121. Cashflow Vs Profit With Russ, Sky & Andy

There's a well known saying out there that cash is not profit and profit is not cash. And that's never more true than actually in the construction industry.

Welcome to Professional Builder Secrets, the podcast for building company owners wanting to grow safely and securely. I'm your host, Will Blunt, and today I'm joined by APB co founder Sky Colliday. Sky, welcome to the show.

Hey, Will, how you doing?

Very well. Nice to have you on. Nice to have you on. As always. We've also got APB's head coach Andy Scarter here with us. Andy, welcome.

Thank you for having me, Will. Nice to be here.

Very good. And Russ Stevens, APB's other co founder, is also with us. Russ, welcome to the show.

Thanks, Will. Good to see you.

Great to have the whole leadership team on the show to talk about a very important issue in the industry. So we're experiencing. We're hearing a lot about cash flow at the moment. Andy, do you want to kickstart us by telling a little bit of a background as to why this is such an important topic?

Well, I think it starts with the fact that a lot of times cash flow is a word that's thrown around a little bit too loosely. I think people that have listened to me on this podcast for any length of time will know that one of my favorite precepts is that words create worlds. And I think cash flow often gets blamed for a lot of other things. So in a lot of cases, the. The failures we've seen with some of the bigger sort of production builders, et cetera, et cetera, gets blamed on a lack of cash flow. But in most cases, we're actually going to find that there were things going on behind that that led to the cash flow problem, and that's actually what should have been addressed rather than just the cash. So, but in simple terms, cash flow really is what it sounds like. I'm tempted to revisit an earlier conversation that we had around. It is the flow of money in and out of the business, obviously revenue coming in from the invoicing that the builder has done and then paying that out in order to run the business. And it's the relationship between those two, with the idea being that the in is always more than the out. That's the simple explanation.

And do you say that as if there's a misunderstanding about what cash flow is in building companies? Russ, do you want to expand on what cash flow is and why there might be a misunderstanding there?

Yeah, I think. I think this happens with a lot of business owners where they tend to look at the bank account and associate the accumulation of funds in the bank account with profit. And yeah, those things are completely different. I mean, there's a well known saying out there that cash is not profit and profit is not cash. And that's never more true than actually in the construction industry. And too much of the time or, you know, too many times, you know, we, we have builders that look at the bank account and think they're doing okay to the extent that they will go and invest, shall we say, in a, in a new boat or Jet Ski or, or even a big ute without understanding the. If they can really aff. Which whether they can afford it or not, isn't just money in the bank, it's about profitability. So this is probably the big confusion there that is affecting builders more than most people.

So sky, do you think there is a cash flow problem in the industry or is it just a perception?

I think it's definitely a reality because I don't think the commentary would be there if it wasn't actually a real problem. But just to go full circle all the way back on what Andy said, it is a problem and it is a reality in the industry that cash flow, a whole cash flow crisis, plagues so many building companies. But it's only because it's a symptom of the bigger problems, like the root causes inside the building companies. So yeah, cash flow is a huge problem in this industry, but it's not the problem. Does that make sense? It's a symptom of the bigger problem. And, and unfortunately it is what is taking down so many building companies. But it's, it's not just because if they just fix their cash flow it would be okay. Like no, there were so many other things that could have been fixed and a huge one is their profitability, knowing their numbers and even to be honest, a lot of their internal systems and processes to be collecting cash on time and having better terms and how they're paying and just having better financial management actually wouldn't have led to having what is called cash flow problems that were to sink a building company. So it's just there's so much more to it than just, you know, not having as much cash coming in is what sunk the building company more often than not. You'll see that it was actually happening for years, years in advance of them really noticing that cash flow was a problem.

I think it's an issue, isn't it, for the builders that don't know their numbers as a, as a General rule, these are the guys that it tends to affect more than. More than anyone else. And that's because we're dealing in this industry. We're dealing with high revenue, so huge amounts of cash, but tiny margins. And whenever you're in an industry with low margins, high revenue, you gotta be across every single dollar, both in and out. And that's why we see the guys that aren't across their numbers. They're the ones that experience cash flow problems.

Interesting. So, Andy, what are some signs that a builder might be experiencing cash flow problems?

Losing his hair, not sleeping.

Well, he chose to lose your hair, though.

Look, I mean, I say that in jest, but the truth is he's going to be stressed to the nth degree, because what happens is it's a little bit like tunnel vision. When a builder gets into a cash flow squeeze, the only thing he can think about is getting work done fast enough to meet the bills, in which case everything else goes out the window. So it's a. It's a huge issue in terms of. As Russ has said and as sky has said, the realities of this industry are that if builders don't understand the difference between, let's call it profit, revenue and cash. And they don't understand credit control, they don't understand that the fact that they've issued an invoice and the books are showing a revenue number, that doesn't mean they've got the cash. It just means potentially they've asked for the cash. If they don't understand those nuances, they can be in a place of literally growing broke. They can be having an increasing trajectory on their revenue and profitability and fail. And this is probably one of the few industries where that is even possible, primarily because they don't separate their money from money that they're holding in trust for their suppliers and subcontractors and then only work with their own money. They end up spending other people's money. And then, as we've seen too often, when it becomes evident for when the sales pipeline dries up and there's nothing bringing new money in to hide the problem, the thing collapses very, very quickly because of the fact that it's been. Sky's got this beautiful picture in our training where she talks about cash is the rug that, you know, profit, in fact, is the rug that covers all the mistakes. And the. One of the mistakes that's sitting under that is there's no cash.

How long can a building company go on that train if they just. If they're just getting more cash and spending more cash.

Russ, you want to have a crack at this one? I'm scared to give an answer to this one.

I can give you a definitive answer on that one. A building company can keep going indefinitely as long as they keep increasing their revenue. And obviously what I'm describing here is a Ponzi scheme. You know, Bernie Madoff, he did it for quite a long while and the only thing that stops him in his tracks really was a massive downturn which then reduced the cash inflows, which meant the Ponzi scheme couldn't continue. And really, in a lot of ways, you know, this is how a lot of building companies are being run, you know, at this moment. And the cash inflows are like Andy described with the, with the rug. You know, they're, they're actually covering up a profitability problem. But as long as you keep making sales, you can just keep going. And this is why we hear like builders that, you know, there may be, they're struggling a little bit. I just need a few more sales, you know, if I can just get a few more sales, I'll be fine. No, you won't. You're not making money on the sales that you've already made. You're not going to make the money that you need to make on those sales coming up. And you know that underneath the rug is just going to get bigger and bigger. So you're just kicking the can down the road. But yeah, it's, it's why we see so many building companies go under in a recession. Because that is when the cash inflows, that is the sows, they dial down. And that's when the tide goes out. And as Warren Buffett says, that's who, that's when we get to see who's been swimming naked.

That's why a lot of builders hate the year end shutdown, because all of a sudden there's no opportunity to invoice for work completed, but the bills are still coming. So it's not always a great time for builders when they're actually not working and issuing invoices.

Yeah, that's absolutely right. And this doesn't really affect, well run profitable companies, does it? Because they can, they can have the extended shutdown and they're always going to have the cash to pay those bills as they become due and payable. But the guys that don't have that cash in the company, it's because that they've destroyed their equity. They've been running at a loss and that's when they get found out Yeah.

I was just going to ask Russ. I guess the last 12 months or so, the market conditions, it's almost like it's exposed those builders that aren't handling their cash properly. But the perception in the market is that, you know, lots of building companies are going under. Is that, is that what you're saying?

Yeah, absolutely. Spot on. So the beginning of last year, we started to see the sales funnels start to dry up. All these, you know, 100% dead cert prelims were going to go to contract. All of a sudden, clients couldn't get financed. They started having second thoughts, procrastinating. That put pressure on the builders. And as we, we saw the inflows then slow up as a consequence of that, that's when we started seeing building companies fall over. And it continues to this moment. Now we're still seeing much the same thing, but it is that slowdown. And, and this is why cash flow is now such a hot topic in the industry at the moment. Yeah, we're seeing a lot of building companies suffering at the moment, not because of where the industry is today, but because of what they've been doing over the last two to three years in terms of, you know, not just marking up their jobs for a proper profit margin, but being able to complete those contracts at a, at the budgeted profit sky.

I want to bring you into the conversation here to talk about the other implications of cash flow on the health and growth of a building company. Can you touch on that?

Yeah. Well, I mean, if you are so stressed about your cash flow situation or position and you are so focused on desperately needing the next few jobs, you're not really going to be running a proper building company. It's like you're just like running around with your hair on fire. You're not making, you're not cool, calm, collected, making proper business decisions and you're not making long term decisions either. Because as soon as we hear any building company owner say what Russ was originally talking about, like, you know, things are going well, I just need to get a few more projects, you know, X, Y, Z. That's not an indication of things going well. And really it's just the tip of the iceberg. That's just what's being said. But what's not being said? Well, everything inside their mind is identical. Desperately need a few more contracts. I need to pay my concreters so that I can actually get a progress claim out, a stage claim so my clients can pay me. Like I need this cash coming in and then suddenly it's you know, you're actually having to sit down and weigh up, well, who do I pay first, who do I ask favors from, who can I extend terms from? And it's a very slippery slope. It's a dangerous game if you start playing with credit as well, because that can go very quickly. Like if you're suddenly known as trustworthy or you're just a little bit more high risk. You can burn bridges very, very easily and you can burn relationships. You can have trades that don't come back and you can very quickly deteriorate your whole reputation that you could have been in this business for years, like decades. We've seen builders work in this industry and from, you know, a little bit of mismanagement, not even intentionally, like, I'm not, we're not, we're not sitting here saying any building company owner is intentionally running their business poorly and running into cash flow problems. And yeah, they're trying to fix it. It's happening honestly a lot of the time through a lack of knowledge and it's, it's, they don't know what they don't know. But as Rasa said, you can, you can go through this for so long. This could be years of mistakes perpetually getting made or, or things just getting overlooked, but it becomes known all at once is how it feels and then it's all consuming. And you can't actually run a proper building company for how you want it to run. You can't make decisions about investing in a better handover experience or more training for your team. And you know, all the things that is going to make you a professionally run building company and take you from good to great. You can't suddenly focus on all of that because you're looking short term, you're short sighted, you desperately need the cash, you need to solve the problem in front of you. And that's when you're just in this horrible, vicious cyc cycle of putting out fires again and again and again. And it's, it's actually really hard to climb out of that hole. So yeah, I think it, it can just snowball into a way bigger problem. It can start small and then it hits you all at once and, and suddenly you're not really being a building company owner, professionally working on the business, leading their team, looking after staff. You're really just reactive and it's just not a place many builders want to be or should be at all.

Well, we can, we can get into the solutions in a moment. Sky, because you really built up the pain that a lot of builders might be feeling out there. But before we do that, Andy, what other blind spots might builders have that could be unexpectedly affecting their cash flow?

Well, I think Russ has touched on the big one already, and that's not knowing the numbers, not being across their own business. We see regularly a misunderstanding and in a lot of cases, miscalculation of profit on jobs. And, you know, just thinking about what sky has just said, when guys get into this, I've got to get money. They'll take whatever's coming across their desk. And the problem with that is, if you take jobs now at margins that are too low to cover the cash now, that's going to bite you in the bum three months down the road again, because you're not getting in the money you need to cover it. So I don't know whether things are going to hit them unexpectedly. Russ touched on the fact that, you know, you could. You could be banking on a certain number of proposals turning into contracts, and they don't. In which case the cash flow stops or slows down to a trickle and then everything gets exposed. I think one of the biggest things that would be unexpected in inverted commas would be, for example, a builder who gets himself into trouble and on the way has a bank that starts to call in loans or negotiates terms with him that are not as advantageous because they will see in his. In his funds and in his account that things are going wobbly. And then literally, we're back to what Russ and Sky have touched on. Once that that starts to collapse, then it's very quick from there onwards. So that's unexpected might not be the right word other than things that you were banking on not happening could be the catalyst.

And I almost want to add to that, like, maybe it's more so a sign. But you know, when. And anyone listening right now, you might have even heard yourself say this in the past. But you know, when you hear a building company owner say, you know, they've got their year planned or maybe everything was good, but they've got a couple little gaps, so they're happy to take on any much smaller projects to fill the gaps for their team, you know, in the interim, and this is a cashflow problem, this is another sign, because number one, or I should say it's another symptom, right? Because if you are properly running your building company and running a balanced construction slot schedule, you have got all of this filled and this actually shouldn't be an issue. And to be honest, it's a way bigger issue because if you're used to doing like million dollar new home builds and you have a little gap that maybe a project got delayed or something happened, that you have a little gap for your team and you want to fill it with some smaller jobs. Well, that's a big problem to begin with because it's a completely different skill set for your team. So if they're used to working on million dollar homes and now you're doing some really tiny renovations jobs just to keep them busy, suddenly that's then going to blow out. There's going to be an issue over there that's going to take away the main focus from your core business and it can spiral so you can actually see how it's making. Those poor decisions can then snowball the real problem. And that's a really common sign as well. When you're desperate to take on any new job to get the next project or if you need to fill in a gap, they're, they're not particularly good signs. You need to step back and reflect how you're running the business as a whole.

I think Andy touched on a very good point there as well. In terms of when, when someone isn't able to pay their invoices or their loan repayments as and when they become due and payable, there is a very high risk that your credit limit will be reduced or in the case of financial institutions, loans being called in. And that's something we're starting to see at the moment as well. And I don't want to sound like a conspiracy theorist, but it begs the question for me, are these recessions caused by the financial institutions reducing the amount of credit in the system or are they reacting to something they've already seen? And what we're hearing at the moment is financial institutions reducing their exposure to risk. In the construction industry, we're hearing repeatedly now we're too exposed in the construction industry. And it's that reduction in credit which can trigger a downturn. We've seen it before, but yeah, I probably wouldn't go as far as to suggest that they're all in cahoots with each other and engineering this stuff. But it's kind of something we need to do, we need to be aware of. But I think other things that could maybe unexpectedly affect a builder's cash flow. I mean, material delays like we saw during COVID that obviously, you know, stretches out, you know, the, the next claim which you know, is, has an adverse effect. All these subby no shows as well. And it's generally what we find when we Study this is. It's always the subbies that are thought of as being the best subbies by the builder. Yeah, they've been using them for years, typically, you know, not always, but it does happen a lot. They're the ones that let you down. When you start actually recording this data and analyzing that, you actually see for yourself. Even staff sickness, you know, if you're employing carpenters that can stretch out a stage claim, client disputes, you know, is another thing that could unexpectedly hit builders. Of course, the weather, that is, we factor in a certain amount of weather days, but we never know when they're going to hit. But the other one, which I know we've already touched on, but I think for a lot of builders it would be class, class as unexpected. But it's the Christmas shutdown that really. That is planned in advance. But all too often we see guys in early January surprised that they don't have any cash. Now, really, they should have been able to forecast that in November, December, when they actually planned that shutdown. So it's kind of. It shouldn't be a unexpected one, but it kind of is.

I was going to add to that the fact that everything you just said up until that last point really, truly is unexpected, but it kind of just shows how that's why the attention of the owner needs to go into running the company. Because if cash. Cash flow is a symptom of all of these other things going wrong. And to be honest, if we could just have contingency plans in place, if.

We could have.

To be honest, well, knowledge and understanding exactly of our financial position and even to the extent of. Of knowing exactly, exactly to the dollar what is left owing at any one time on any project. It's almost. It's suddenly like, wow, that little bit extra knowledge, you know, how to make better decisions long term. And you know, every single point that you mentioned, Russ, up until that last one is out of your control, quote, unquote, because it's relying on other people or suppliers or whatever. But again, it's nothing new. It's. It's still very consistent in this industry and other builders have managed to get through it. So we just need to do better at planning. But like you've said, Andy, reserves, that's what gets you through a rainy day.

Absolutely. And you know, I mean, I think I just. Because it resonated with me, I want to jump on Russ's comment about the conspiracy theory. We seldom stop to think about what the business of a bank is. I mean, they're the best marketers in the world. Because if you think about it, they get us all excited when we get approved to work for them. I mean, just, Just think about what that's done in our brains, okay? But anyway, their job, if you think about it, is to sell money at a profit for them. So the bottom line is, every time you get a loan, effectively what that bank is doing is it's investing in your business. And they watch their money like a hawk because that's their business. And when they start to see that your account is not showing the kind of picture that it needs to for them to get their return on their money, they. They're coming to knock on the door to say, it's time. We. We want. We. We need to lower our investment in your business, which they do by either raising the interest rates or calling the loans, as Russ has said. But, you know, we've got to understand that's part of the way they look after their business, and we shouldn't be surprised when it happens.

And also, you probably don't have as good a relationship as you think you do with your bank manager, because at the end of the day, you don't pay their bills. Who they work for pays their bills. So it is their KPI to keep it under control. So you could have as great a relationship as you think, but they have to answer to someone else, and it's not you. So the rug can be pulled from under you very quickly.

And when it goes wrong and you're in the bank manager's office sweating, that's not the right time to be negotiating good terms, you know, And I mean, the number of builders we've heard have said. I've been banking with that bloody bank for 35 years, and now that I need their help, they won't give it to me. Of course they won't. They know what, they know what their cash flow position is. That's why they won't give it to you. So it's.

It's coming at it. Yeah, they're coming at it from an analytical perspective, not emotional. And when you are sitting there in that seat sweating, you're emotional. And that if you can't control your emotions, you can't control your money. I think Warren Buffett said that, like, that is the baseline. If you're in cash flow issues, you're sweating. You. You need another project, you're emotional about it, you're not going to make good financial decisions.

Exactly. And I mean, if you, if you take that, then full circle. As, as Russ, you know, said earlier, if you don't know your financial position, then you can't predict what's coming, then everything's unexpected. I mean literally you putting yourself into a place of things being unexpected but they shouldn't be because again, proper planning, proper strategic planning, SWOT analysis. What are my threats? What is my sales pipeline guys thinking clearly, thinking objectively, planning, none of that is unexpected. You'll see it coming and then you can make the adjustments.

Most of the issues we've discussed so far are internal, like they're very much within the business. Russ, maybe you can touch on this. Are there any impacts which happen externally, maybe with the customers or the perception of the building company in the market?

Yeah, well, clients don't like seeing sites with no activity. So anytime that there is a delay and this could be caused by cash flow because if you're not paying your suppliers on time, that's going to lead to a delay in the delivery of materials which is going to lead to inactivity on site. Equally with subcontractors who generally they're on 7 to 14 day payment terms. And if you're not paying those guys, they're not going to show up. And when clients arrive at their site and there's no activity, they're, they're going to be looking to you for answers. And if they see it happening too often, it doesn't matter what you're telling them, they're going to stop believing, believing you. So that can very quickly lead to a deterioration in the relationship. And of course another consequence of that is that these delays cascade eventually leading to liquidated damages, which again is coming straight out of your bottom line. It doesn't come out your revenue, doesn't come out your gross profit that is straight out of your net profit, which is very, very painful when you're working on tiny wafer fit margins as it is. So yeah, this is why it's not just about cash. At the end of the day, the cash will affect your profitability and I.

Think will, I know you want to start talking about solutions at some point, but just before we go there, we've kind of looked at this from the perspective of the bad things that caused this problem. We must never lose sight of the good thing that causes this problem. And that's the reality that growth sucks cash. If, if you are growing your building business, you can only grow at the rate that your cash can support. And we back to what we said earlier. If you don't know your numbers and you don't know what rate you can afford to grow at if you're going to push beyond that rate, you're going to end up in a scenario where for every dollar you're earning, it's costing you $1.10 to make that, in which case you're going backwards. Now, growth is a good thing. Growth is never a bad thing. But it needs to be planned. Safe growth. We always talk about growing a building company safely and securely. That's part of our ethos that safely and securely is understanding the impacts of these things, particularly things like cash, and then making sure that we growing with within the, the ability that our cash gives us.

You actually made such a good point because. So it's so easy to make the argument when you're talking about cash flow problems. You're talking about, well, can I, who do I pay? Like the concreter or the plasterer? Like, you know, that sort of. That has to be done because then you need the progress claim to come through. But, but what does happen so frequently is when a building company is experiencing cash flow problems, they stop making the investment in the things that will not solve it completely, but actually help them run a better building company. What's one of the first things any building company cuts if they're not all across their numbers and know everything? It's marketing. Like, okay, let's turn off all of the marketing. Okay, you're gonna make a worse problem in a few months time, but sure, marketing. All right, what software can we call, ooh, what staff can we get rid of? And you suddenly just start just deconstructing your entire building company before your eyes. But you can justify it because I have cash flow problems. At least the projects are more important. And it's kind of like what Russell's talking about. It is a Ponzi scheme. You're robbing Peter to pay Paul. So you're trying to get rid of everything that you should be investing in to run a proper building company just to really keep the wheels turning, but barely and very stressfully as well. So yeah, growth sucks. Cash. You need to make sure you can pay not only the bills on site, but all of your other bills and some so that you can actually invest.

Great point.

So picking apart the building company, cutting spend, cutting staff, all that kind of stuff. If that's not the solution, what, what is the solution? Sky, do you want to give us an overview of that?

Oh, well, at risk of sounding like a broken record, like, know your numbers, we talk about this every episode. But you just have to. It's, it's. I really come back to we did an event and I think, think, you know, we've probably told this story like half a dozen times already now. But I remember doing an event, a live event, and you know, all these different building company owners in the room and went through a whole presentation, talked about a range of topics, a lot of which we've covered in different podcast episodes. And you guys, everyone listening knows apb. We talk heavily about numbers and benchmarks and margins and everything. And there was sales and marketing and all different things included in this presentation. But we could see a notepad left behind by a set of builders who did attend this event. And I think we are talking to them at the end of the event. They just left. But on this notepad they were passing notes to each other and there was a whole full blown conversation. But a big thing that was highlighted and agreed to underlined on this notepad was how are you supposed to run a building company when you have to do all this numbers crap? And it was just so, it really just highlighted like, look, they weren't the builders for us, if that's what you believe. But because running a successful and profitable building company, you have to know every number, like every KPI. And that's not just about, you know, cash in and cash out. That's really like oversimplifying it, to be honest. You want to know every number coming in, every number that is going out and owed. What are your forecasts? What are you hoping to invest in? What, how long does your sales cycle go for? What are all of your terms with all of your suppliers and subcontractors so that you can really paint a really detailed picture of your building company and build in systems and processes that you are never left wondering who should you pay first or what expenses should you cut? Because you also have built up a strong amount of reserves. A huge aha moment for many of our clients is when you start focusing on your numbers and you're really working through a lot of the KPIs and the benchmarks that we talk about and tackle. It's just take the focus off of the dollar amount. Take the focus off of, you know, in this contract, you know, you've, you've got a markup and you're going to make like 200 grand. It's a lot of money. To some people it sounds like a lot of money. Some people it doesn't sound like a lot. Forget the dollar amount, just think about it in terms of the percentage. And then it's not emotional. It's either above the line, where it needs to be or below the line, and that's how you need to start making decisions. But you either know your numbers or you don't. There's no gray about it. You can't blag your way through knowing financially your position. You either do or you don't. That's very black and white.

And of course, to know your financial position, you've got to understand the work in progress accounting adjustment, calculation, and you've got to insert that into your figures. And when you do that, I mean, this actually helps your cash flow because as we've said, knowing your numbers is critically important. You've got to know where you are before you can fix a problem. But doing that one simple thing, if you've not been doing it before and you're doing new construction, in all likelihood you've been paying too much tax because you've been overstating your profits. So by doing this calculation, you're actually going to reduce your tax liability, probably even get a tax refund. So that will then help your cash flow. We had a client just recently. Andy will know this, probably a bit more detail, but once they did their work in progress calculation for the first time, they said they knew there was something wrong. They couldn't put their finger on it. Their accountant didn't understand, and they couldn't get any straight answers. But when they went through our courses and understood how to do this calculation, they actually reduce their tax bill by $177,000. I mean, that's a huge amount of money to pump into your cash flow. And of course, there's also, there's another calculation that builders can take advantage of, which is the wipra, which is the work in progress revenue adjustment. Now, this is a way of calculating work in progress that is, you know, it conforms with accounting standards, so it's perfect for legal, but it makes the liability even higher, which in turn reduces your tax liability even more. And like I say, it's perfectly legal. Now, it's not the recommended approach for doing financial accounting because it can distort your profitability. So it's not ideal from that aspect, which is why we always encourage builders to use the WIPA calculation. But if you want to reduce your tax at the end of the year, you simply use this tax accounting calculation, which again will. Will improve your cash flow no end.

That sounds like a relatively complicated concept for some people. Russ, who would you talk to if you wanted to find out more information about that?

Well, I'll tell you who not to talk to. Probably you don't want to talk to an accountant that is not an expert in construction financials, which is probably about 90% of accountants. But who I. I would talk to is typically accountants that aren't construction specific should understand this. Of course, APB are all across this calculation. Andy and his team. Yeah. Are probably the, the best people to, to speak to. Yeah. Regarding understanding not only the calculation, but the implications in terms of both tax and cash flow and will.

This one can't be under emphasized. I mean, really, what, what, what. What Russ is talking about is starting by knowing what your money is. Because if you think about it, that's what the work in progress accounting adjustment does. It separates your money from other people's money so that you can run your business not as a Ponzi scheme. Because the Ponzi scheme element is I'm using other people's money to pay my bills. So what you first got to get to is you've got to get to a place where your money's paying your bills. And when your money is paying your bills, then you can start to build reserves. And that then gives you the opportunity to protect yourself in the future against, as sky was saying earlier, those short term holds and the contract that you're expecting that falls over if you've got three months or six months or 12 months fixed expense reserves in the bank. You don't get stressed, you still sleep, your hair doesn't fall out. You make objective professional decisions. So it's, it's the getting to the point that, you know, how much money is yours to spend in the first place is first base on this, on this particular baseball diamond.

What is the optimal amount of fixed expense reserve to have on hand?

Well, we talk about a minimum of three months, but we'd like to see everybody at 12 months at least.

And which a lot of accountants do not like.

Like.

Oh, absolutely.

A lot of accountants do not like the sound of this. Which, you know, it's interesting in itself.

Financial advisors as well, they don't like it.

Yeah. Because it sounds crazy. Right. You're holding on to a lot. Like, you know, oh, you could invest it. You could do so much more with the money. Well, okay. What happens when something unexpected happens? You have a rainy day.

Yeah. And. And I'm glad you said the I word because it's important. Important. It's not an investment. It's an insurance policy. That's what it's doing for you. It's not there to earn you a return. It's there to let you sleep at night. So it's, and that's the problem is obviously accountants and you know, financial advisors are talking about investment. Well we saying get, become profitable, sort out your work in progress, accounting adjustments so you can pay your bills, then build your reserves to the 12 months and then invest everything else. So really what we say. Exactly, all we say to the financial advisors is wait, we're coming, we'll be there in a second, just hang on, we're on our way.

And what that does to the business owner in terms of allowing them to sleep at night to make longer term decisions, it transforms businesses because you think in a very different way and you're not wasting your time fending off phone calls, chasing up money, making short term decisions. Decisions.

Yeah.

Lets you feel very in control as well though because suddenly you're self insured. You're actually not relying on, on anyone or anything else. Like you were able to do that for yourself, for your building company, for all of your staff, all of your clients. You're self insured. That's really what it is. You don't need to rely on hoping if something bad happens, someone will give you that lifeline.

You're good.

You got it.

Your biggest concern at that point is is the bank secure looking after all? Yeah, yeah, you probably want to limit it to quarter of a million per bank and have a few.

Are we still on solutions or not?

Oh, we're deep into solutions. Yeah, yeah, we're deep into.

Because I mean really if you look at this whole discussion so far has been about accuracy. That that's solution number one. Make sure that your numbers are accurate and you know them. The second one, which it's like often when we talk about this we, we sort of overcomplicate it. Let's make it as simple as we can. Can get paid sooner, build on time and literally make the time between getting paid as short as you possibly can. So literally what we're saying there is, there is this fallacy that I can only be paid on X basis. Well the reality is if you don't ask for anything else. That's true. But if you actually sit down and look at it and simple example, a lot of renovators and remodelers actually invoice every two weeks or every month, irrespective of progress. Well what that says then is that that is a model that you could be applying particularly in new home construction where some of the stages are pretty long. If you can find a way to break those up so that you're getting cash injected more regularly. There's another solution that people can think about. And my favorite one, Russ. Russ said this is a throwaway comment I don't know, about a year ago and it just won't leave me alone. We often have people who come to us and say to us, I really want business coaching, but I can't afford it. And we look at their revenue and they're doing three to four million dollars a year in revenue. And Russ, it was literally a throwaway comment. He said anybody that's doing over $3 million a year and can't afford business coaching needs to change their business model. There's something wrong with their model. And that thing has just, it's been like a, like a lighthouse for me because essentially what it's saying is if you've got $4 million million with a MMM going through your bank account and you can't find less than 1% to invest in your business, there's something wrong, there's something in your business model that needs to change. And it can be as simple as this. I've got a client who is now almost covering their overheads with the cash they generate from the sale of their prelims. I mean, think of, think about what that says. What that says is they used to do that work for free. They used to do all their quotes for free and then chase the money to get the money in from construction to cover their bills. They're now in a situation that because they charging upfront for prelims, they're actually generating cash that they would not have had previously in the business. Add to that the saving on tax from wipa. Why wouldn't you? I mean, it's it. That's the beauty. Once you turn it positive live, it's very, very quick to, to recover. And sorry I cut across you, but sometimes these things, if I don't get them out, they just disappear. And that would be sad.

No, very good. That's what we want. That's what we want. I was just going to ask Russ, how often do builders need to be looking at these numbers?

Daily, I'd say certainly look at the, the bank balance daily. Yeah. First thing when you wake up in the morning, have a look. What's the bank balance? What is it? How does it compare to yesterday? Why has it changed? You got to know the answer to that question, I believe, straight away. But another thing I think would be good for builders to look at maybe on a weekly basis is what we call the quick ratio, which is your cash and your debtors basically divided by your creditors. And your work in progress, if it's a liability, which in new construction it is, if it's an asset because you're doing remodeling jobs, that will probably switch to the first part of the calculation. But you cash in your debtors divided by creditors and work in progress. That is what's known as your quick ratio. Record that number and importantly, record the trend because that will give you an insight into what's happening with your building company. Any number over one is generally accepted as being good, but that will. Yeah, that. I think that will help. But of course, there's a lot of other KPIs that we look at weekly on, you know, from an APB dashboard perspective, but also monthly as well. You know, some of these numbers, you know, they, they only make sense when you look at them monthly. But lead indicators, you've got to be looking at, you know, on a weekly basis. There's a intermediate one as well. Well, which I think is probably a very important number to know in terms of cash flow. And that's your workflow. So if you look at all your contracts in play or all your signed contracts that aren't finished, and then you deduct the amount that's been claimed from those contracts, the balance is your workflow. And this is like your, your guaranteed revenue almost, because it's very unlikely that, yeah, those contracts wouldn't to be executed. So when you look at that figure in total and then you measure that on a monthly basis, again, it's not the number itself that's important, it's the trend. And when that figure is trending up, I. E. Getting bigger, you got to be thinking, what other resources do I need to put in place? Because if you don't, you're going to slow down construction. That's going to have an adverse effect on your cash flow. But equally, if that number is trending down, which for a lot of building companies at the moment, you know, that is exactly what's happening. That's okay. But let's look ahead and let's plan on scaling back our resources, I. E. Our fixed expenses, because if we don't, our fixed expense ratio is going to be way too high in proportion to our revenue, and that is going to destroy our net profit. So there's a lot of different numbers we need to be looking at, but they're daily, they're weekly, they're monthly, and they're even quarterly.

And that's a good point that you mentioned on that, like, final number there, because you get to make the decision in advance. And it's a non emotional decision like what you decide to scale back on in your fixed expenses. Not when you're strapped, struggling to pay someone. And then it's like, what can we cut immediately? It's that distressed one. And ultimately you're not making the best decision. Look at your, for your workflow forecast or what's left in your workflow and you will know, okay, can I, can I get those sales? Can I beef it up? And if you know the timeline is just not there, proactively make the call. It's just so much more, less emotional.

Let me play devil's advocate for a moment. I'm going to throw to you, Andy, because I know you love these questions. It all sounds good, you know, get on top of your numbers, make non emotional decisions, plan well in advance. But let's just say for a moment, moment. I'm running a building company. I'm not in that position. I need cash now. What do I do?

I'm tempted to tell you to get a suitcase full of white powder and go to London. But no, I won't tell you that. Look, the, the, the, the reality is there's no short term, there's no short term fix to this. If, if you are, if you are in trouble, number one, you need to acknowledge you're in trouble and you need to be communicating over, communicating with everybody in your world. You've got to be talking to the people you owe money to. You've got to be talking to the people that owe you money. Obviously, if you, if there's money outstanding, you need to, to get that in as quickly as possible. You may be able to accelerate some of your construction schedules. But what we got to understand, going back to the point that Rust and Sky just made, if you accelerate your build rate, you're burning through that workflow quicker, which means you're going to end up, you might be okay short term, but you're going to end up with a problem, you know, down the road. So the real answer is do what we've spoken about today as quickly as you can. You know, there's that saying that says if you want to sit in the shade of an oak tree, the best time to plant the tree was 20 years ago. Well, the second best time is today. So it's really one of those things that if you're listening to this podcast and you are in a cash flow bias, you've really got to first get to understand why you are. You know, at the beginning of this, we spoke about the fact that Often cash flow gets blamed, but the problem is, why have you got no cash flow? And if you can first answer that question, then you can come up with a potential solution. Really, the, the only, the only other way you can go is you've got to, you've got to be talking to somebody about some kind of business financing arrangement, loans. The danger with that, you know, we're talking about the flip side of cash when we talk about debt. I mean, if you think about it, the only two numbers on a balance sheet that are fact, not an opinion, are cash and debt. Those are real, those are actual. So the point is, you, you, you, you don't want to go down that road if you can avoid it. If you can't avoid it, think about what Scar said. Unfortunately, you are now negotiating from a weak place, a week weakness because you're desperate. So again, we're back to, you know, get into your numbers, make sure that they're accurate, use that to predict what's coming, and then make the necessary, objective professional decisions before it actually hits you.

I think because of the, the nature of new construction being cash flow positive, you should always be able to pay every single bill as and when it becomes due and payable and still have ac significant. And by that I mean hundreds of thousands of dollars sitting in the bank in reserve. Because that's what we see from our top builders, isn't it? We see these huge reserves, they pay everything on time. They never miss a beat. If you're doing new construction and you can't do that, if you've got a bill that you need to push back a week, that is your early warning signal. That is something not to be ignored. Something is not right now. You can choose to ignore it and then wait another year or two. You literally don't have any cash and it is too late to retrieve the situation. Or you can acknowledge that something in your business model is not correct and you can speak to an expert who can help you identify what is going wrong and help you to fix it. But yeah, it's like a cancer if you ignore it. Before you know it, you're going to be at stage four and there's no turning back now.

And ignore everything else we've said on this podcast, except that because I think the most frustrating part for every one of us on this call and all of our coaches and our member success coaches, when somebody comes to us too late for us to help them, that is that, I mean, if, if you want to see coaches physically upset, it's seeing somebody arrive where had they come to us six months earlier, we could have helped them turn the ship around. But that ship's already on the reef. It's already gone. All we can do is try and, you know, save people and a few positions. It's really don't wait. If you even slightly worried, do something about it.

So the easiest thing you can do is a nice little triage on the jobs you have at the moment. And the easiest thing you can do, obviously as a member you get access to the calculator, but go and complete the work in progress. Accounting adjustment, calculator first. Go project by project and then you will definitively know literally, definitely to the last dollar what is owing on every single contract. And what the first shock might be is that you might realize you're actually a lot less profitable than you first thought when you signed the contract on a particular job because of how you know, if it's delays or this or that or variations or whatever, the costs have actually increased, you will definitively know. Is it all of your jobs that have gone down the toilet or is it. And this happens very frequently, it's this one project that has sucked the life out of your building company and that could be how it starts. And then you can go down that slope. But do a nice little triage of all of your projects on the go at the moment and use that calculator because step one is really getting all the figures. Where WIPA really makes sense and will help you from a financial perspective is when you do the adjustment and inside your accounts and then you can see, okay, profitability wise, here's how it then looks. With all of my fixed expenses and.

The, the most common problem, it's your own house, it's the one you built yourself that you thought, nah, I don't need to really, this is for me. I can, I can sort of just. I'll just fly this one by the seat of my pants. Just bit you in the bum. You shouldn't have let it anywhere near the seat.

So we've talked about this quite a bit. Like Eddie and I have sat down, spoken about it and it's a bit contra of a word to use, but really you're robbing your own building company blind when you do that. Like you're stealing from your own building company if you are not accounting for it properly. You know it. There's the, the big hairy thing that you've been looking for, stealing all your money.

It's the ultimate mates rates job, isn't it? Building your own home.

Sky you mentioned the WIPA training for members of apb. Where can non members go to get started on this topic?

We've got heaps of resources on what WIPA is, how to calculate it, and you can figure it out and do it yourself. Of course you can. The shortcut way is just join this calculator. We'll pay for your membership for the next, I would say 20 years, but more than 20 years. It's. It's inexpensive to join APB to get these kinds of resources, but if you feel like figuring it all out yourself, we've got numerous podcast episodes on it. We've got a free resource download that explains the whole calculation. We've got blog articles. So go anywhere on our website and you'll be able to find a whole heap of resources on wipa, the accounting adjustment, how to do it, how it all works.

Go anywhere you want on our fancy new schmick website.

Absolutely. Well, Russ, Sky, Andy, thanks so much for joining me today on Professional Builder Secrets. Any final thoughts before we wrap things up?

Don't leave it too late.

Don't leave it too late. Well, let's leave it there. Thanks very much, Andy. Also, a big thank you to our listeners wherever you are in the world. If you like the show today, please subscribe to Professional Builder Secrets on your platform of choice. And if you're feeling generous, leave us a review. But until next time, have a great day.

J.