Cash Flow 101: Why Profitable Businesses Still Go Broke (and How to Fix It)

Rule number one, never run out of cash. Rule number two, don't forget rule number one. Today we're talking about cash flow. I'm John Wilson. I'm the CEO of Wilson. We're around $40 million in revenue with roughly 200 team members across Ohio, Indiana, and Nashville. Now, cash flow is a big, broad term, but we're gonna try to break it down in a way that makes sense and why focusing on it, aside from the obvious, is the important thing to do. Your accountant has just filed your taxes and you get a call saying, hey, You had a great year. Here's how much you owe in tax. Well, that amount of profit that you're telling me that I earned isn't in my bank account, but yet I still owe tax on it. Somebody walk me through what happened. Most businesses feel that way. You can be profitable and still be broke. Most businesses are profitable but still broke. There's a lot of layers to it that we're gonna be solving today, but this is essentially the cash flow problem. Cash flow is a pretty simple core concept. How much cash is in my bank account? Versus how much cash leaves my bank. Are you paying bills? Are you paying debt? What are you doing with the cash? It's how fast you get paid, how fast you have to pay out, how much you get to keep, and how much of it can you reinvest into new equipment or marketing campaigns or staff members. Before we dive too deep, let's talk about what does not show up on your books. That way you know like what will impact cash. Accounts receivable. If people owe you money. You don't have that cash. So if you had $1 million of profit, but you have $1 million of accounts receivable, you might have nothing in your bank account despite having $1 million of profit. Your accounts payable, you might actually have more cash in this case because if you've received all your cash, but you haven't paid your vendors yet, you could have an excess of cash, which could be a problem if you don't know that and understand. Maybe you go buy a new car or a new truck or something, and you didn't realize that, hey, I still owe all this money. This cash really isn't mine. Debt touches cash but doesn't touch net profit. So if you're paying off auto loans, if you bought a business, if you bought a new building, if you have a line of credit, those are decisions that absolutely impact cash but do not impact profit. There's a ton of these examples, but the core concept is net profit does not equal cash and EBITDA does not equal cash. So we have to install some systems into our business to understand What is cash? Where is it going? And how's it coming in? That way we can truly understand cash flow. As a big example, there was a company for sale in our industry 2 or 3 years ago, and they were doing $12 million of EBITDA, which is a way to measure profit. Now that company was losing $2 million of cash flow a year. How on earth was that company doing that? And it's honestly not that complicated. They had some auto debt, they had some M&A debt because they were buying companies, they had some real estate debt, Lo and behold, it happens really fast. We self-funded our growth. We're called a bootstrapped company, which means that we took no outside funding to get to where we are today. We started at $1 million of revenue, and today we sit at around $40 million of revenue, 10 years later. That was bootstrapped. We took on some debt, we reinvested all of our profits, and we learned most of the lessons that we're going over in this video the hard way. We learned it by living out the failure. We learned by buying too much equipment and not paying enough attention to this, or buying a ton of inventory, Not having the cash when we needed it. So most of these decisions we learned in the tough way, the school of hard knocks. And what we learned over the past decade is that nearly every decision that we make comes back to cash. If I buy inventory, maybe I can get it 30% off, but I also have to buy it, which means my cash shrinks significantly. Okay, can I buy? Can I cover payroll? Can I pay for marketing? Will I be okay for my debt payments? Will I be okay for my payroll? Hey, that software, it requires an annual upfront payment versus monthly. Well, can we do that? We have to be focused on our cash flow, not just the price. And this is the difference between your cash flow and your profit and loss statement. On your profit and loss statement, those 2 decisions are great decisions. If I get to buy inventory at a deep discount and then cost it properly, well, that's amazing because on my, on my profit and loss statement, I will show even more profitably. But on my balance sheet, I'll have no more cash. You don't want to be in a situation where you have no more cash. Here's a couple other examples that can impact cash pricing to customers. Pricing from vendors, cutting or renegotiating vendors should add more cash as you drive less cost. The timing of payments, that can be really important. Is payroll every week? Is it every 2 weeks? How often are you paying your vendors? How long do you have to pay your vendors? Marketing can be a huge cash suck. If you're doing broadcast media, that might take 12 months to get a return on, whereas if you're doing Google, it might take a day. So be thoughtful for what you're investing in because broadcast will probably work, but it takes a big investment before it starts spinning off new cash. Rebates, credit card returns, how to buy vehicles, all these things impact cash in a big way. Cash flow is a million of micro decisions every single day. All of these micro decisions add up to your actual cash flow. If we're running a profitable business, we're paying taxes to our community, we're creating new jobs, we're creating growth, which creates opportunity. We are creating for our team and our community. In order to run a profitable business, we need to be cash flow positive. Businesses don't actually go bankrupt because they're not profitable. They go bankrupt because they run out of cash. You can be not profitable for a very long period of time But if you have cash flow, you can be net profit negative forever as long as you still have cash flow. And there's tons of businesses doing it. As CEOs and operators of our businesses, we are active investors. It is our job to take the incoming cash and allocate it to whatever the best return for that cash is. Maybe that cash is a hire, maybe it's inventory, maybe it's a marketing channel, maybe it's an acquisition. I don't really know for your scenario, but that is your job as the CEO of your business is to allocate capital. The smaller the business, it's probably just you thinking about this. You probably don't have a CFO, you probably don't have a real thought partner in this. It's just going to be you, and whether or not you make the right decision is basically going to determine what happens with your business. If you make the right decision, like M&A or a marketing channel that works or effective buying decisions on your vehicles, your business can continue to grow and grow and grow because you have more cash flow to invest into marketing and people And you have a you'll be able to create a safety net so that you can scale. But if you don't pay attention to this, then you're just going to get stuck. The best contracting businesses out there actually grow cash faster than they grow their core business because if they get paid a customer deposit, they get paid upon completion, they pay payroll two weeks later, and they pay their supplier thirty days after that. You're actually getting paid to grow your business. You're getting all of your money up front, and then you're paying out. Costs on the back end. So the best contracting businesses out there are self-funding their own growth because they're prioritizing their cash flow and they're dialed in and focused on it. And then they're paying their costs in 14, 30, 60 days, and that's allowing them to fuel themselves as they scale. Now, this one might be a little bit controversial, but I think over the last few decades we have been served up metrics for what is good in our industry. Good might be 50% gross margin, 40% overhead, and 10% net. But today in 2026, I don't know how right that is. As an example, today we're running in a mid-20% EBITDA margin, which is a lot for a business our size. Now, 24% is a big difference from 4%, which is our industry average. The way that I like to think about this is, is the cost in your business something that a customer would care about? If you remove that cost, would the customer care? If you added a new cost, would the customer pay more for your service because they like your service better because of this new cost? And if it's not, then you should probably work to eradicate. But if you're overpaying for your office or you're doing some other luxury spending, but you're skimping on your call center, well, the customer's probably gonna care a lot more about the call center when they call in, will they get served, than they did about the fancy office. My firm belief is if you are benchmarking against 20 years ago KPIs for profit, you're measuring against the wrong thing. Most contracting companies today, I believe, should be between 50% and 60% gross margin with a mid-20% profit. I think in the next few years, with all of the AI and automation that is coming out, I think we will start to see at-scale contracting businesses in the 30% free cash zone, which is absolutely unheard of. If I was back at $1 million, here's a couple of things that I would do. One, I would start tracking cash weekly. This isn't complicated. We still do this to this day. We call it our cash out, and it's cash in, cash out. 2, I like separate accounts. I always loved the book Profit First, and in that book there's a profit account. We call it our capital account, where every day or every week or every month we just automatically transfer money to that account, and then we use that money as our profit account. Maybe we buy some vehicles, maybe it's a distribution for the owners. 3, Can you pull cash forward? How do you get paid faster? How do you make it so easy to pay you that you get paid immediately? The back half of that is delay your payments. Negotiate terms with every vendor that you can possibly negotiate terms with. If you're buying goods, if you're buying services, push for terms. The difference between getting your cash and paying your costs is cash flow. Just doing those 4 things, if you did them for a month, You would understand your business better than 90% of contractors out there. You'd know where you're hurting, where you can cut, where you can optimize, and how to drive more cash so you can keep scaling your business. The way I like to think about this and the way I talk to my team about this is this is less cash flow and this is just control. Do I have control over where the cash is coming in and where it's going out? Do I feel like I'm in control or do I feel like I am held hostage by whatever cash reality is happening in our business. For the first 6, 7 years of my career, I felt like I was hostage to the business. And it was only after we installed some of these disciplines that I feel like I am in control. And that's the difference of a $1 million plumbing company and a $40 million plumbing company. If you like what you heard, make sure you like and sub.