If you're running your business and you don't understand your numbers, you could be looking at your profit and think all is well, but you may be on the brink of bankruptcy, or you could be one job away from going out of business because you run out of cash. Let's talk numbers because as you know, profit is not the same thing as cash flow.

So if you're running a business, you're putting in place work, you're looking at your job profitability report, your projects are profitable, but then you look at your bank account and you're like, where the heck is all the cash? The reason why there's this discrepancy is because profit is not the same thing as cash flow. And we need to break down the difference.

Now, the reason why I'm doing this episode is because over the weekend, something really touched a nerve and you could tell I'm very passionate about this topic, but I was doing some yard work. I had my earbuds in and I was listening to YouTube and the algorithm suggested the next video. And I was just listening. I wasn't watching the video, but essentially it's this guy speaking. He has a much bigger audience than me. So kudos to that. And he's talking about how he coaches other contractors. And he's talking about specifically how boring businesses is a very attractive proposition for people because tech and professional services are being disrupted by AI.

So his argument is if you invest in boring businesses like landscaping companies, electrical businesses, plumbing businesses, et cetera, you could do pretty well. Then he starts saying things like, yeah, so you can have a plumbing business and make a million bucks a year. You could have a concrete business and make 300 grand a year. And he's like, and I have a friend and he started a landscape business. And in a couple of years he's doing design build work. So he's doing these projects, installing water features, fire pits, outdoor kitchens, doing sod, planting trees, installing irrigation systems, the full gamut. And he's making $400,000 a year off $2 million in revenue. And that's when my hair stood up. And if you know me, I'm bald. I have like one thick hair on top of my head. It stood up at attention because I'm like, that's the problem. That's the problem that exists out there is that people create a lot of confusion when it comes to numbers because they don't provide the full story in all the context in their conversations.

So let me explain. So this guy's talking about a landscape business that does $2 million a year in revenue and $400,000 in profit. Now he's not specifying, is it gross profit? In other words, revenue minus cost of goods sold, that's gross profit. Or is it operating profit, which is gross profit minus operating expenses, all your overhead. There's a big difference between the two.

So he doesn't clarify that, but let's assume he's talking about operating profit, the amount of profit that's left over at the end of the day after covering all expenses. Well, I know from number one, running a landscape business for 13 years and advising businesses in the landscape space, pretty much my whole career, I have access to all these numbers. I've worked with so many businesses. I've been a CFO. I've been an operator. I know how this works. And I could tell you in the landscape industry, if you're earning a 10% operating margin as a percentage of your revenue, you're doing pretty well.

All right. Now, not too long ago, I was working with a landscape business. They're doing about $50 million a year in revenue. They had a 7% operating margin, still doing really well. This is a high-performing company that's been around for a long time with a very strong brand. They do incredible work and they're earning 7%. So still noteworthy.

But this other guy is talking about how his friend's doing 20%, because 400 grand of profit onto a million of work is 20%. But here's the real kicker. This is what really gets to me. And this is why I think so many construction companies fail. In fact, 82% of small businesses fail because of cashflow issues.

And the reason why is because they're not paying attention to two things, working capital and capital expenditures. And I'm going to break these down really simply. Working capital is the amount of money you have tied up in accounts receivable, in inventory, in over under billings, in retention, in accounts payable, et cetera.

All of these things are on your balance sheet, but they don't flow over to your income statement quite yet. So for example, you may show profit on your income statement. You're like, okay, I made a hundred grand in profit. But what if 50 of that was tied up in retention on a project? You show a hundred grand in profit. You only have 50 grand of that money. You're still waiting on the other 50 to be freed up from retention prison.

And so that's where there's a discrepancy between cash and profit. Also think about capital expenditures. Capital expenditures include investments in trucks, trailers, skidsters, trenchers, rototillers, sod cutters, buildings, all the equipment necessary to run your business.

So when this guy is talking about his friend making 400 grand in landscaping, what happens is it gets everybody excited, right? And they're like, Ooh, I want to consume more of this content. Tell me more how I could own a landscape business. And then if misguided, they go out there and start their own company only to find out later on that the numbers aren't really what people said they were.

And sure you have to do due diligence, but I also think it's like shame on the people that don't fully educate the public on the numbers. And that's what I'm here to do. That's why I'm so passionate about strategy and finance.

So let's talk about this. If you run a landscape company and you're showing a 20% profit, the first thing I'm going to ask you is, does that include your compensation as the owner, as the operator? Because a lot of companies are set up as LLCs and they take distributions instead of paying themselves wages. And therefore distributions don't show up on the income statement because they come out of equity on the balance sheet, not out of profit on the income statement.

So that could be problem number one, which is skewing your numbers. Number two is I would ask, are you paying yourself a market salary? In other words, if you had to replace yourself, how much would you have to pay somebody to do the same role that you're doing? And so if you're paying yourself, let's just say wages of $50,000 to run your landscape business, but you have to go find another operator to replace you. No one's going to run your $2 million company for 50 grand.

I'll tell you that. So you're misstating your numbers on your financials. It's not that you're committing fraud. Don't hear me wrong. It's just your numbers don't match the true economics of your business.

So going back to this example, I'm like hyper-focused on this because I want to set the record straight. Maybe he is making a 20% net and maybe he is paying himself a market salary of 150 or $200,000 to operate the business. Maybe, just maybe. And it's like, prove me wrong.

But I would have to guess that number one, you do $2 million a year in revenue. Let's say you do 10% in operating profit. That's good. Then you have to account for working capital because you go out there, you do work, and then you bill your customer. They pay you in 30 days. You're floating that, or you have money tied up in retention, et cetera. Right? So that's your working capital.

But then you also have to buy new skidsters, buy new trenchers, buy new trucks. And those capital expenditures don't show up on the income statement and they don't hit profit as well.

So remember that $50 million landscape company I was talking about? 7% operating profit, 1.3% free cashflow at the end of the day as a percentage of their revenue. So that means 5.7% of their revenue was tied up in working capital and capital expenditures. That's a big number.

So think about that. This $2 million landscape company is probably earning closer to $200,000 in operating profit if they're performing well. Then they have working capital, then they have capital expenditures, and maybe they're walking away with 5% in free cashflow. That's the amount of cash that's really yours. So that's $100,000. That's a big difference between $400,000 and $100,000. And that may be the difference between somebody saying, I want to start my own landscape business and I want to just go get a job.

Now, look, I'm not poo-pooing entrepreneurship. I think buying a construction company is a great idea if you find the right one. That's what we do at Coltivar. We invest in construction businesses. So we help turn them around. We help grow them, but we also acquire them when it makes sense.

I'm just doing this episode because if you're running your business and you're thinking, why am I underperforming? All these other gurus are saying this or that, or you're hearing people brag about how they make $500,000 a year. The story may be incomplete.

This can be very dangerous for your business. Also, if you're running a business and you don't understand your numbers, you could be looking at your profit and think all is well, but you may be on the brink of bankruptcy where you could be one job away from going out of business because you run out of cash. So that's why I'm so passionate about this topic.

What do you think? I'd love to hear your thoughts. You can DM me on LinkedIn. Also, if you want access to our cashflow blueprint, you can go to Coltivar.com. I'll leave a link in the show notes down below so you can access that really easily.

And it's completely free. It's a cashflow blueprint. It talks about the eight levers of cashflow. It has a diagram that breaks cashflow out into its component parts. It gives you a complete checklist, a sprint, everything you need to fix the financial performance of your business. It's totally free. It's at Coltivar.com.

All right. That's what I have for you. I hope you have a great week and until next episode, take care of yourself. Cheers.