurance, everything, $3,200 a month, utilities as well. My three year old costs us about $1,500 a month, of that 1,250 is going towards childcare, household, and food. We’re just under a thousand dollars a month with food taking $600 of that. My wife and I spend about $375 each a month, so $750 for us, and that’s haircuts, through alcohol, through a new microphone for my computer, for a BiggerPockets interview. We’ve got travel, was $350 a month last year, which was all combined into one big trip. I am Canadian, so we have universal health care, but I do pay for some private health insurance for dental, vision, any PharmaCare stuff. Giving includes gifts and charities at about $300 a month, all told. My cars, $750 a month. The vast majority of that is payment towards a $30,000 car loan and then restaurant 150 bucks a month. If you add all that up, it runs into about $8,250 a month, so that’s -2,600, is the difference if you might have noticed.

Scott: Yeah. We can definitely see that. How much cash do you… Oh, go ahead, Mindy.

Mindy: I was going to say right here, I can see a couple of things to discuss, but Scott’s got a better point. Let’s finish up the numbers first and then let’s go back and talk about these

Scott: Where are your assets and how much cash do you have?

Chris: Cash, I used to have a lot more cash. We’ve been living off of my savings for a while, so I’m down to somewhere in the $10,000 in cash, and then assets, if you add my cars together, they’re worth about $35,000, but my wife’s car being the vast majority of that, and then my business has about five grand in it, something like that, a bunch of outstanding invoices. Are we getting into equity now? Do you want to get into equity now as well?

Scott: Yeah. Let’s do all your net worth. We have $15,000 in cash-

Chris: Roughly, and then I’ve got two rental properties with total equity of about $210,000 and my primary residence with almost $370,000 in it in equity, so just shy of 600K net worth.

Scott: Okay. You obviously can see that you’re cash flow negative right now and have $15,000 in cash, I’m sure that is somewhat stressful for you?

Chris: Yes. It’s starting to come to a head. For a while, it was okay, now, it’s starting to feel very, very stressful.

Scott: Do you have a plan of action or a set course there to resolve the situation or what is your thought process there?

Chris: Temporarily, obviously there’s things we can cut out of that budget that we might need to for a little bit, and there’s a few different ways we’re going to approach that. Restaurant spending and personal spending both have to come down temporarily, hopefully temporarily, I suppose, and the childcare spending, we just filed our taxes two or three weeks ago, and theoretically we will now qualify for a subsidy for childcare spending, because our income was kept very low last year in 2021. I’m hoping to bring that down by almost a thousand dollars a month, and then obviously some of these variable expenses or expenses we can control more has to come down as well, and of course at the same time, I’m focusing on actually invoicing my customers as opposing to leaving the invoices on the side as something I’ll get to eventually.

Mindy: Okay. Okay. Let’s talk about paying yourself first, and your company needs to get paid first. I don’t know how a job works, do you do the work and then you bill for the entire thing at the end, or do you bill hourly, every week or can you set it up in a different way so there’s a different stream of income?

Chris: There’s two different streams of income for the business, the energy audit that I do. Typically, residential and those are organized through a service organization. I build them directly for that and that I typically do monthly, relatively straightforward, and it’s about half of the revenue, I’m getting right now. The other half is engineering projects where typically there are only $1,000 to $3,000 in size, and I have been generally billing after work complete. The issue that I’ve had with that, is work tends to stretch on, and even if I’m charging extra for the extra work, I’m not sending out the invoices. I’m actually owed around $35,000 right now, in my business that hasn’t come in.

Mindy: Okay. With the energy audit, this sounds like it is set up through like a government agency?

Chris: They’re a nonprofit, but it is a government run program, which is why it’s quite so busy right now. We have a program in Canada where houses can get up to $5,000 back to do green things basically, and they require the energy audit to begin with.

Mindy: Are you doing this personally or is this being done by an employee?

Chris: To follow the rules, which of course I do, I have to go in and actually do the pictures and do the actual energy audit. My employee does the background math and work, and then I sign off on it before it goes into the organization.

Mindy: Okay. Let’s see, I’m trying to think if you’re doing these jobs weekly, you should be billing them weekly, and is there any difference in a job or is it just, it pays a hundred dollars, so here’s a bill for a hundred dollars or is it, how does that bill work?

Chris: There’s minor differences, but for the most part, it’s $300 per house, roughly. My contract with that company says I’m supposed to build a monthly.

Mindy: Oh, okay.

Scott: Stepping away from invoicing the customer and the timing of cash collections, which I don’t think is your fundamental problem. It could be a problem, but it may accelerate the payments to some degree, but let’s just do some simple math. You say your business is going to do $120,000 annually right now, and it could do up to $210,000 with its current situation, right?

Chris: Roughly, yeah.

Scott: You just hired your second employee and both employees cost $50,000?

Chris: Yes. Although, I did forget to mention that one of those employees is subsidized for the next six month at 80%. That 50K becomes 10K for six months, if that makes sense.

Scott: Say that one more time.

Chris: One of my employees comes with a young engineer’s grant basically to the business, so he costs me 50,000 and then somebody pays me back 40,000 of that salary cost. What you said was correct, except I forgot to mentioned that I am getting a subsidy for one of those employees.

Scott: Okay. So we have $60,000 in expenses on $120,000 in current run rate revenue?

Chris: Yes.

Scott: Okay. That’s your fundamental problem right there. $60,000 in revenue with your business is not enough to sustain your lifestyle. You do not yet have a viable business. Let’s do the math on your end state, six months to a year from now. You think best case scenario, you’re going to get to $210,000 per year in revenue, right?

Chris: Best case might be strong. I think that’s my expected case, looking at the projects I’m quoting on right now.

Scott: Okay. You’re anticipating case is, let’s call $200,000 in revenue in a year from now, and you’re going to have two employees, each being paid $50,000. The grant will be over with at that point?

Chris: Yeah, it will be.

Scott: Okay. You’re going to net $100,000 in revenue or in gross margin, we’ll call it, at this point. You will have other expenses you’ll have to pay for your business besides the employees. What are some of those expenses that you’ll have?

Chris: It’s actually a relatively low overhead business, but yes, there are expenses. It’s roughly $3,000 a year in insurance, another, let’s just call it 3000 again, in terms of engineering licenses and keeping up to date with all of that stuff, and then the only other one I really pay for regularly is paying myself a mileage allowance for my car.

Scott: What about your engineers, will they have mileage allowance?

Chris: No, they work from home and aren’t going anywhere.

Scott: Do they have equipment that you pay for?

Chris: Nope, I’m limited. Our contract has them paying. I pay for paper if they print, that’s about it, and then there’s a couple of software licenses as well, so it’s another thousand dollars or so on top of that. All told, expenses are running in and about $10,000 to $12,000 a year, except from employees. I had some setup costs obviously, but those are all done at this point.

Scott: Okay. We have 200,000 in income, earn revenue, we have a hundred thousand dollars in employee expense, and we have $12,000 in other incidentals, as a conservative estimate for your business, right?

Chris: Yeah.

Scott: That brings you to $88,000 per year in income that you will then pay taxes on, the net of which is what you can use to fund your lifestyle, your lifestyle costs 8,250?

Chris: Sure.

Scott: 8,250 times 12 is 99,000.

Chris: Yeah.

Scott: That’s the basic problem that I’m struggling with from your business perspective here. Something has to change, in order for that to work out. Either the expenses have to get… And by the way, that’s a year from now, from that. Something has to change in order to do this. Where do you think the biggest leverage is?

Chris: I just want to throw in there that, I do have the two rental properties, which are cash flowing a little bit, pretty safely, as well as my wife is going to go back to work as soon as she is able to, and hopefully until then the employment insurance keeps coming in. There is a little bit of a buffer there. My wife was making about 45,000 to 50,000 a year before we started taking this medical leave.

Scott: Got it. Okay. So we have another 45,000 to 50,000 in income there. What are your goals?

Chris: Six months ago, I would’ve said stabilize my income and buy a couple more rental properties. Right now, what I really want to do is stabilize my business income at a much higher level. I want to grow the business and actually make it… I don’t want to make $88,000 a year, that wasn’t why I got into it. I could make $88,000 a year as an engineer at a job tomorrow if I really wanted to, so that is my focus right now, is growing that business income up and making sure my bottom line makes sense for all the work I’m putting in, which is a lot.

Scott: Great. That’s what I figured your goal would be. I wanted to make sure though that was the right case here. Let’s go through the workload again. What do you need the two employees to do?

Chris: I need them to do a lot of the technical stuff, where I am just double checking and providing my stamp. I don’t know how it works elsewhere, but Ontario, the stamp is the engineer seal, without the stamp, things can’t get built or past building code. Generally, how it works in engineering firms is the junior engineers will do a lot of the background, basic math, the basic drawings, that kind of thing, put it all together, and then the senior engineer will come in and review and stamp and provide to the customer and as well-

Scott: How long does the work that the engineers are doing take you to do?

Chris: That’s very variable. I’m charging roughly $160 an hour for my time and I’m charging $60 an hour for the junior engineer’s time, if that helps with that. That’s probably fair in terms of how long it takes them to do something that I would do as well, right now.

Scott: Here are some thoughts that are occurring to me. I do not believe you can afford a full-time employee right now. I think you can definitely not afford two and full-time employees. I think that based on the high level things that I’m observing, I’m going to go drilling into this. You can tell me if I’m wrong with this, but my instincts say that a reduction in force or a layoff is in your business’s future for this, because it’s going to come down to you depleting your cash reserves, or you continuing to pay your employees, with what is currently going on in this business, and that is not good news, and I’m not going to pretend that is good news or anything. That’s what I see with my CEO hat on, in looking at your business as an outsider from this. When you say, my time is built out at 160, and my team is time is built out at $60 an hour, that’s viable, if you’re paying your team $25 an hour, roughly with $50,000 a year. But you are not actually getting that arbitrage because your income is so variable at this point. You’re not filling up. I can tell immediately that you’re not filling up these engineers time with billable hours and that 30 plus hours a week range, that you can actually charge off to customers downstream. If you could fill that pipeline with 30 to 40 plus hours per week of time for your engineers to actually doing that work, you might have a viable arbitrage business model there, but the simple unit economics don’t appear to be working out. How much time are these engineers billing in your business?

Chris: Right now, I have one, as I said, just started. He is basically just doing training right now, and I did accept that there was going to be obviously almost zero build hours out of him for a while.

Scott: But your guy who is billing hours, how many hours is the guy who is billing hours getting?

Chris: She was billing about 25 hours a week, roughly. A lot of that, I was putting towards the background math for the energy audit, as I also trained her up. She is a new engineer, so I was also training her up to do the drawings and the heat load calculations and the math, basically.

Scott: She’s billing 25 hours a week, at $60 an hour to your clients, you should be bringing in 6,000 a month in revenue from employee alone. Is that happening?

Chris: That would be the goal. Like I said, right now, she was doing a lot of the background math for the audits, so I was paying out about 80 bucks for her to do an audit and I was getting paid 300 bucks to get that audit finished, and obviously I spent an hour and a half on it as well.

Scott: Okay. You got a services business here, so that means that the economics here are billable hours times rate times arbitrage.

Chris: Sure.

Scott: You’ve got pretty easy math there and maybe this is a good first step, build a KPI dashboard that you’re looking at on a weekly basis. How many hours am I billing out per week at my rate, which is, you said 320?

Chris: 160.

Scott: Okay. My rates 160, what is my target goal for billable hours and how do I get that number up? That is your number one job as the CEO of your small business. That’s your highest revenue driver. If you’re not billing 25, 30, 40 hours a week, something’s wrong with that. Why do you have employees if they’re not putting you on the clock, billing that time all the time, right? If you’re doing, let’s just do that real quick. If you can do 25 hours a week, you’re going to do $16,000 a month, and now you’re now you’re bumping against $200,000 in annual income, alone, just from you. Is it possible to get you to 25 hours a week in billable time?

Chris: Just for me?

Scott: Yes.

Chris: The work is there, yes. I spend a lot of time in the background right now as well, doing the sales, the accounting, all the other stuff, but 25 hours is roughly what I’m doing at the moment. It’s just not all of it is… Sorry. It would be 25 hours. This is complicated, because I fix price jobs generally, which is something else I have to stop doing. I need to start doing time and materials because things go over through no fault of my own, but I’m working more than 25 hours a week for customers, I’m just not billing for all of those hours, if that makes sense.

Scott: I got no trouble believing you’re working more than 25 hours a week. Don’t worry about that. No one’s worried about that. The question is, are you billing that to customers there? I would like come off the call today, I would go back for the last three months, and I’d say, “How much billable time am I putting in?” And then putting a daily and weekly dashboard and saying, “How many hours am I billing at my rate and what is my blended rate?” If you’re doing contract projects and they take you six hours and you’re billing them at like 300 bucks, you’re doing 50 dollar an hour work, with that. You need to be honest with that and say, “My number one business goal is to get my time built out as close to 40 hours a week as possible, not to get my employees time built out at $60 an hour.” That’s way worse arbitrage. Your revenue’s coming from your time with this, and then that would inform your employee strategy. You may not even want an engineer, if you come to that conclusion. You may say, “No, an executive assistant is what I really need, because they will be booking me and keeping track of my billable hours, hounding the customers for payment, invoicing them, doing all of the other stuff that is taking my time away from billable hours.” Unit of value in your business right now is you and your time.

Chris: Unfortunately. Yes.

Scott: That’s fine. That’s how you get started. After you get booked fully out, okay, now I’m going to bring on the next person and build their time out at a hundred bucks an hour and pay them in the $50 an hour range, the hundred grand range. Now, you’ve got even better arbitrage than I think with these other engineers. It sounds like there’s work there, is for the $160 an hour team. But that’s how you build a scalable enterprise here with services based business, I think.

Chris: Yeah, I can’t disagree. I think that is my goal. Right now, I’ve been spending a lot of time training and bringing my new engineers up so that I can get them doing some of the more background work and actually build them out, and every hour I spend is tracked.

Scott: It’s too expensive to do that. You can’t do that with your business model. You can tell that by looking at the very simple high level math here. Your time’s worth $160 an hour, their times worth $60 an hour. You’re arbitrage at best, $30 an hour time. If you work a 40 hour week, for billable hours, that’s $25,000 per month in income. That’s 300 grand annualized. Every hour that you’re not working training your employee, they’re going to arbitrage you $30 an hour, maybe which you-

Chris: At some point, not today.

Scott: At some point, and they’re not going to get up to that that full level. You’re spending $160 an hour time, to make $30 an hour, maybe downstream. I think your fundamental problem here and why you’re upside out on your cash flow situation is these employees are killing you. Bottom line, they may be good people, they may be doing all the right things, but the unit of value in your business is not their time, it’s your time.

Mindy: I have a question. I don’t disagree with Scott, as much as I want to, because we’re talking about two people and their jobs. I would love to disagree with Scott and be like, “Hey, I’ve got a great solution,” but I don’t. I’m wondering about the energy audits. You’re getting $300 for these, but how much time does it take to do an audit? I’m talking from the time you leave your office, you drive to wherever this property is located, take the pictures, and I’m a real estate agent. I’m out there looking at houses all day long. I’m not even looking at their energy stuff. It is really easy to spend an hour in a house, just looking around and taking pictures and talking to the people. But then you have to come back and the engineering work, which your employees may be doing, and write the report and submit the bill. I think these are taking a lot longer than two hours total, which is your time. I’m thinking it’s probably more like three or four hours, so now you’re down to $60 an hour making on these audits?

Chris: Roughly, yes, and that has definitely been at the front of my mind, recently. I started doing the audits more as a filler than as something I wanted to do full-time and I’m booked out through the end of June for them, already right now, just because there’s been so much demand for them. I did start pulling back. At the beginning of June, I’ll be doing three a week instead of five a week, and I’m hoping to bring them back even further. But yes, the time, the dollar per hour rate for the is nowhere near as high as what I get when I’m engineering.

Scott: You said it’s five hours?

Chris: No, it’s less than five hours. I batch them together, so I’m doing two or three in a day, on the road and then it takes another day to get through those, so that’s 900 bucks over two days, roughly.

Scott: 900 bucks over two days. So 900 divided by 16, what is that?

Mindy: I don’t know. Let’s get it calculated.

Scott: $56 an hour.

Chris: That’s about what I’ve worked it out to be hourly for those, for me.

Scott: That’s why you have a lot of demand for that, your time is worth 160 bucks and people are getting you for $56 an hour. You’re going to have to make that all day. That’s okay, that’s a hundred grand a year from that, but that’s not okay if you have two employees, who cost a hundred grand a year. If you have two employees that cost that, you cannot be doing activities that are less than a hundred dollars an hour, in my opinion, and you have to be doing a lot of activities that are $100 to $150 an hour, in order to make up for that. You can do fewer activities that are 500 or a thousand dollars an hour, with two employees with that. This will bankrupt you. It won’t bankrupt you right away, because you got a strong core financial position. You obviously made a lot of good decisions in the past, and are strong with money, overall, so you’re not in an emergency mode here, but-

Chris: No, not yet. Although, we are heading that direction. As I’ve noticed when I’m tracking my… My net worth keeps going up because housing prices are so ridiculous and I own three of them, but my cash on hand and actual cash flow numbers have certainly not been trending that way.

Scott: Well, okay. Let’s come up with some actions here that we can do here. I think we’ve zeroed on the problem and it’s an uncomfortable one, but do you agree that we’ve zeroed in the problem?

Chris: I think so. Yes.

Scott: Okay. First option and the one that I would recommend here would be helping explaining the situation to your employees and helping them find a new home with that. That may not be something you’re willing to consider there, but it’s a good market, I’m sure they’ll be able to find other work. If you give them, “Hey, in two months, I’m not going to be able to do this. I’m going to keep paying you till then, but here’s the deal. I got to fix this.” That’s option one. Option two, is to try to stick it out and perform a deep analysis and say how much $160 an hour work is there for me. How many billable hours can I get in per week in a realistic long-term scenario for me and do my current employees aid me in actually realizing that income? I think that’s going to be difficult because I think that in order to maximize your time, you need to sell the client, which you’re not going to get paid for these deals, and you got to do that. Then the best case scenario is, that’s an hour pitch or something like that. Your executive assistant, books all of the meetings, takes care of all of the billing, collects all the revenue, drives your schedule, makes sure that those are the appointments. I think best case scenario, you’re getting in 25 to 30 hours a week of billable time, and you’re working 50 hours a week in order to get that billable time. That’s not bad. That’ll get you to 200 plus thousand dollars in net revenue before you pay the executive assistant with that. But that’s what I think is the best case scenario here within a 6 month to 12 month period for your business. What do you think? How’s that logic working out?

Chris: Well, when I was putting together my little summary for you guys today, this is the first time I’ve sat down and looked at my business financials in a while because I’ve been working 60 or 70 hours a week without doing the financials, and I was coming to the same conclusion that obviously, what I’m doing is not working the way I’m running it right now. I do think there is enough work on the table, like enough engineering projects that, once at least one of these guys is up and running, I’m able to hand it to them, continue getting the sale on the next project and doing the stamping. I feel there is enough business there at least for one employee, but I do definitely agree an executive assistant is probably very much worth the time because I spend way too much time and I do track every hour while I’m working as doing.

Scott: An executive assistant is only worth the time, if you can arbitrage your time for that amount, and you don’t have your two employees. I’m not saying go get an executive assistance.

Chris: No, no. I’m not thinking I should also hire an executive assistant.

Scott: Great. Now, here’s one thing to think about with regards to your aren’t employees. There is an arbitrage opportunity here for you. You are getting business that they can perform for the most part, and you just put your stamp on the approval. I don’t know if that’s the right motion for stamp. You probably have a digital stamp.

Chris: Yeah. Close enough.

Scott: This is where I would consider using contractors instead of an employee, and you say, “Hey guys, this is not… But what I can do is, I can help you find a good home that will have similar compensation overall with peers of my network, and I will contract you for this work for a higher dollar per hour rate.” Right now you’re paying them $25 an hour, pay them $45. Try the contract method so that when you actually get the work, you can build it out to them and pay them $45 an hour. That’s an enormous raise for them, for the work that they’re actually doing, that’s adding value and they can do it on a side project or afternoon, evenings and weekends if they so choose. I’m sure a lot of people would jump at the opportunity to make those kinds of dollars, and you can build these out in a contract basis. It’ll cost you more per unit, but you don’t have the risk of paying somebody $50,000 per year on your variable income. You only pay when you make money, and then once you get to a certain scale, “Okay, now it’s time to bring back the full-time employee because I know I’ve got enough consistent work of this nature, that it will lower my overall costs and reach my profit affordability to bring in the employee.”

Chris: Yeah. I do want to clarify that they are paid hourly right now. It’s not a salary and it is understood that if I don’t have things for them to do, they will not be getting-

Scott: You’ve already mitigated that risk?

Chris: I have. I’m not guaranteeing them 50 grand a year. I am paying them at about that rate, and right now, I have been having them work for about that amount of time. But like I said, a lot of it has been training, so not revenue generating.

Scott: Okay. You will get to that level down, so the problem really is your billable hours are not… Instead of putting your billable hours out, you’re essentially generating work for these employees and arbitraging that, and that is not enough to cover your expenses.

Chris: Yes. At the moment, that is pretty much exactly where I sit.

Mindy: I think it comes back to this energy audit. That’s a lot of work and I would be… I know you’re tracking a lot of time or a lot of your expenses, but I would really be curious as to exactly how much time that audit takes you. Not just the typing up the math and all of that stuff, but driving there, taking the pictures, coming back and doing it, and even if you’re batching it, at what point… You said, you have to do it, they can’t go and take the pictures and do the audit themselves. At what point could they, and at what point would it be worth it for them to do that? I really come back to this thinking, this doesn’t sound like these audits are really worth it. Do you have a contract that you have to fulfill obligations for? I don’t think it’s fair that you just say, “Oh, I’m not going to do any more of these at all. Do whatever through June and then stop taking audits.” You also said something about engineering work you’re billing at the end of the job, and you said you’re doing fixed price jobs instead of price and materials, and I’m not sure what materials you’re doing.

Chris: That’s more of just a phrase. It’s basically just time. Occasionally, travel allowance if I have to drive to site, that kind of thing, but for the most part time.

Mindy: Okay. Do you know how much time it takes to do a job? Like, you want me to do X, Y, Z job. That is probably going to be a 25 hour job, so at 25 hours it’ll cost this, and if you need to increase the scope, then I’m going to need to increase my price. I don’t know how to phrase that, but I think setting up expectations up front is going to be really important and structuring the contracts differently, so you get paid in a different way, like 30% upfront to start the work and 30% when you deliver your first report or halfway through or whatever, and then 40% upon completion. There’s incentive for you to complete the job, but there’s also, you’re not waiting until the end for this $35,000 that all of a sudden plops into your account.

Chris: It’ll be a nice day when it happens, but-

Mindy: I’m sitting over here in perfect world.

Scott: That’s where an executive assistant, I think it could be very powerful for your business. That would be the first place I would be looking in your shoes for an employee if I’m starting over and appraising my business as an outsider and saying, great. You should have somebody research, put in place Mindy’s terms, and then they enforce that for you. Where it does not begin or get scheduled on your calendar to begin, until the first payment’s received. You get going, finish the project through your completion, take a couple of sales calls for you to build up your pipeline and go from there. That’s what a healthy business in your industry would look like to some degree. This is not going to make you a billion dollars, but I think a clear cut path to $200,000, $300,000 in annualized income per year, maybe more if you’re willing to put in 50, 60 hour weeks to get that billable time up.

Mindy: Another thing to think about is, is $160 an hour, a good rate for your level of experience and your level of engineering prowess? I’m clearly not an engineer, so I don’t know what I’m asking, but is that the going rate or are you billing yourself a little bit low?

Chris: That is a little bit low against the current rate for an engineer of my experience. It’s all actually published if you’re paying the right fees, so that’s like a 25% or 30% discount. Part of that is that, I don’t have the overhead, and part of it is that I have the experience from my own old jobs, that kind of thing, but I don’t have the track record yet. My business started two years ago, but if you remember, two years ago was March 2020, so I didn’t do a whole lot for six months, and then after that-

Mindy: I’m not laughing at you.

Chris: No, it was great. I actually incorporated on March 16th and then Canada shut down as a whole on March 17th. Yes, it was a great start, but what I was trying to say there is, I was pricing low to begin with and it is on my… Like this summer, as things start to ramp up, construction projects are ramping up again to raise that rate for my own billable hours, and yes, I do want to start quoting, not as fixed price but as estimates based on the job and then tracking my hours, because I already track all my hours and that’s the way I should be doing it.

Scott: Two years from now, you’re telling me you could be billing 200 or 225 an hour for these services and putting your income closer to $300,000 to $400,000 per year, right? Now, we’re talking. Now, we got a little dental practice here or something. I don’t know if that’s what dentists make, probably more, but-

Chris: Probably more. But yes, it could be in that similar time range. I think a big part of it is, I don’t mind working 50 to 60 hours a week, and I’ve been obviously doing it. Part of the reason I was bringing it on employees maybe early, was to make sure that I can shove some of the work onto them and not work the 50, 60 hours of sitting there designing ducts, which I don’t know if you’ve ever designed duct work, but it’s not fun.

Scott: I think that continuing to study the art of business and building a business, is going to be really important for you because you are… I’m just sensing you not optimize for unit economics here and say, what are the actual things that drive revenue and profit in my business and we’ve identified them here. The number one thing is your time. It’s a senior engineer’s time. Arbitraging, unless you could also start with a different thesis, which is I’m going to actually arbitrage junior engineer’s time for these projects and I’m going to need 40 of them in order to drive this level of profit with that. That would also be a viable business model with that, but I don’t think that’s what you’re necessarily going for here. It sounds like the path to easy street financial freedom to a certain degree is get your time up to 35, 40 hours a week, move your rates toward the 225, say two years from now, I want to be billing out 30 to 40 hours a week, 25 to 40 hours a week, whatever you think is reasonable there, in billable hours at $225 an hour and say, “What do I need to do to back in there? Well, first I’ve got to start billing out my time right now at $160 an hour. That should be easy because I’m undercutting the market by 40% with all of these things.” In theory, the business should be there. “How do I get that business? Well, I’ve got to sell it, then I’ve got to schedule it, then I’ve got to book it.” Some of those things are things only I can do, and some of those things are activities that someone much less skilled than I, can do. Which of those activities can be done there? Great. If I’m hiring an executive assistant and they’re idle much of the time, but it’s saving you from having to do 10, 20 hours a week of work, you’re making really good arbitrage on that executive assistant in that particular case. Maybe you can get a fractional. Someone fractional or can do that 10, 15 hours a time with that. That’s the path I see for that. The third option here, so we had two options. First one was, continue to working your current business and consider layoffs for your current employees or finding them a new home. The second option is, part of that first one. An acting part one, but then also saying, “Okay, let’s consider hiring an executive assistant and mapping out my time so that I’m moving that business towards the maximum number of hours.” That’s really the same option there. The third option here though, is the next option is, just close the business and go get a job in this space. I don’t want dismiss that out of hand. What does a job, you could get at W2 job pay?

Chris: It’s called a T4 in Canada. 80,000 to 120,000 would be the expectation. That depends, if I go on the technical side where it’s probably more on the 80 to 100 or the sales side, which is where I used to be, which would be 100 to 120, roughly.

Scott: Either option would immediately result in a huge increase in income over your current state, and the second option would be more than the best case scenario for your business or the expected case for your business, one year from now without any major changes? I think you should look at those and coldly appraise that math and think through, “Okay, if I’m going to run a business for myself, I got to make much more than that,” because that’s 40 hours a week, 45 probably and you’re home and relaxing after that. There has to be a premium above that if you’re going to work 50 to 60 hours or some advantage to your business which, I could guess right now is going to be a lot of work that is frustrating and hard. Perhaps rewarding too, with a lot of that, but that’s not giving you the income that you could be getting from-

Chris: From a W2, T4. Yes.

Scott: A T4.

Chris: Exactly.

Scott: Sorry about that. I didn’t know that was called a T4.

Chris: We have our own tax free savings account as well. We tend to name… Like you guys have the Roth IRA, all these other ones that I hear about all the time on your show. We’ve got tax free savings account, which is exactly what it sounds like. We put money in and it grows tax free and we can take it out at any time. RSP, which is the one where we put in, that’s pre-tax dollars. Those are the two, that’s about it. There’s employee plans and stuff, but RSP is a registered retirement savings plan-

Scott: Just a simpler way of life up there.

Chris: Everything is just a little bit different, but I like our TFSA because I can put money in and take it out at any time tax-free.

Mindy: I want that too. I want to take money out tax-free anytime, instead of at age 55.

Chris: You’re not allowed to day trade in it. There’s some rules, but as long as it’s just general savings and investing, you can pull that money out of tax-free.

Mindy: Wow, nice. Scott, I’ve got a couple of things. Before we shutter your business and I’m not… Again, I really want Scott to be wrong, but I don’t think that he is. Can you hire a salesperson to sell your time, so you’re billing at 160 instead of not, instead of pitching these jobs and your wife is currently on medical leave, does she have any capacity to help out with executive assistant ding in any way?

Chris: We did try that and that actually is her general role in real life or before my leave was executive assistant thing. She’s just really not able to right now. We tried and it wasn’t going to work. As per hiring a salesperson, I do find it difficult. A lot of the sales I am getting is from people I know in the landlording community basically, and it’s starting to come in cold where my website is just generating. I’m getting cold calls from people now, which is nice as opposed to going out to them. Obviously, there’s background work there, but that can maybe is more of an executive assistant than it is a salesperson I think, because there’s certainly enough work to keep me busy. The projects I have just lined up right now, could keep me alone going for two or three months probably.

Scott: At $50 an hour?

Chris: No, at my-

Scott: At 160?

Mindy: At 160?

Chris: Yeah.

Mindy: Okay. If they can keep you going for two or three months, what is preventing you from billing at 160 an hour for two or three months? I’m not trying to be mean, because there’s more to it than just sit down and bill at $160 an hour, that would be so easy.

Chris: Well, after this conversation, I’ve noticed that it is all the time on spending training my employees and not billing and the energy audits, which I’m not contractually obligated to do. You had asked earlier if there was a contract, there is not. I could theoretically just say, “No, I’m not doing it anymore” at any time, but those obviously take up quite a few hours as well as training employees and getting them up to speed has been taking quite a few hours. That’s why I haven’t been billing it 160 bucks an hour straight.

Mindy: Okay. With regards to the audits, where do your employees have to be in order to be able to do the audits? Do they need more schooling or do they just need more years of experience?

Chris: They would need to pass an exam. But as soon as they pass the exam, they have no need of me, if that makes sense. There’s enough demand right now that they could go directly to a service organization and just start doing them on their own if they wanted to. Which I have pointed out to them, that it is a possibility in the future. One of them could probably pass the test today. The other one could pass the test in a month pretty easily, if they wanted to go that route.

Mindy: Not everybody wants to do their own thing. What does it cost to take this test?

Chris: Nominal amount, not enough to worry about.

Mindy: I wonder if there’s any benefit to having the one who could pass it today, take the test and take over the audits?

Chris: She is actually based about 400 miles away from me, roughly.

Mindy: So no benefit whatsoever?

Chris: No benefit to me. If we are talking about finding them other homes and she could pass that test tomorrow, she could start doing them for a service organization in her area, if she wanted to. I’m not sure she wants to. She hasn’t really expressed the interest, but it could be an option.

Scott: Well, I think based on what I’m hearing, this is a great place to stay away from, from your business or conversely, if you just embrace those audits and you say, I’m not going to have any employees, I’m just going to do audits all day, that’s a 100K a year right there, if you can do them right there. That is a viable income stream, for sure. It’s not going to get you to the several hundred thousand dollars in income, but you could certainly make a living and fund all your expenses and maybe begin building wealth, especially when your wife goes back to work, with that as a full-time,

Chris: I also don’t have to be scheduled this far in advanced for them. What I just thought about when you said that is, I could obviously say, “Okay. Nope, don’t book me anymore at the end of June, don’t fill my calendar anymore with those.” And then if I have downtime in the engineering work, there’s nothing stopping me from calling them and saying, “Hey, can I take two this week, can I be able to get two that week? Absolutely. They’ve got a cancellation list a mile long and they will, for at least six or eight months from now. That actually does make a lot of sense on that side.

Scott: We talked a lot about the business today and I think for good reason, that’s the big item in your situation with this, that we have to figure out here, but is there anything else that you want to talk about besides the business?

Chris: No, I know we need to cut back on our personal spending and we know where we can do that, as I think I mentioned early on there. It’s not easy. We have gotten used to living. I used to make $110,000 a year in the sales role and my wife was making $50,000 and we didn’t have a kid at that time. We started spending money and it’s hard to pull back, but it’s not impossible at all to pull back, and we know we have to for a bit here.

Mindy: One of the biggest expenses that I see just jumping out, is the childcare expense.

Chris: Yes.

Mindy: $1,250 a month. This is going to sound super insensitive, please email me and tell me what a terrible person I am. But if your wife is on medical leave, $1,250 a month can go really far in other places.

Chris: We tried this as well.

Mindy: I was a stay at home mom, kids are a full time and a half job. It’s not like she’s just laying on the couch, eating bond bonds all day and watching TV, while your child goes to school. You’re typically on medical leave for a reason.

Chris: And that’s what it comes down to. She is on medical leave for reason, and we did try. We had my son home for two weeks straight, without canceling daycare, because daycare spots are impossible to get in Ottawa, impossible. We spent two weeks with my son at home and it was not feasible, unfortunately.

Mindy: I know someone’s listening and saying, “Why didn’t you ask about that?” Well, I did.

Chris: That’s fair, and it is a fair question. We tried. There is cheaper daycares available, but once again, it would take months just to get into them, potentially. We love our current daycare, it’s not really where we want to cut. We have other opportunities to cut, so we’re going to start there and we don’t have any family that’s capable of taking care of a child either, so before anybody asks.

Mindy: Childcare is a difficult, one to try and cut and like you said, getting a good childcare, it’s worth paying it just to test out. That was a really smart move. Just because she’s on medical leave now doesn’t mean that she’s going to continue forever when she goes back to work, you would need the childcare again. How old is your son?

Chris: Three and a bit.

Mindy: Okay. You’ve got a couple more years of that.

Chris: Yes. He’s a January baby, so it will be as long as possible before he actually makes it into preschool, yes.

Mindy: Yes. I had a November baby, same thing.

Scott: Well, how about any other areas that we can talk about?

Chris: I’m just looking over my income and debt statements here, but I don’t think so. Yeah, I don’t really think so. I’ve been spending a fair amount of time on my rental properties lately as well, because we had a sewage backup in one of them. Yes, that face exactly Mindy.

Mindy: I’ve had a sewage backup.

Chris: Yeah. Took insurance almost eight months to get through that, and we haven’t actually rented that apartment back yet. We’re hoping to get it on the market for early May. I spend a lot of time there, but the cash flow and the appreciation we’ve seen on that has been ridiculous. That $350 a month for rental one, once we get that running again, we’re probably looking at almost $800, $900 a month of cash flow there as well, and that’s after I put aside money for furnaces, roofs, all the other stuff. It’s nice. It’s a good property.

Scott: That’s great.

Chris: Other than that, I don’t really have anything else in any questions. I think this has been very useful. I’m going to have to sit down with my employees and see where they want to go. I would like to take advantage of the 80% grant for six months, because again, if I’m paying him 20 cents on the dollar, at the very least he’ll be able to run through the energy audit background stuff for me and some of the other stuff for a while.

Scott: Yeah. That makes perfect sense.

Chris: Yeah, and it is an internship, so theoretically there’s no obligation to keep going after that, but yes. Anyway, I’ll have to sit down with them and see where they to go and how we can approach this.

Scott: Before you sit down, I would take out your spreadsheet and I would say, KPI one, Key Performance Indicator one, is my bill of hours. How many hours did I bill? What was my blended rate? How many did I bill at 56 effectively? How many did I bill at 160? And say, okay, that was this week. Next week, I’m going to move it up from $75 to $77 an hour. Then I’m going to move it up and I’m going to get 15 hours instead of 10 build. Then I’m going to go, and if you just put that on your scorecard as your number one thing, then you can put secondary one, is employee number one, billable hours. Yeah. Rate charge to customer, rate paid to employee, spread with that. If you can come up with just a simple set of KPIs on half a page of a word document put in a spreadsheet, 15, 20 lines in a spreadsheet and just update them, populate them once a week, I think you will see magic happen over a few months in terms of your revenue output.

Chris: The thing is, I have all the background information. I have how much money I’m billing, how much time I’m working on each job, how much time they’re working on each job or trading, it’s all there. I just need to put it together.

Scott: Call your employees in together and show them. After you’ve done for a couple weeks, have your weekly KPI meeting and say, “Here’s where we’re at.” People understand capitalism with this, they need to produce more economics than they cost in order for it to be viable employment arrangement. And you can say, “Great, these are the goals of the business, and Hey, here’s a little reward, if we start hitting some of these bigger goals,” that’d be one way to begin salvaging things with the current folks, if you want to do that.

Chris: Yeah. I’ll have to sit down and run through all of that. Lots of good ideas and options here about some not so great, but things that I might have to do anyway.

Scott: You have three to six months before you run out of cash, not an emergency, but time is ticking to think-

Chris: I started this process. I’m conservative when I estimate these things, I will say. I started this process with three to six months of cash and that was two years ago and I still have three to six months of cash but yes, you’re a hundred percent right. I have seen that. It’s been trending downwards anyway.

Scott: Well, Chris, thank you for sharing this. This is a valuable perspective that I think a lot of people are struggling with, and we’re really grateful that you’ve come on to talk about this. I know there was some hard conversations are hard feedback that we had for you, but I think this is going to help a lot of people to hear what you’re going through, because I think that this is going to be much more common than we’ll hear from a lot of that. It’s tough as a business owner to come in and say, “I don’t really know how to get this thing to the profit level that I want to get it to from that.” I think takes a lot of courage and I think we’re really grateful for you to come on.

Chris: I will say that when I originally applied, I was making 100K a year as an energy auditor and without any employees and it was going to be very straightforward, and then I started growing and it’s six months later. Things change, but I’m glad I came on anyway, I didn’t need to talk about it.

Mindy: You know what, that’s a really good point. Life changes really quickly and I bet your plans six months ago were a little different than what’s going on right now. A lot of my plans six months ago are different than what is the reality of my life. That’s something to keep in mind. Your plans should be fluid because life is fluid.

Chris: Yeah, absolutely.

Mindy: Okay. Chris, thank you so much for your time today. Thank you for sharing your story. I really appreciate it.

Chris: Thank you guys very much for having me. This was kind of fun, mostly fun.

Mindy: It was interesting.

Chris: Yes.

Mindy: Okay. We’ll talk to you soon. Scott, that was Chris, the engineer from Canada, and I really, really, really wanted you to be wrong with your suggestions. I don’t think you are. I think that it’s a harsh reality for a lot business owners listening to this, just because you own a business does not mean that it will be instantly profitable. What a lot of business owners do, is hire too late. They’re swamped with work and they’re so swamped and they’re working 90, 150 hours a week, and then they hire somebody, and I think maybe in this instance, Chris hired a little too soon.

Scott: First of all, I hope I’m wrong as well. I think that the real problem for entrepreneurs and first time CEOs and a lot of this is, it’s really hard to get the structure of your organization right, in the early days. What skillset and employees do I actually need and how does that work with where I want to get to a year, two years, three years from now? I think it’s really hard to be able to come up with that. An engineering firm needs engineers, that seems logical. Well, when we unpack it, maybe it’s more logical that the unit of value in Chris’s business is Chris’s time, and the employees that maximize the ability for him to bill ours are more valuable than many Chris’. Many Chris’ being more junior Chris’ that are able to do some of the work, the engineering work, but not all of the engineering work. That I think is hard, and it’s a guessing game and hindsight’s 2020, maybe it’s easy for us to look at the situation now and be, “Oh, we could have done this.” It’s really hard to do that in the act of building a business. A year ago, his situation could have looked like, “Hey, I’m doing all these jobs that look like this, here’s what this employee will help me do and free up my time and all that stuff.” I think it’s just a challenge there. No blame game going anywhere in the discussion today. I just think a cold look at the reality of the situation to me suggests that, that business is not going to sustain two employees and Chris’ family.

Mindy: I, like I said, I want you to be wrong, but I don’t think you are. Another option, another viable option is to go back and get a job to get over this hump while his wife is on medical leave. You don’t shutter the business necessarily, you put it on hold. Maybe you do one extracurricular job instead of a whole full-time jobs worth of curricular jobs, while you’re waiting for life to stabilize. But I think being fluid in life is the best way to live life. Make good plans, but be fluid with them.

Scott: It makes you wonder, I don’t know, but I wonder aloud whether service professionals that offer their time and build them out, what the difference between a W2 and starting their own practice really is. You’d imagine there’s going to be a period where there’s going to be a lot less income and then a period where there could be a lot more income, but I bet you, the spread isn’t massive for most folks in the mid-career phase of that. Perhaps the advantages of going into business for yourself need to be in the form of much higher income or scalable opportunity or lifestyle benefits in order for the switch from a W2, in a field like Chris’s or law or something like that, to owning your own practice with that or you need to be willing to put in the 70, 80 hours a week, 60, 70, 80 hours a week, for many years to get that off the ground to then have the cake and eat it too. The more income and the better lifestyle.

Mindy: Yeah. I think you hit the nail right on the head there Scott. If you’re not making more money and you’re not a better income or a better lifestyle, if you reduce your income, but you’re also working 10 hours a week, that’s great if that’s what you want, but if you don’t have either, then it may be time to really seriously reassess.

Scott: Yeah.

Mindy: Okay. Scott, should we get out of here?

Scott: Let’s do it.

Mindy: From episode 296 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying, got to go buffalo.

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