Last year, an older friend of mine dipped into his 401K to purchase a handy-man business with his son. The details of the sale and the state of the business itself when they bought it, I don’t know. But what I can tell you is that their handy-man business is absolutely booming.  And I couldn’t be happier for him. My friend took a chance, gambled his retirement and, for all intents and purposes, appears to be winning. I honestly only rarely see him anymore because he is so busy, so full is his calendar with clients’ jobs.

But does Busy = Successful?

You see, the problem is that my exhausted friend and his son simply can’t know how truly well their business is doing because they are ignoring the most important aspect of their business: cash flow.  They see cash flowing into their bank account and see success. This is not correct.

You see, my friend and his son didn’t buy a business with employees; he and his son are the employees. What this means is that because they have so much work to do, they don’t have time for much else. As soon as the purchase of the business closed, they have been running at a million miles an hour trying to keep up with the work they have booked! When last I spoke with him, he had jobs booked out at least a month and a half into the future. A very good problem to have. But because he and his son are the only employees, their business will never grow beyond what they can do.  At a certain point, Queue Theory states that their future customers will cease waiting in line and hop to a competitor! Not good.

The Side Hustle Blind Spot

What my friend and his son don’t see yet is that, they may have bought an existing business but they aren’t operating it as a business; they are basically running a glorified lemonade stand.  They are still trading time for money.  What my friend doesn’t see just yet is that owning a business is more than just getting jobs and doing work. That’s what employees are for.  The role of a business owner is much broader.

My friend and his son are ignoring:

• Their online presence,
• Maintaining a customer database,
• Any sort of accounting or bookkeeping,
• Maintaining an accurate inventory,
• Depreciation of their capital assets.

Do you see what I am getting at? My friend, unfortunately, does not own a business. He owns a side – hustle that is masquerading as a business.

Case in point:

One day my friend and I were chatting and he told me about a job that they had just finished. He proudly told me that it priced out to a tune of $15,000; a princely sum no matter who you are.  I naturally congratulated him on booking such a high-priced job and asked, “How did the costs break out for that $15,000 dollar job?” I was obviously curious about the margin of such a high-priced job.

At this point, he proudly told me that the cost of materials was $12,000 alone.  Yes, that IS a big job! He continued, “we made $3,000 on that job alone over one weekend!”

It was at this point that I asked, “did you and your son work on the job?”  To which he responded, yes.  “And the job was a full two days’ worth of work?”  Again, he answered yes.

Punching a couple buttons on my calculator, I paused, took a breath, and broke it to him saying: “Brother, I hate to break it to you, but you didn’t make any profit on that job.”

It was at this point a confused look on his face appeared.

I continued, “Let me explain. Assume your hourly rate is $85/hour. Let’s also assume that your son’s hourly rate is also $85/hour.”

“OK,” he responded cautiously.

“Well,” I continued, “that is a total of $170/hour for the two of you.  And because you both worked 2 days (16 hours), that comes out to a total labor cost of $2,720. Did you include the cost of labor in your bid?”

It was at this point that my friend’s look of confusion slowly began to morph to a look of resistant realization.

I continued, “if your total labor cost was $2,720, and your total materials cost was $12,000, the job cost you a total of $14,720.  Buddy, you didn’t make $3,000 on that job.  You spent an entire weekend working in the hot Florida sun for 16 hours for a measly 280 bucks that you have to split between you and your son.”

I didn’t have the heart to ask him if he charged tax on the job which would have only exacerbated the loss.

Ouch.

As you can see, although my friend bought a business, he is operating it like a side-hustle; pretending to be a business owner, when in fact, he’s operating no differently than a kid with a lemonade stand or lawn mowing business.

But Why?

His oversights may be obvious, but why do so many business owners like him ignore the business side of their endeavors? Why does this always happen?

My sense is that it’s a combination of factors, not least of which is Human Nature.  You see, we tend to pay attention to the things that we understand and interest us and ignore those things that we don’t.

My friend is a technical wizard; he is not a handy man; he is a handy magician. He is so incredibly talented and experienced, there’s nothing this man can’t fix, build or replace.  In fact, if someone were to ask me, I would recommend him in a second and give them his website to schedule work! If only he had one…

The reason he and his son are ignoring the business side is because they are not familiar with the skills necessary to properly manage it. They have the skills and experience to be employees, but not business owners. As a result, they naturally gravitate and pay attention to the aspects of their business that they DO understand. Quite natural.

But ignoring this part of their company doesn’t mean it will magically improve. Nor does it mean the IRS will happily ignore it either.

The ironic part is I can completely understand and sympathize with why my friend and his son ignore the more technical part of their business. Why should they? They are making money hand over fist and running from job to job to job.  Their bank account is fat and they’re busy.  How could they possibly be failing? Well, busy doesn’t equal profitable, as we just saw.

Do you think this could be happening to you as well? Do you think you might have blind spots that you’re not aware of?

 

The BreathEasy Solution

Here are my recommendations for my friend’s business:

• Accounting: Sign up for Quickbooks Online to formalize his estimating, invoicing and accounting activities into a repeatable process. Doing this kills four birds with one stone as it will not only formalize his books, but it will also maintain a customer database, manage his inventory as well as the depreciation expense of his business’ capital assets. This piece is the most important.
• Online Presence: Because most of his clients come from word of mouth, having a fancy website is not required, but a basic presence is. Therefore, he should update his existing website to reflect the new ownership and redesign it to be a simpler design and something that he or his son can manage on their own. Do some modest SEO and create/update their Google My Business entry wouldn’t hurt either.
• Customer Relationship: Invest in a Customer Relationship Management system to build and manage email campaigns for their existing customers. By marketing to existing customers and being at Top of Mind, they can reduce the amount of effort they spend on acquiring NEW customers (which also comes at a cost).
• Inventory: Organize, audit and value their inventory so they have a solid understanding of their Cost of Goods Sold as well as their intangible Holding Costs.

These four steps would pay HUGE dividends in operational efficiency for his company. And efficiency, as a business owner, should be what you are aiming for. Not just ‘high priced’ jobs.  How well are you managing your operations?

I would also add one more strategic step: Hire two employees to take his, and his son’s, places executing the jobs so that he (the father) can manage the business from his home office and get out of that Florida heat and let his son collect and estimate jobs for clients. THAT would be the formula to grow his business beyond a glorified side-hustle.

Avoiding Their Mistake

So how can YOU avoid making the same mistake so many other small business owners just like my friend make?

This is the easiest fix in the world, and you have a choice. You can either:

• LEARN the knowledge you need, or
• HIRE somebody to guide you as you build your empire.

If you opt for the learning route, can I recommend The Tradesman’s MBA? It provides all the fundamental information a business owner needs to organize his business for efficient success.  Topics include Finance, Accounting, Operations, Inventory Management and Strategy.

If, however, you’d prefer someone to come along side and guide you as you build or optimize your business, please consider reaching out for a free consultation. The services that BreathEasy Consulting can provide include, but are not limited to:

• Accounting system set up and management
• Bookkeeping
• Business Optimization
• Inventory Management,
• Email Marketing Campaign creation
• Website design and management
• And much, much more.

 

Sincerely,

R. Altomare

Founder, BreathEasy Business Consulting and Bookkeepting