How do you manage cash flow in a small survey business? Why is this important? Why is it so hard?
In this episode, Landon answers those three (3) questions and talks about his own struggle to improve cash flow management at Redefined Horizons, the small survey business he runs with Dani Cano and Brian Leiser.
How do you manage cash flow in a small survey business? Why is this important? Why is it so hard?
In this episode, Landon answers those three (3) questions and talks about his own struggle to improve cash flow management at Redefined Horizons, the small survey business he runs with Dani Cano and Brian Leiser.
The title of today's episode is managing cash flow in a small land surveying business. This is going to be pretty specific to land surveying businesses in the private sector. But it could also be applicable to folks that are working for a government agency, possibly. And also if you're running a department in a large organization, but you have to manage a budget budget for your department. But but I'm going to tailor the content, as if I'm speaking to a small business owner, a land surveyor, but could be could be other types of small businesses, too. So this would apply, what we're going to talk about today would apply to like civil engineers, architects, geotechnical engineers, structural engineers, any kind of professional consultant in the design industry that that is running a small business. So we're going to talk about cash flow today. That's one of the big three challenges of our first few years in business that I talked about in the very first episode. And so we're going to, we're going to talk about that in depth today. I may, I may do it, individual episode on each of those three challenges, haven't decided yet. But this is this is covered the first one. And the reason I'm doing this particular challenges is because it remains persistently. One of one of the toughest things about running a small business, I'm not going to say that we haven't gotten better at it. I think we have, but I'm surprised at how much we still struggle with it. And certainly we've done better with the other challenges. The other two challenges I mentioned in that episode, we have done better with them we have with this challenge. So that's why I wanted to talk about it. I will let you guys know, too, that I'm trying to improve the audio quality of the podcasts. So I went back and listened to the first two episodes, and the audio quality is really horrible compared to the third episode, I recorded the third episode with some different equipment and software. So I think I'm gonna go back and rerecord those first two episodes, I was on the fence about it, but it's bad enough, I think I'm going to do that. So I'll keep you guys posted on how that progresses. And if I get some time to get that done, and I get those re recorded, I'll let you guys know. So you can listen to those with with some better audio. So what are we going to talk about in this episode, I want to just kind of give you an overview. So I've got eight, eight main points that I want to cover a, see if I can hold up my fingers the right way, and you go eight. So I'm going to give you a full confession. That's the first thing. Second thing is I'm going to talk about why cash flow management is important. Third thing is I'm going to cover some definitions of some terms related to cash flow. Four thing I'll do is tell you how we manage cash flow at my serving business redefined horizons, there are different ways to do it. I'm going to tell you how we do it. And that'll be very specific. So that'll be something you guys can actually apply in your own business if you want. We'll talk a little bit more about why this is so hard. And I talked about that a little bit in the first episode, but we'll talk about it's more. I'll talk a little bit about who I think struggles with this in our industry. It's probably more people than you think. So I'll talk a little bit about that, from my experience. I'll share a few tips and some best practices that should make managing cash flow easier. And then we can maybe think about some other episodes related episodes that we might talk about cover to cover in the future that are related to this, this topic of managing cash flow. So I'm going to start with my confession. So what it what is my confession here, properly managing cashflow is really hard. As I mentioned, I said it's one of our top three challenges. That was one of the top three challenges in our first few years in business and talked about that in the first episode of this podcast. It's still hard. It's still hard. So we just in the last episode, I thought we'd been open for five years we haven't we just had our four year anniversary. So So I apologize for those that listened to the last episode. But yeah, it it's, it's still we're rolling on to year, year for now. And it's still hard. So cash flow is still still a big challenge for us. It's definitely still in the top three. And it might even be the top challenge now. So I'm still learning to do a good job of this. I don't I don't want you guys to think that I have all the answers. I don't I get frustrated as a business owner at the fact that this still remains a problem. I wish I wish I didn't have to. I wish it wasn't a problem anymore. It still is. And that frustrates me. I think that illustrates why it's so hard. I give it a lot of my time and attention and we still struggle with it. We'll talk about a few of the reasons why that is. So full confession. I hear that you're not talking to a guy that has solved this problem, or has it figured out but I think a lot of organizations struggle with it. I think a lot of the surveying companies that I've worked for that have not done a good job of it. And so I want to share with you a little bit about what what I have learned. But yeah, that's my confession. This is this is still hard, and I don't have it all figured out. And then the other thing, too, is part of my confession, I just want to let you know, I'm not sure if you ever get to stop thinking about this, as a small business owner, I don't know that you ever get to just like put cash flow management on autopilot. Maybe you do, maybe at one point, you have enough money in the bank, or you got a big enough line of credit where you don't have to worry about this. But I don't think that's true. I was talking to a friend of mine who owns his own surveying business. He's been in the business long time 20 or 25 years and, and he's still he still struggles with cash flow management, too. So that's just one data point. But it may be evidence that this remains something that demands a lot of your attention as a business owner throughout the life of your business. Alright, so there's my confession. That was the first point I wanted to cover. The second thing I want to talk about is, why is this important? It's really important, that may be one of the most important things you do. So why is that? Well, it's key to the financial health of your business. So practicing good cash flow management allows you to pay your employees on time, which is important. I mentioned in the first episode, there have been a handful of times when I've had to pay people a few days late. I don't think we've ever paid more than more than a week leave maybe two weeks late one time, I think we may have paid two weeks late. And it really bothers me. I hate doing that. So good. Cash Flow Management allows you to pay people on time, that's one of the most important reasons why you you want to practice good cash flow management. The other thing is it allows you to pay your own bills on time. So that, you know, that's bills for your vendors, your sub consultants, your landlord, your utility companies, your insurance companies, you know, you got to pay all those people if you're running a real business, and you want to pay them on time. And we work really hard to pay our bills on time. So if you don't do a good job of cashflow management, you end up paying your bills late and that that can damage relationships. And so you want to work really hard to avoid that. The other thing, and I think this is super important is good cash flow management significantly reduces your stress as a business owner, I would say 50% of my stress as a business business owner comes from cash flow management. So that's a significant portion. I don't think there's any other part of the business that causes me as much stress as cash flow management does. So that's pretty significant. So if you do a good job of it, hopefully your stress as a business owner will be lower. And the other thing is, it will help you to avoid bankruptcy. So I've got a friend of mine is named Kevin. He also is a principal at a civil civil, he's a principal to civil survey company. So he also runs a survey business. And he said, he told me, I call him pretty regular just to pick his brain about running a business because he's been doing it longer than I have. And he's a smart guy. And one of the things he tells me is you know, and you don't typically go bankrupt because you don't have any money coming in. You know, it's not because you lack work, typically, even work that pays he says you go bankrupt because you don't have enough money in the bank when you need it. So it's a cash flow problem. That's what creates insolvency? And I think he's right, that's a good advice that he gave me. Okay, so that's why it's important. So point number three of the of the podcast is just to cover some definitions. So I have I don't have a half a dozen that I'll go over. So in the rest of the episode, when you hear me mention these terms or phrases, I want you to know what I'm talking about. Okay, so the first one is money in the bank. What does that mean? So money is the bank is cash you got in the bank, it's it's liquid assets. So it's it's money you can use today to pay bills. So most businesses have some assets that aren't liquid. So you know, it's things like your equipment, and your computers and your software. Maybe you have some money invested in like a CD certificate of deposit or some other kind of vehicle, it may not be super liquid, you might not be able to get that money today may have to wait to get it. So that's not money in the bank money in the bank is money you can use to pay bills today. Yeah, I'm not telling you keep all your money in the bank. Because at some point, you know, inflation is a real thing. And there's disadvantages to that you can, you know, certainly the last year has taught us you don't want to have more money in one bank than the deposit limit than the federal deposit insurance limits. So there's some things to think about there. But that's what I mean when I say money in the bank. That that's money you've got in your bank account that you can use to pay those. Another term you'll hear me say is money earned. So what is money earned? Money earned is work that you you or your team has completed. It could be build it might not be build, but it's you don't have to earn it. In other words, you've already typically paid the payroll to realize that income So that's, in other words, you've earned the money. Now that's important for our business because we get deposits. So sometimes we'll get a deposit, I might get a 5000, or 10,000, or $15,000 deposit, when we get that deposit check, we have not earned that money yet. So it's alive, it's like a loan, it's like a liability. So you have to be aware, just because you have money in the bank doesn't mean you've earned it. And that's important, because when you get a deposit, like that, it makes your bank account balance today look good, but you're gonna have to pay the payroll to earn that money at some point. So it's not, you don't get the full dollar value of that money when it's in your bank. So money earned is, is money that you've earned already through payroll, you pay basically future revenue, that that's, we'll talk about revenue, that's money coming in the door. So future revenue is either work that you have under contract, or high confidence proposals. It could also be regular income, you get, like maybe have monthly fees that you get paid by a client, I don't have any work like that. But I can see how a company could have that. So that's, that's money that's coming in the door in the future. And you have to be careful with that, because you high confidence proposals go sideways, sometimes that work gets delayed, you can even have a contract cancelled. But you do, you know, part of managing cash flows, you got to make some estimates. And so you have to estimate, yeah, you got to understand you're taking some risk there with future revenue. So future revenue is your best idea of high confidence, you know, at a high level of competence of the money that you've got coming in the door, the next, let's say, 90 days, good money. So there's good money and bad money. So when you hear me say that, what does that mean good money is money earned, that you know, will be paid, or you're highly confident will be paid. So that's good money. So it's money you've earned you build to a client, or you're about to build a client, and you know, they're gonna pay the bill, that money is money you've earned that will not be paid. Constant, always pay the bills. And so sometimes you get bad money. Now we do a good job here at our age, we don't have, we have almost no bad money. It's a very small percentage of our overall revenue. So I think we do a better job of that than most companies do. And part of that deposits getting paid before we deliver working for the right kind of client, we did have some bad money this year. And actually, most of it, I don't know, we had somewhere between 10 or $20,000 of our money last year 2023, which isn't bad. That's a very small percentage of our overall revenue. But some of that money was on one of my jobs. So we had a time and materials task we did per client, I didn't get a retainer. Because the client was referred to us by business partner, and I ended up not getting paid for that work. So that was bad money on one of my jobs. So it does happen. time we're going to eat. So when hear me say this is time we're going to eat what that means is you've got to pay wages to perform work, then for whatever reason, you're not going to get paid for the client. So it can be you're doing extra work for a client that isn't gonna get paid, or you're over budget, but you have a contractual obligation you got to meet. And so you're gonna eat the tie, you're gonna eat the payroll, you're gonna eat that time. And then late money, that's when you have good money. That's gonna be late. That's late money. You know, bad money is a late money because bad money is probably never come in, right and bad money rarely ever turns in late money. But you could have good money that turns into late money, and which is not good either. But at least you're getting paid. So. So those are my those are my definitions. Alright, so just to review, we talked about my confession, and some definitions of terms related to cashflow management. Alright, so what are we gonna talk about next? Point number four is how do you manage cash flow? And we're going to talk about a practical way that you can do that I'm going to share the way we do that at my business. So how do we do that? How do we manage cash flow at refine horizons? So what we do is we use what I call a forward looking ledger. You can think about it like your checkbook register, okay, and we do it in Microsoft Excel, you could use other software to do that if you want to. But we keep a forward looking ledger. So it's not a traditional ledger. So a traditional business ledger accounting ledger looks backwards, right? It's looking at transactions you've already made. So a, I'm talking about what we call our cash flow management spreadsheet is a forward looking ledger. So you're trying to look forward and predict what your cash what your actual, you know, checking account balance is going to look like at some point in the future time. So it's not a budget folks. It's it's not it's not a budget. It is a forward looking. It is a forward looking prediction of what your your bank transactions are going to be and what your balance is in your bank account. Remember we talked about money in the bank so that's what it's really looking at, because the the money in the bank is what is important. That's what use Pay Bills. Now I thought I had a YouTube video that showed you guys a cash flow spreadsheet, but I checked my channel, I don't have one on there. So we will put a short, you know, 10 or 15 minute video on our YouTube Learning Channel for redefined horizons that shows you what a cash flow spreadsheet looks like. So let me just describe it to you, you're gonna want to watch the video, but let me describe to you what it looks like. So the top row has your current current money in the bank balance. And then, for us, that's the, that's the balance in our primary checking account, we do have more than one bank account, and we have a couple of credit cards, but most of our money's in one bank. And then each row underneath that top row is either going to be a transaction that puts money in the bank or transaction that takes money out. And for each row, you calculate the balance that's going to what the balance will be money in the bank after the transaction. And it's your best prediction of what that bank account balance is going to look like as those transactions come in and out of the bank. Now, one of the reasons we do that is we that allows us to look forward and and determine where we might have what we call a cash flow, pinch. And I apologize, I left that out on my definition. So a cash flow pinch is when you need to pay a bill and you only have enough money in the bank to pay. So you're getting pinched. It's not that you you're insolvent, you know, you may have that money coming that you need to pay the bill. But the bill is due today, and you might not get the money till tomorrow. That's the cash flow pinch. So that's what we really use the cash flow spreadsheet to do is we used to try and avoid cash flow pinches. And one of the things that really helps us as principals do is be diligent about our billing. Because if we can look ahead and see a cash flow pinch, then then we know, hey, we got to really jump on making sure that we hit some milestones and get some bills out or that we can call and follow up on bills that maybe aren't aren't paid yet. So is that tool perfect? No, it's not perfect. Why is it not perfect, you get expenses you don't expect. So that'll throw your that'll throw your spreadsheet off. You know, your some of that future revenue we talked about is an estimate, and projects get delayed clients pay bills late, sometimes clients don't pay bills. So I often find you'd have gotten better over the last four years at making the cash flow spreadsheet, a little more conservative, but even trying to be conservative, I find that I'm sliding payment dates in the spreadsheet. So you don't get to slide the date of your bills, right, those come usually the same time every month, but you're gonna find that you have to slight payment dates, which is frustrating. But work starts late. Clients don't pay on time, it just it happens. But if nothing else, the spreadsheet gives you an idea. It's just an it's just an estimate. It's just a prediction. It's not, it's not foolproof, but I I'm surprised at the number of organizations that have no clue what their bank account balance might look like in two weeks. So at redefined horizons, we always know what our bank account balance is going to look like in two weeks. And by the way, all of our people have access to that. So they can get in and see the bank account balance at any time. And they can see what money's coming in and what money's coming out. We don't hide that from people. Everybody in my organization has access to that as part of how we try and be transparent. Now I will tell you, there's a limit to how useful that tool gets as you move further and further into the future, it gets less and less reliable, right? So as a general rule, we're not typically filling that spreadsheet out past 90 days. every once awhile, we might look ahead four or five months if we have some long term work on the books, but you get past 90 days, and it just starts to get real unreliable. So that's the tool we use. The fifth main point I wanted to talk about in this episode is our even even with that tool. Why is this so hard? We talked about it a little bit in the first episode of the podcast. But so why is cashflow management so hard? You know, life happens. That's one reason. What do I mean when I say that, you know, your work truck breaks down. You didn't expect that the project manager or your client has a major medical emergency and they aren't they aren't in new approve your invoice. Bad weather delays the start of a project so you don't get to start a project when you thought if you don't get to start it when you thought you don't get to finish it when you thought your whole team gets COVID-19 for two weeks. So life throws you unexpected curveballs. That's one of the reasons why cash flow management is hard. We talked about this but clients don't pay their bills on time. That doesn't mean they're evil. Some clients are evil, but just because a client pays bills. It doesn't mean they're evil. It could be poor planning on their part. It could be that they haven't been paid by their client. So sometimes clients pay the bills late. Clients sometimes don't pay bills. We don't have that problem very often but three times in four years I've had a client just not pay a bill or not pay part of the bill. So that happens. The other reason this is hard is it takes regular attention. And there's a lot of elements to juggle. And it needs continuous updating, you know, I would say I'm in our cash flow management spreadsheet three times a week, at a minimum, sometimes a minute, every day, depending on what our situation is. So it takes I think it takes high level involvement, I have a great bookkeeper slash accountant that helps me with that. But I personally am in the cash flow spreadsheet, at least three times a week, and my partners and I, the other two principals of the company also look at it. So when you're a small business, I think it's important that the owner, the principal has have his or her eyes on that information, because you're going to use that information in that spreadsheet to make decisions. So it's important. So it takes a lot of time. It's a lot of time and effort to do it well. And the other reason I think this is ours, we're not typically taught how to do this. So if if you're a land surveyor, or GIS person, or even civil engineer, and you have a business, you know, a lot of times you aren't taught how to run a cache, nobody taught me how to do this. Now, maybe if you if you have the right business background, you know, you you happen to work at a place where you got taught this, or, you know, you went to school, you got a business degree, maybe you've been taught this, but I worked at five or six different places and never saw anything like this. So that's another reason why this is hard. The last reason why this is difficult cash flow management is cash flow tends to be lumpy. And we talked about that a little bit in the first episode of the podcast. So what do I mean? Well, you know, we talked about your bills tend to come out the same time every month, right, they're on a regular schedule, regular interval of and cash flow is just for most consultants, cash flow is lumpy. So that means your your money tends to come in big chunks. Now there are things you can do to minimize the lumpiness, your cash flow, but I don't think you can ever eliminate it. Just as an example. I'm recording this, this episode at the end of January 2024. Like we always get a what's the word I'm looking for? We don't get checks the last half of December or the first half of January, because everybody's out for the holidays. So my invoices aren't getting approved, people aren't working. And then we almost always get a big pile of money at the end of January. I don't know if there's anything you can do about that. That's just part of how the economy works in America, everybody is off work the last two weeks of December, so it's hard to get bills paid so that we have done that every year for four years, I end up with a cashflow pinch in the middle of January because it's hard to get bills paid in the end of December in the first part of January. Okay, so next we're going to cover the number main point number six and number seven. So that is who in our professional industry struggles with this. And just a few tips to help you manage cash flow besides running the cash flow management spreadsheet. So who who in civil engineering and land surveying struggle with this problem cashflow management? The answer is everyone. Everyone struggles with it. Now, if they tell you they've got it all figured out. They're probably lying. Now, why do I say that? Well, I've worked at some big companies. And I know folks in some big companies and I consistently hear stories about people that struggle with, you know, those organizations, even large organizations that struggle with cashflow. So I heard a story a few months ago about a pretty big civil survey firm in my area that had almost a million dollars in accounts receivable. So that was money they wrote, and there was causing a cashflow pinch, that was a pretty regular thing. And one of the other big engineering companies I work for, you know, my boss and I were in monthly meetings, and he was always getting his butt chewed for having way too much. Way too much money wrapped up in in bills that were either, you know, 60 days or 90 days or over 90 days late. So I think everybody struggles with it. Now, bigger companies will oftentimes have a cash flow cushion or a big line of credit with a bank, which makes this easier, but I think I think they still have to, it still causes headaches, I think. So they're big companies are not an exception. So I think it's more of a problem for small companies, but everybody deals with it. So if they tell you, they don't have to worry about it. They're either lying or they're not the person at the organization that has to make sure the paychecks Get, get run and will cash. So it could just be you're not talking to the right person in the organization. That could be a problem too. Alright, so what are some tips and best practices for managing cash flow? I have a few written down here. Don't forget keep that cash flow management spreadsheet remember that's a forward looking ledger. That's a really important tool use I'll get a YouTube video up that shows you how to do that. The other thing that we do a really good job of it RH that that I know almost nobody else in our industry does is we ask for deposits and retainers and that deserves its own episode. But typically, if your new client coming to us, we're going to ask for 50% deposit and payment on full before we deliver. We will occasionally make an exception for that. But it doesn't happen very often. And me and my partners and I are doing it less and less as, as we spit, spend more time in business, we were making exceptions to that rule less because every time we not every time, but frequently, when we make an exception, we regret it. So deposits and retainers and payment on delivery will help smooth out your lumpiness, your cash flow, which is important. We also stopped work for clients that are seriously late paying their bills, it's hard to do that those are difficult conversations. Sometimes you just have to call a client up and say, I'm going to stop work till I get my bill paid. And my experience is even when clients get upset, what usually happens after that is your bill gets paid. So you have to do that sometimes. Another thing that will help you be careful with the debt you take on. I think most companies get into serious financial trouble or go insolvent in our profession, or industry. The root cause of that is too much debt. And why why do companies do that? That's a whole nother episode. But the main reason why they're taken on debt to pursue growth, a lot of times that that growth is not high quality growth, it's low quality growth. So that's something we've worked really hard to try and avoid here at refined horizons, we have almost no debt. We have a very small amount of debt. But we basically run the business on on the money we bring in the door every month, which is part of the reason why cashflow management is so important in our organization. So be careful with your debt. Let's see Sorry, let me go back to my notes here. So you want to be careful with your debt. You want to also carefully consider payment terms, and payment frequency when you're evaluating new clients projects, and you're negotiating contract terms. So I always look at two, the first two things I look at when I'm negotiating a contract are the indemnification limitations of liability, that clause or clauses and I look at the payment terms. So I'm amazed at how many people and it's usually civil engineers, but they'll call architects will call up here and want me to do$50,000 or $100,000 really work on net 90 payment terms, that's almost impossible for small business. And we don't do it. I don't I don't do net 90. Almost never, not not for that kind of dollar value. And that means we don't work for some clients. That's okay. I had a large civil engineering company call here. They wanted me to take on a$30,000 job. It was net 90 payment terms, that particular client had been almost seven or eight months late paying a previous bill 25 grand and tell them I wouldn't do it. I said I'm not going to take another 30 grand to work for you guys. Net 90 and then have you pay me four months after that. So we didn't get the job. And that's okay. I don't think I needed it. So you got to carefully consider your payment terms. So all all those things will help you manage your cash flow as a small business. So why why is cashflow management important? We're just going to review the the main points from the episode now. So why is it important? It's a it's a key factor in the financial health of your business, right? You want to be able to pay your people on time and you want to be able to pay your your vendors and your subs on time. We talked about some key terms, right money in the bank money or good money, bad money. So all those terms are are important, you need to understand what they mean. I told you one way to manage your cash flows to keep that forward looking ledger, right or, or checkbook checkbook register. And we do that and and I'll do a video, I promise I'll do a YouTube video that shows you that. We talked a little bit about why it was hard and give you five or six reasons why it's hard. cash flow management, it's hard. There's good reasons why it's hard. So it's not hard because you're done. It's hard because it's hard. It's an inherently hard thing to do. And then we we offered you a few tips or best practices on how you can make your cash flow list less lumpy, and do a better job of managing that. So what are we going to talk about in the next episode? I'm going to answer this question Should you outsource your CAD drafting? So that should be interesting episode I hope I get I don't know, two or three or five offers a week from offshore companies to outsource our CAD work. So why would that be a good idea or bad idea? When should you do it? We'll talk a little bit about that in the next episode. So if you liked the podcast don't forget subscribe. Like it share the episode on social media and hope you guys enjoyed learning a little bit about how to manage cash flow