{"id":2489,"date":"2022-04-29T11:39:55","date_gmt":"2022-04-29T11:39:55","guid":{"rendered":"https:\/\/imsfund.com\/?p=2489"},"modified":"2022-04-29T11:39:56","modified_gmt":"2022-04-29T11:39:56","slug":"how-do-i-get-out-of-this-cash-flow-crisis","status":"publish","type":"post","link":"https:\/\/imsfund.com\/index.php\/2022\/04\/29\/how-do-i-get-out-of-this-cash-flow-crisis\/","title":{"rendered":"How Do I Get Out Of This Cash Flow Crisis?"},"content":{"rendered":"


\n<\/p>\n

Everyone has experienced negative cash flow<\/strong><\/a>. If you have a troublesome rental property<\/strong>, 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\u2019re in the early stages of building your small business<\/strong>, negative cash flow may be a harsh but hard to mitigate reality.<\/p>\n

Chris <\/strong>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 himsel<\/strong>f. He hired a couple of employees and started taking on more and more work. But, he\u2019s spending too much time training his junior engineers<\/strong> and not enough time locking down high-value contracts<\/strong>, leaving him in the red every month. Surprisingly, more business owners face this problem than you would think.<\/p>\n

Scott puts on his CEO hat to dive deep into the finances of Chris\u2019 business and gives some challenging, yet reasonable, advice on how he can immediately <\/strong>improve his financial situation<\/strong><\/a>. With suggestions from both Mindy and Scott, Chris may have a better picture of how he can go from <\/strong>cash flow<\/strong><\/a> negative to very comfortable<\/strong> with highly positive cash flow in the near future. You may not be in Chris\u2019 position now, but if you ever plan on starting a business<\/strong>, or have already, this episode is a MUST.<\/p>\n

\n

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.<\/p>\n

Chris:
Well, when I was putting together my little summary for you guys today, this is the first time I\u2019ve sat down and looked at my business financials in a while, because I\u2019ve been working 60 or 70 hours a week without doing the financials, and I was coming to the same conclusion that obviously what I\u2019m doing is not working the way I\u2019m running it right now.<\/p>\n

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and joining me today is my smart cookie cohost, Scott Trench.<\/p>\n

Scott:
What a fully baked introduction as always Mindy.<\/p>\n

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.<\/p>\n

Scott:
That\u2019s 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\u2019ll help you reach your financial goals and get money out of the way, so you can launch yourself towards your dreams.<\/p>\n

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\u2019re in. He lives up in Canada. He would like to be financially independent within the next 10 years, but he\u2019s got some interesting curve balls being thrown at him right now. Most of them stem from the fact that he owns his own business.<\/p>\n

Scott:
Yeah, we\u2019ll get into this, but Chris is upside down. His business is not bringing in enough income to support his lifestyle, and he\u2019s 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\u2019re wrong on, but think probably might need maybe to be implemented by Chris.<\/p>\n

Mindy:
Strongly considered. We\u2019ll 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\u2019s running his own business, and I think there\u2019s a lot of business owners, who will listen to this show today and say, \u201cOoh, I feel seen.\u201d We gave Chris several options. We didn\u2019t just give him one option. This is what you have to do, and that\u2019s the only path to success. There are a lot of things to consider, and I hope that if you\u2019re listening and this is making you feel seen, you think of the different options that we\u2019ve given Chris and see if those can apply to your situation as well.<\/p>\n

Scott:
Absolutely. Well, should we bring them in?<\/p>\n

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.<\/p>\n

Chris:
Thank you very much Mindy. I\u2019m happy to be here.<\/p>\n

Mindy:
I am excited to talk to you. You have a lot of interesting aspects to your financial situation, so let\u2019s jump right into it. What is your income and where\u2019s it going? I already answered that question. Your income is whatever and where does it go?<\/p>\n

Chris:
Precisely, whatever. That\u2019s a very good way of putting it, actually. I\u2019m 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\u2019ve got two rental properties bringing in about $850 a month. My wife\u2019s employment insurance is bringing in about $2,000 a month. Canada has this baby bonus basically, that\u2019s bringing in about $300 a month, and then my business, generally most months it\u2019s mildly profitable, but it averages out to maybe $1,000 to $3,000 dollars a month. All told, I\u2019ve got income at around 5,700 bucks a month, Canadian. You can translate that to American, if you really want to.<\/p>\n

Mindy:
We\u2019ll just go with a dollar for dollar and call it, because it\u2019s the same. The math still works. Canadian math is the same as American math.<\/p>\n

Scott:
What does your business look like six months to a year from now?<\/p>\n

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\u2019m looking to stabilize and bring it up to a steady. I\u2019m 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.<\/p>\n

Scott:
What would you expect annual revenue for your business to be?<\/p>\n

Chris:
Revenue? I\u2019m 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.<\/p>\n

Scott:
Your annual revenue is $200,000, what is an employee cost?<\/p>\n

Chris:
Sorry. I\u2019m hoping my annual revenue is going to be $200,000 in the next six months. Right now, I\u2019m bringing in somewhere in the range of $120,000 annual. I\u2019ve 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.<\/p>\n

Scott:
In base salary or base bonus?<\/p>\n

Chris:
That includes everything, taxes, everything.<\/p>\n

Scott:
Okay, great. We\u2019ll come back to the business in a little bit here for sure. We\u2019re bringing in $5,700 a month, where on average very variable, where is that money going?<\/p>\n

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\u2019re 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\u2019s haircuts, through alcohol, through a new microphone for my computer, for a BiggerPockets interview.
We\u2019ve 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\u2019s -2,600, is the difference if you might have noticed.<\/p>\n

Scott:
Yeah. We can definitely see that. How much cash do you\u2026 Oh, go ahead, Mindy.<\/p>\n

Mindy:
I was going to say right here, I can see a couple of things to discuss, but Scott\u2019s got a better point. Let\u2019s finish up the numbers first and then let\u2019s go back and talk about these<\/p>\n

Scott:
Where are your assets and how much cash do you have?<\/p>\n

Chris:
Cash, I used to have a lot more cash. We\u2019ve been living off of my savings for a while, so I\u2019m down to somewhere in the $10,000 in cash, and then assets, if you add my cars together, they\u2019re worth about $35,000, but my wife\u2019s 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?<\/p>\n

Scott:
Yeah. Let\u2019s do all your net worth. We have $15,000 in cash-<\/p>\n

Chris:
Roughly, and then I\u2019ve 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.<\/p>\n

Scott:
Okay. You obviously can see that you\u2019re cash flow negative right now and have $15,000 in cash, I\u2019m sure that is somewhat stressful for you?<\/p>\n

Chris:
Yes. It\u2019s starting to come to a head. For a while, it was okay, now, it\u2019s starting to feel very, very stressful.<\/p>\n

Scott:
Do you have a plan of action or a set course there to resolve the situation or what is your thought process there?<\/p>\n

Chris:
Temporarily, obviously there\u2019s things we can cut out of that budget that we might need to for a little bit, and there\u2019s a few different ways we\u2019re 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\u2019m 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\u2019m focusing on actually invoicing my customers as opposing to leaving the invoices on the side as something I\u2019ll get to eventually.<\/p>\n

Mindy:
Okay. Okay. Let\u2019s talk about paying yourself first, and your company needs to get paid first. I don\u2019t 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\u2019s a different stream of income?<\/p>\n

Chris:
There\u2019s 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\u2019s about half of the revenue, I\u2019m 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\u2019ve had with that, is work tends to stretch on, and even if I\u2019m charging extra for the extra work, I\u2019m not sending out the invoices. I\u2019m actually owed around $35,000 right now, in my business that hasn\u2019t come in.<\/p>\n

Mindy:
Okay. With the energy audit, this sounds like it is set up through like a government agency?<\/p>\n

Chris:
They\u2019re a nonprofit, but it is a government run program, which is why it\u2019s 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.<\/p>\n

Mindy:
Are you doing this personally or is this being done by an employee?<\/p>\n

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.<\/p>\n

Mindy:
Okay. Let\u2019s see, I\u2019m trying to think if you\u2019re 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\u2019s a bill for a hundred dollars or is it, how does that bill work?<\/p>\n

Chris:
There\u2019s minor differences, but for the most part, it\u2019s $300 per house, roughly. My contract with that company says I\u2019m supposed to build a monthly.<\/p>\n

Mindy:
Oh, okay.<\/p>\n

Scott:
Stepping away from invoicing the customer and the timing of cash collections, which I don\u2019t think is your fundamental problem. It could be a problem, but it may accelerate the payments to some degree, but let\u2019s 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?<\/p>\n

Chris:
Roughly, yeah.<\/p>\n

Scott:
You just hired your second employee and both employees cost $50,000?<\/p>\n

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.<\/p>\n

Scott:
Say that one more time.<\/p>\n

Chris:
One of my employees comes with a young engineer\u2019s 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.<\/p>\n

Scott:
Okay. So we have $60,000 in expenses on $120,000 in current run rate revenue?<\/p>\n

Chris:
Yes.<\/p>\n

Scott:
Okay. That\u2019s 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\u2019s do the math on your end state, six months to a year from now. You think best case scenario, you\u2019re going to get to $210,000 per year in revenue, right?<\/p>\n

Chris:
Best case might be strong. I think that\u2019s my expected case, looking at the projects I\u2019m quoting on right now.<\/p>\n

Scott:
Okay. You\u2019re anticipating case is, let\u2019s call $200,000 in revenue in a year from now, and you\u2019re going to have two employees, each being paid $50,000. The grant will be over with at that point?<\/p>\n

Chris:
Yeah, it will be.<\/p>\n

Scott:
Okay. You\u2019re going to net $100,000 in revenue or in gross margin, we\u2019ll call it, at this point. You will have other expenses you\u2019ll have to pay for your business besides the employees. What are some of those expenses that you\u2019ll have?<\/p>\n

Chris:
It\u2019s actually a relatively low overhead business, but yes, there are expenses. It\u2019s roughly $3,000 a year in insurance, another, let\u2019s 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.<\/p>\n

Scott:
What about your engineers, will they have mileage allowance?<\/p>\n

Chris:
No, they work from home and aren\u2019t going anywhere.<\/p>\n

Scott:
Do they have equipment that you pay for?<\/p>\n

Chris:
Nope, I\u2019m limited. Our contract has them paying. I pay for paper if they print, that\u2019s about it, and then there\u2019s a couple of software licenses as well, so it\u2019s 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.<\/p>\n

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?<\/p>\n

Chris:
Yeah.<\/p>\n

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?<\/p>\n

Chris:
Sure.<\/p>\n

Scott:
8,250 times 12 is 99,000.<\/p>\n

Chris:
Yeah.<\/p>\n

Scott:
That\u2019s the basic problem that I\u2019m struggling with from your business perspective here. Something has to change, in order for that to work out. Either the expenses have to get\u2026 And by the way, that\u2019s a year from now, from that. Something has to change in order to do this. Where do you think the biggest leverage is?<\/p>\n

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.<\/p>\n

Scott:
Got it. Okay. So we have another 45,000 to 50,000 in income there. What are your goals?<\/p>\n

Chris:
Six months ago, I would\u2019ve 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\u2026 I don\u2019t want to make $88,000 a year, that wasn\u2019t 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\u2019m putting in, which is a lot.<\/p>\n

Scott:
Great. That\u2019s what I figured your goal would be. I wanted to make sure though that was the right case here. Let\u2019s go through the workload again. What do you need the two employees to do?<\/p>\n

Chris:
I need them to do a lot of the technical stuff, where I am just double checking and providing my stamp. I don\u2019t know how it works elsewhere, but Ontario, the stamp is the engineer seal, without the stamp, things can\u2019t 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-<\/p>\n

Scott:
How long does the work that the engineers are doing take you to do?<\/p>\n

Chris:
That\u2019s very variable. I\u2019m charging roughly $160 an hour for my time and I\u2019m charging $60 an hour for the junior engineer\u2019s time, if that helps with that. That\u2019s probably fair in terms of how long it takes them to do something that I would do as well, right now.<\/p>\n

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\u2019m observing, I\u2019m going to go drilling into this. You can tell me if I\u2019m wrong with this, but my instincts say that a reduction in force or a layoff is in your business\u2019s future for this, because it\u2019s 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\u2019m not going to pretend that is good news or anything. That\u2019s 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\u2019s viable, if you\u2019re 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\u2019re not filling up. I can tell immediately that you\u2019re 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\u2019t appear to be working out. How much time are these engineers billing in your business?<\/p>\n

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.<\/p>\n

Scott:
But your guy who is billing hours, how many hours is the guy who is billing hours getting?<\/p>\n

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.<\/p>\n

Scott:
She\u2019s 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?<\/p>\n

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.<\/p>\n

Scott:
Okay. You got a services business here, so that means that the economics here are billable hours times rate times arbitrage.<\/p>\n

Chris:
Sure.<\/p>\n

Scott:
You\u2019ve got pretty easy math there and maybe this is a good first step, build a KPI dashboard that you\u2019re looking at on a weekly basis. How many hours am I billing out per week at my rate, which is, you said 320?<\/p>\n

Chris:
160.<\/p>\n

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\u2019s your highest revenue driver. If you\u2019re not billing 25, 30, 40 hours a week, something\u2019s wrong with that. Why do you have employees if they\u2019re not putting you on the clock, billing that time all the time, right? If you\u2019re doing, let\u2019s just do that real quick. If you can do 25 hours a week, you\u2019re going to do $16,000 a month, and now you\u2019re now you\u2019re 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?<\/p>\n

Chris:
Just for me?<\/p>\n

Scott:
Yes.<\/p>\n

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\u2019m doing at the moment. It\u2019s just not all of it is\u2026 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\u2019m working more than 25 hours a week for customers, I\u2019m just not billing for all of those hours, if that makes sense.<\/p>\n

Scott:
I got no trouble believing you\u2019re working more than 25 hours a week. Don\u2019t worry about that. No one\u2019s 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\u2019d say, \u201cHow much billable time am I putting in?\u201d And then putting a daily and weekly dashboard and saying, \u201cHow many hours am I billing at my rate and what is my blended rate?\u201d If you\u2019re doing contract projects and they take you six hours and you\u2019re billing them at like 300 bucks, you\u2019re doing 50 dollar an hour work, with that.
You need to be honest with that and say, \u201cMy 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.\u201d That\u2019s way worse arbitrage. Your revenue\u2019s 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, \u201cNo, 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.\u201d Unit of value in your business right now is you and your time.<\/p>\n

Chris:
Unfortunately. Yes.<\/p>\n

Scott:
That\u2019s fine. That\u2019s how you get started. After you get booked fully out, okay, now I\u2019m 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\u2019ve got even better arbitrage than I think with these other engineers. It sounds like there\u2019s work there, is for the $160 an hour team. But that\u2019s how you build a scalable enterprise here with services based business, I think.<\/p>\n

Chris:
Yeah, I can\u2019t disagree. I think that is my goal. Right now, I\u2019ve 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.<\/p>\n

Scott:
It\u2019s too expensive to do that. You can\u2019t do that with your business model. You can tell that by looking at the very simple high level math here. Your time\u2019s worth $160 an hour, their times worth $60 an hour. You\u2019re arbitrage at best, $30 an hour time. If you work a 40 hour week, for billable hours, that\u2019s $25,000 per month in income. That\u2019s 300 grand annualized. Every hour that you\u2019re not working training your employee, they\u2019re going to arbitrage you $30 an hour, maybe which you-<\/p>\n

Chris:
At some point, not today.<\/p>\n

Scott:
At some point, and they\u2019re not going to get up to that that full level. You\u2019re spending $160 an hour time, to make $30 an hour, maybe downstream. I think your fundamental problem here and why you\u2019re 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\u2019s your time.<\/p>\n

Mindy:
I have a question. I don\u2019t disagree with Scott, as much as I want to, because we\u2019re talking about two people and their jobs. I would love to disagree with Scott and be like, \u201cHey, I\u2019ve got a great solution,\u201d but I don\u2019t. I\u2019m wondering about the energy audits. You\u2019re getting $300 for these, but how much time does it take to do an audit?
I\u2019m talking from the time you leave your office, you drive to wherever this property is located, take the pictures, and I\u2019m a real estate agent. I\u2019m out there looking at houses all day long. I\u2019m 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\u2019m thinking it\u2019s probably more like three or four hours, so now you\u2019re down to $60 an hour making on these audits?<\/p>\n

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\u2019m booked out through the end of June for them, already right now, just because there\u2019s been so much demand for them. I did start pulling back. At the beginning of June, I\u2019ll be doing three a week instead of five a week, and I\u2019m 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\u2019m engineering.<\/p>\n

Scott:
You said it\u2019s five hours?<\/p>\n

Chris:
No, it\u2019s less than five hours. I batch them together, so I\u2019m doing two or three in a day, on the road and then it takes another day to get through those, so that\u2019s 900 bucks over two days, roughly.<\/p>\n

Scott:
900 bucks over two days. So 900 divided by 16, what is that?<\/p>\n

Mindy:
I don\u2019t know. Let\u2019s get it calculated.<\/p>\n

Scott:
$56 an hour.<\/p>\n

Chris:
That\u2019s about what I\u2019ve worked it out to be hourly for those, for me.<\/p>\n

Scott:
That\u2019s 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\u2019re going to have to make that all day. That\u2019s okay, that\u2019s a hundred grand a year from that, but that\u2019s 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\u2019t 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\u2019re not in an emergency mode here, but-<\/p>\n

Chris:
No, not yet. Although, we are heading that direction. As I\u2019ve noticed when I\u2019m tracking my\u2026 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.<\/p>\n

Scott:
Well, okay. Let\u2019s come up with some actions here that we can do here. I think we\u2019ve zeroed on the problem and it\u2019s an uncomfortable one, but do you agree that we\u2019ve zeroed in the problem?<\/p>\n

Chris:
I think so. Yes.<\/p>\n

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\u2019re willing to consider there, but it\u2019s a good market, I\u2019m sure they\u2019ll be able to find other work. If you give them, \u201cHey, in two months, I\u2019m not going to be able to do this. I\u2019m going to keep paying you till then, but here\u2019s the deal. I got to fix this.\u201d That\u2019s 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\u2019s going to be difficult because I think that in order to maximize your time, you need to sell the client, which you\u2019re not going to get paid for these deals, and you got to do that. Then the best case scenario is, that\u2019s 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\u2019re getting in 25 to 30 hours a week of billable time, and you\u2019re working 50 hours a week in order to get that billable time. That\u2019s not bad. That\u2019ll get you to 200 plus thousand dollars in net revenue before you pay the executive assistant with that. But that\u2019s 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\u2019s that logic working out?<\/p>\n

Chris:
Well, when I was putting together my little summary for you guys today, this is the first time I\u2019ve sat down and looked at my business financials in a while because I\u2019ve been working 60 or 70 hours a week without doing the financials, and I was coming to the same conclusion that obviously, what I\u2019m doing is not working the way I\u2019m 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\u2019m 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\u2019m working as doing.<\/p>\n

Scott:
An executive assistant is only worth the time, if you can arbitrage your time for that amount, and you don\u2019t have your two employees. I\u2019m not saying go get an executive assistance.<\/p>\n

Chris:
No, no. I\u2019m not thinking I should also hire an executive assistant.<\/p>\n

Scott:
Great. Now, here\u2019s one thing to think about with regards to your aren\u2019t 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\u2019t know if that\u2019s the right motion for stamp. You probably have a digital stamp.<\/p>\n

Chris:
Yeah. Close enough.<\/p>\n

Scott:
This is where I would consider using contractors instead of an employee, and you say, \u201cHey guys, this is not\u2026 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.\u201d Right now you\u2019re 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\u2019s an enormous raise for them, for the work that they\u2019re actually doing, that\u2019s adding value and they can do it on a side project or afternoon, evenings and weekends if they so choose.
I\u2019m 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\u2019ll cost you more per unit, but you don\u2019t 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, \u201cOkay, now it\u2019s time to bring back the full-time employee because I know I\u2019ve got enough consistent work of this nature, that it will lower my overall costs and reach my profit affordability to bring in the employee.\u201d<\/p>\n

Chris:
Yeah. I do want to clarify that they are paid hourly right now. It\u2019s not a salary and it is understood that if I don\u2019t have things for them to do, they will not be getting-<\/p>\n

Scott:
You\u2019ve already mitigated that risk?<\/p>\n

Chris:
I have. I\u2019m 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.<\/p>\n

Scott:
Okay. You will get to that level down, so the problem really is your billable hours are not\u2026 Instead of putting your billable hours out, you\u2019re essentially generating work for these employees and arbitraging that, and that is not enough to cover your expenses.<\/p>\n

Chris:
Yes. At the moment, that is pretty much exactly where I sit.<\/p>\n

Mindy:
I think it comes back to this energy audit. That\u2019s a lot of work and I would be\u2026 I know you\u2019re 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\u2019re batching it, at what point\u2026 You said, you have to do it, they can\u2019t 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\u2019t sound like these audits are really worth it. Do you have a contract that you have to fulfill obligations for? I don\u2019t think it\u2019s fair that you just say, \u201cOh, I\u2019m not going to do any more of these at all. Do whatever through June and then stop taking audits.\u201d You also said something about engineering work you\u2019re billing at the end of the job, and you said you\u2019re doing fixed price jobs instead of price and materials, and I\u2019m not sure what materials you\u2019re doing.<\/p>\n

Chris:
That\u2019s more of just a phrase. It\u2019s basically just time. Occasionally, travel allowance if I have to drive to site, that kind of thing, but for the most part time.<\/p>\n

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\u2019ll cost this, and if you need to increase the scope, then I\u2019m going to need to increase my price. I don\u2019t 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\u2019s incentive for you to complete the job, but there\u2019s also, you\u2019re not waiting until the end for this $35,000 that all of a sudden plops into your account.<\/p>\n

Chris:
It\u2019ll be a nice day when it happens, but-<\/p>\n

Mindy:
I\u2019m sitting over here in perfect world.<\/p>\n

Scott:
That\u2019s 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\u2019m starting over and appraising my business as an outsider and saying, great. You should have somebody research, put in place Mindy\u2019s 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\u2019s 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\u2019s 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\u2019re willing to put in 50, 60 hour weeks to get that billable time up.<\/p>\n

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\u2019m clearly not an engineer, so I don\u2019t know what I\u2019m asking, but is that the going rate or are you billing yourself a little bit low?<\/p>\n

Chris:
That is a little bit low against the current rate for an engineer of my experience. It\u2019s all actually published if you\u2019re paying the right fees, so that\u2019s like a 25% or 30% discount. Part of that is that, I don\u2019t 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\u2019t have the track record yet. My business started two years ago, but if you remember, two years ago was March 2020, so I didn\u2019t do a whole lot for six months, and then after that-<\/p>\n

Mindy:
I\u2019m not laughing at you.<\/p>\n

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\u2026 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\u2019s the way I should be doing it.<\/p>\n

Scott:
Two years from now, you\u2019re 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\u2019re talking. Now, we got a little dental practice here or something. I don\u2019t know if that\u2019s what dentists make, probably more, but-<\/p>\n

Chris:
Probably more. But yes, it could be in that similar time range. I think a big part of it is, I don\u2019t mind working 50 to 60 hours a week, and I\u2019ve 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\u2019t know if you\u2019ve ever designed duct work, but it\u2019s not fun.<\/p>\n

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\u2026 I\u2019m 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\u2019ve identified them here. The number one thing is your time. It\u2019s a senior engineer\u2019s time. Arbitraging, unless you could also start with a different thesis, which is I\u2019m going to actually arbitrage junior engineer\u2019s time for these projects and I\u2019m 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\u2019t think that\u2019s what you\u2019re 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, \u201cWhat do I need to do to back in there? Well, first I\u2019ve got to start billing out my time right now at $160 an hour. That should be easy because I\u2019m undercutting the market by 40% with all of these things.\u201d In theory, the business should be there. \u201cHow do I get that business? Well, I\u2019ve got to sell it, then I\u2019ve got to schedule it, then I\u2019ve got to book it.\u201d
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\u2019m hiring an executive assistant and they\u2019re idle much of the time, but it\u2019s saving you from having to do 10, 20 hours a week of work, you\u2019re 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\u2019s 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, \u201cOkay, let\u2019s consider hiring an executive assistant and mapping out my time so that I\u2019m moving that business towards the maximum number of hours.\u201d That\u2019s 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\u2019t want dismiss that out of hand. What does a job, you could get at W2 job pay?<\/p>\n

Chris:
It\u2019s 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\u2019s 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.<\/p>\n

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, \u201cOkay, if I\u2019m going to run a business for myself, I got to make much more than that,\u201d because that\u2019s 40 hours a week, 45 probably and you\u2019re home and relaxing after that.
There has to be a premium above that if you\u2019re 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\u2019s not giving you the income that you could be getting from-<\/p>\n

Chris:
From a W2, T4. Yes.<\/p>\n

Scott:
A T4.<\/p>\n

Chris:
Exactly.<\/p>\n

Scott:
Sorry about that. I didn\u2019t know that was called a T4.<\/p>\n

Chris:
We have our own tax free savings account as well. We tend to name\u2026 Like you guys have the Roth IRA, all these other ones that I hear about all the time on your show. We\u2019ve 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\u2019s pre-tax dollars. Those are the two, that\u2019s about it. There\u2019s employee plans and stuff, but RSP is a registered retirement savings plan-<\/p>\n

Scott:
Just a simpler way of life up there.<\/p>\n

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.<\/p>\n

Mindy:
I want that too. I want to take money out tax-free anytime, instead of at age 55.<\/p>\n

Chris:
You\u2019re not allowed to day trade in it. There\u2019s some rules, but as long as it\u2019s just general savings and investing, you can pull that money out of tax-free.<\/p>\n

Mindy:
Wow, nice. Scott, I\u2019ve got a couple of things. Before we shutter your business and I\u2019m not\u2026 Again, I really want Scott to be wrong, but I don\u2019t think that he is. Can you hire a salesperson to sell your time, so you\u2019re 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?<\/p>\n

Chris:
We did try that and that actually is her general role in real life or before my leave was executive assistant thing. She\u2019s just really not able to right now. We tried and it wasn\u2019t 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\u2019s starting to come in cold where my website is just generating.
I\u2019m getting cold calls from people now, which is nice as opposed to going out to them. Obviously, there\u2019s background work there, but that can maybe is more of an executive assistant than it is a salesperson I think, because there\u2019s 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.<\/p>\n

Scott:
At $50 an hour?<\/p>\n

Chris:
No, at my-<\/p>\n

Scott:
At 160?<\/p>\n

Mindy:
At 160?<\/p>\n

Chris:
Yeah.<\/p>\n

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\u2019m not trying to be mean, because there\u2019s more to it than just sit down and bill at $160 an hour, that would be so easy.<\/p>\n

Chris:
Well, after this conversation, I\u2019ve noticed that it is all the time on spending training my employees and not billing and the energy audits, which I\u2019m not contractually obligated to do. You had asked earlier if there was a contract, there is not. I could theoretically just say, \u201cNo, I\u2019m not doing it anymore\u201d 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\u2019s why I haven\u2019t been billing it 160 bucks an hour straight.<\/p>\n

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?<\/p>\n

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\u2019s 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.<\/p>\n

Mindy:
Not everybody wants to do their own thing. What does it cost to take this test?<\/p>\n

Chris:
Nominal amount, not enough to worry about.<\/p>\n

Mindy:
I wonder if there\u2019s any benefit to having the one who could pass it today, take the test and take over the audits?<\/p>\n

Chris:
She is actually based about 400 miles away from me, roughly.<\/p>\n

Mindy:
So no benefit whatsoever?<\/p>\n

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\u2019m not sure she wants to. She hasn\u2019t really expressed the interest, but it could be an option.<\/p>\n

Scott:
Well, I think based on what I\u2019m 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\u2019m not going to have any employees, I\u2019m just going to do audits all day, that\u2019s a 100K a year right there, if you can do them right there. That is a viable income stream, for sure. It\u2019s 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,<\/p>\n

Chris:
I also don\u2019t have to be scheduled this far in advanced for them. What I just thought about when you said that is, I could obviously say, \u201cOkay. Nope, don\u2019t book me anymore at the end of June, don\u2019t fill my calendar anymore with those.\u201d And then if I have downtime in the engineering work, there\u2019s nothing stopping me from calling them and saying, \u201cHey, can I take two this week, can I be able to get two that week? Absolutely. They\u2019ve 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.<\/p>\n

Scott:
We talked a lot about the business today and I think for good reason, that\u2019s 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?<\/p>\n

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\u2019s 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\u2019t have a kid at that time. We started spending money and it\u2019s hard to pull back, but it\u2019s not impossible at all to pull back, and we know we have to for a bit here.<\/p>\n

Mindy:
One of the biggest expenses that I see just jumping out, is the childcare expense.<\/p>\n

Chris:
Yes.<\/p>\n

Mindy:
$1,250 a month. This is going to sound super insensitive, please email me mediabiggerpockets.com 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.<\/p>\n

Chris:
We tried this as well.<\/p>\n

Mindy:
I was a stay at home mom, kids are a full time and a half job. It\u2019s not like she\u2019s just laying on the couch, eating bond bonds all day and watching TV, while your child goes to school. You\u2019re typically on medical leave for a reason.<\/p>\n

Chris:
And that\u2019s 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.<\/p>\n

Mindy:
I know someone\u2019s listening and saying, \u201cWhy didn\u2019t you ask about that?\u201d Well, I did.<\/p>\n

Chris:
That\u2019s 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\u2019s not really where we want to cut. We have other opportunities to cut, so we\u2019re going to start there and we don\u2019t have any family that\u2019s capable of taking care of a child either, so before anybody asks.<\/p>\n

Mindy:
Childcare is a difficult, one to try and cut and like you said, getting a good childcare, it\u2019s worth paying it just to test out. That was a really smart move. Just because she\u2019s on medical leave now doesn\u2019t mean that she\u2019s going to continue forever when she goes back to work, you would need the childcare again. How old is your son?<\/p>\n

Chris:
Three and a bit.<\/p>\n

Mindy:
Okay. You\u2019ve got a couple more years of that.<\/p>\n

Chris:
Yes. He\u2019s a January baby, so it will be as long as possible before he actually makes it into preschool, yes.<\/p>\n

Mindy:
Yes. I had a November baby, same thing.<\/p>\n

Scott:
Well, how about any other areas that we can talk about?<\/p>\n

Chris:
I\u2019m just looking over my income and debt statements here, but I don\u2019t think so. Yeah, I don\u2019t really think so. I\u2019ve 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.<\/p>\n

Mindy:
I\u2019ve had a sewage backup.<\/p>\n

Chris:
Yeah. Took insurance almost eight months to get through that, and we haven\u2019t actually rented that apartment back yet. We\u2019re 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\u2019ve seen on that has been ridiculous. That $350 a month for rental one, once we get that running again, we\u2019re probably looking at almost $800, $900 a month of cash flow there as well, and that\u2019s after I put aside money for furnaces, roofs, all the other stuff. It\u2019s nice. It\u2019s a good property.<\/p>\n

Scott:
That\u2019s great.<\/p>\n

Chris:
Other than that, I don\u2019t really have anything else in any questions. I think this has been very useful. I\u2019m 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\u2019m paying him 20 cents on the dollar, at the very least he\u2019ll be able to run through the energy audit background stuff for me and some of the other stuff for a while.<\/p>\n

Scott:
Yeah. That makes perfect sense.<\/p>\n

Chris:
Yeah, and it is an internship, so theoretically there\u2019s no obligation to keep going after that, but yes. Anyway, I\u2019ll have to sit down with them and see where they to go and how we can approach this.<\/p>\n

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\u2019m going to move it up from $75 to $77 an hour. Then I\u2019m going to move it up and I\u2019m going to get 15 hours instead of 10 build. Then I\u2019m 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.<\/p>\n

Chris:
The thing is, I have all the background information. I have how much money I\u2019m billing, how much time I\u2019m working on each job, how much time they\u2019re working on each job or trading, it\u2019s all there. I just need to put it together.<\/p>\n

Scott:
Call your employees in together and show them. After you\u2019ve done for a couple weeks, have your weekly KPI meeting and say, \u201cHere\u2019s where we\u2019re at.\u201d 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, \u201cGreat, these are the goals of the business, and Hey, here\u2019s a little reward, if we start hitting some of these bigger goals,\u201d that\u2019d be one way to begin salvaging things with the current folks, if you want to do that.<\/p>\n

Chris:
Yeah. I\u2019ll 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.<\/p>\n

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

Chris:
I started this process. I\u2019m 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\u2019re a hundred percent right. I have seen that. It\u2019s been trending downwards anyway.<\/p>\n

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\u2019re really grateful that you\u2019ve 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\u2019re going through, because I think that this is going to be much more common than we\u2019ll hear from a lot of that. It\u2019s tough as a business owner to come in and say, \u201cI don\u2019t really know how to get this thing to the profit level that I want to get it to from that.\u201d I think takes a lot of courage and I think we\u2019re really grateful for you to come on.<\/p>\n

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\u2019s six months later. Things change, but I\u2019m glad I came on anyway, I didn\u2019t need to talk about it.<\/p>\n

Mindy:
You know what, that\u2019s a really good point. Life changes really quickly and I bet your plans six months ago were a little different than what\u2019s going on right now. A lot of my plans six months ago are different than what is the reality of my life. That\u2019s something to keep in mind. Your plans should be fluid because life is fluid.<\/p>\n

Chris:
Yeah, absolutely.<\/p>\n

Mindy:
Okay. Chris, thank you so much for your time today. Thank you for sharing your story. I really appreciate it.<\/p>\n

Chris:
Thank you guys very much for having me. This was kind of fun, mostly fun.<\/p>\n

Mindy:
It was interesting.<\/p>\n

Chris:
Yes.<\/p>\n

Mindy:
Okay. We\u2019ll 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\u2019t think you are. I think that it\u2019s 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\u2019re swamped with work and they\u2019re so swamped and they\u2019re working 90, 150 hours a week, and then they hire somebody, and I think maybe in this instance, Chris hired a little too soon.<\/p>\n

Scott:
First of all, I hope I\u2019m wrong as well. I think that the real problem for entrepreneurs and first time CEOs and a lot of this is, it\u2019s 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\u2019s 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\u2019s more logical that the unit of value in Chris\u2019s business is Chris\u2019s time, and the employees that maximize the ability for him to bill ours are more valuable than many Chris\u2019. Many Chris\u2019 being more junior Chris\u2019 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\u2019s a guessing game and hindsight\u2019s 2020, maybe it\u2019s easy for us to look at the situation now and be, \u201cOh, we could have done this.\u201d It\u2019s really hard to do that in the act of building a business. A year ago, his situation could have looked like, \u201cHey, I\u2019m doing all these jobs that look like this, here\u2019s what this employee will help me do and free up my time and all that stuff.\u201d I think it\u2019s 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\u2019 family.<\/p>\n

Mindy:
I, like I said, I want you to be wrong, but I don\u2019t 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\u2019t 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\u2019re 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.<\/p>\n

Scott:
It makes you wonder, I don\u2019t 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\u2019d imagine there\u2019s going to be a period where there\u2019s 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\u2019t 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\u2019s 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.<\/p>\n

Mindy:
Yeah. I think you hit the nail right on the head there Scott. If you\u2019re not making more money and you\u2019re not a better income or a better lifestyle, if you reduce your income, but you\u2019re also working 10 hours a week, that\u2019s great if that\u2019s what you want, but if you don\u2019t have either, then it may be time to really seriously reassess.<\/p>\n

Scott:
Yeah.<\/p>\n

Mindy:
Okay. Scott, should we get out of here?<\/p>\n

Scott:
Let\u2019s do it.<\/p>\n

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

\u00a0<\/p>\n<\/div>\n

Help us reach new listeners on iTunes<\/a>\u00a0by leaving us a rating and review! It takes just 30 seconds.\u00a0Thanks! We really appreciate it!<\/p>\n


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