 Okay, so we're going to go ahead and get started as people trickle in a little bit here. You're in the forecasting, obviously, with metrics for creative service companies with that to kind of give you a little background on us. My name is Jody Grondin and this is Jamie Nile, both CPAs and we've been in the, we've been actually, we're virtual CFOs and we've been doing self-support since, what, 2002 and we deal mostly with creative agencies like yourself, we've got a lot of clients actually here at the conference and so we deal with these individuals on a daily basis and so we've got a lot of insight we'd like to give you guys and ladies about the, basically how to manage your company and what the key metrics to look for. To start off, real quick, if everybody can get their phone out real quick, we're going to do live polling as we go through it to kind of make it pretty interactive. So if you can get your phone out and look at summitcpa.cnf.io if you can navigate to that, that'd be great. You can use your laptop or tablet as well if you have that available. There's no downloading anything, it goes right to the polling. And all the polling we'll do is anonymous and so you know we'll kind of use the polling throughout really to get live opinions as we talk but also it's a way for you guys to ask questions so feel free to ask questions as we talk, come up to the mic and ask a question but also if there's something you just want answered later, you can do that on this website as well. You just type the question in and over the next couple days I'll go in and answer it via the moderator function. Give everybody a second to log in there. The more people we have actively participating, the more valuable it's going to be for the entire group so it should be pretty pretty good information. So everybody, any problems getting on? It's easy to find. Okay, so you want to pop your phone open, go ahead and type in summitcpa.cnf.io and it will get into the live polling. Okay, so the kind of test it out and show you how it works here. We're just going to start off with just a word association. One word describes why you are attending DrupalCon. So if you can type in that one word and you'll kind of see how the polling actually starts how it works. And I'll have my phone throughout so I can kind of tell me people have answered so I know we'd move on so I'm not sitting up here checking my email or text and stuff like that. It's like learning and work, learning to take in the lead there. Hawaiian. I was talking about Jody's shirt helping me. Okay, cool. So it kind of gives you an idea here. So we're going to use the polling throughout with some key, as we go through the key performance indicators, the key metrics to look for. We're going to kind of pull the group here and see where everybody kind of stands within that group. So as people trickle in, if you could help them log into the site, that would be great to get everybody so they're participating. Now we talk about key performance indicators. There's tons of them out there. And so we're not going to go through all the financial metrics. That's not why you're here. We're going to go through the ones that are really key to your companies and how the, and the ones that you need to really monitor on a regular basis so that you can manage your, your company's effectively. And we keep referring back to a forecast because we're going to build these around a forecast to show you exactly what you should be doing throughout the entire year and how you should be maintaining that. And starting off, when we talk about key metrics, again, we got tons of them out there that, you know, you'll see them a lot in like QuickBooks, you'll see them in FreshBooks, all these different metrics that nobody really knows how to control. They really know how to read them and they don't know how to control them. And so we're going to show you the ones you can actually control. And the four that we're going to, we're, four groups we're going to actually focus on today would be money in the bank, effective rate, net income, and then contract capacity. So we're going to go through how much money you should have in the bank at all times, how, you know, basically how to manage your production, what your net income should be in all the different categories. And then do you have enough in your pipeline to support your entire forecast that we're going to kind of build as we go along. So it should be pretty, pretty interactive here. With that, as you have questions, you know, feel free to raise your hand and so forth and we'll cover them as we go. Or again, you can just type in to the question, answer, and Jamie can bring those up as a, as they need to be. The first thing we talk about is money in the bank. With companies of all sizes, you want to have at least 10% of your annualized revenue in the bank at all times. 30% is what you want to strive towards. And what 10% equates to is about two months worth of expenses. 30% equates to about six months worth of expenses. So if you kind of do the math and back into it, that's what it equates to. Now, why would you want 10% versus 30%? Well, if you've got a lot of recurring revenue, then you really don't have a lot of risk in having to fill that pipeline for when your big job drops off. So that's where the 10% comes in. If you are, if you have a lot of big clients that drop off, well, then 30% is more what we're going to do because you're going to need to have a gap in there which going to need that. If all your clients are on 60 day terms, maybe 30%. If they're on 15 day terms, maybe 10%. So there's a lot of different variances on which, which one you want to have in there, but you want to at least have 10%. 10% is going to actually give your team a lot of security and then give you guys a lot of the opportunity to have, you know, basically take, take advantage of opportunities that come along. You know, great business development person comes in. It'll help you out with that. You can maybe maybe end up spending a little money on that business development person versus if you didn't have the cash in the bank, you wouldn't have that money or be able to take that risk. In addition to that, you're going to want to be back up one year. You're going to have 40% of your net income in the bank to cover taxes all time. So in addition to the 10%, you're going to want another amount of money stuck in the bank to cover taxes for Uncle Sam when it comes tax time there. So again, don't, don't, don't, you know, basically confuse yourself a little bit thinking I got the 10% in there, but when tax time comes around, it all goes away. So we say 10 to 30% and then 40% of net income. You have the example on the board here, we've got $3.5 million times 10%. This company should have about $349,000 if they're more towards the 30% and closer to the million dollars. In addition to that, they should have the 40% of the net income, which is the bottom line number of 262. So again, a couple different buckets there. We recommend three different bank accounts for everyone. So you want to always have what we call our operating cash account. You want to have your your cash reserve account and then your your tax reserve account. So we have three different buckets that we recommend everybody putting their money in. The operating accounts what you're paying your bills out of. And so you want to have at least two payrolls in that at all times. The cash reserve account is the remaining balance there. So you're making some interest on that money. And then the tax reserve accounts completely out of sight out of mind. We recommend sliding money into that on a regular basis there to cover taxes. So when it comes tax time, we're not paying, you know, we don't have all that extra, you know, we actually have the funds available to pay for that for that money. Now to kind of go through our first poll question. Sure. Yeah, yeah, exactly. So within typically with a lot of companies, what we do is we recommend cutting a quarterly distribution check of 40% to cover the taxes for that for that period. So you want to have that in there. And with the that's a very good question. So kind of going back to what is, you know, what percentage of annualized revenue do you currently have in the bank? So if you think what you have currently in cash versus your revenue, what percentage do you guys have in the bank? And so as the poll questions are, as you guys are answering it real quick, one thing that we'll talk about with each of the questions is, as Jody mentioned, we work with a lot of companies similar to you. And so we will mention what we normally see in the industry because we have, you know, 50, 60 companies that we see in these ranges will kind of give you compare you to what we normally see. So for this, you know, it depends on where companies are in the time working with us. A lot of times company will come to us and they'll just have less than 5%. But then after working with us, this is one we really emphasize a lot and say you really want to get this 10% so you can make better decisions. So normally you get to that 10% after about six months to a year. So yeah, it looks like the majority of people are falling in above the 11%, which is awesome. That's great. Yeah. And a lot of times, this will not include your tax reserve account. So this is just the cash reserve account. So if you want to take that tax reserve account and say that's already out the door, don't worry about that. You've already paid that. You don't want to consider that cash because you have an earmark for something. So again, the key there is having the three separate accounts. Again, it's out of sight, out of mind when it comes to the tax reserve account. Okay, so now we're going to get into the production side. So we've determined, hey, how much money we need to have in the bank. So this is what our forecasting amount is. Now let's look at the production side. And with the production side, we look at a couple different rates. The first one we look at is what we call a weekly expectation. And this is what we expect our team to work during a 40-hour work week. So if we expect them to bill out 30 hours a week or 32 hours a week or 34 hours a week, that's what we call our weekly expectation. The utilization rate's a little different. It takes into account the weekly expectation, but that also includes all the holidays, all the vacation days, all the company culture days are building the utilization rate. The next one we have would be our standard rate. And we're going to go through and go through an example how to build this model. The standard rate's what you charge a client. So if you're a flat fee, it's what you build into your estimate. So you're back into your estimate with that standard rate. The average bill rate's what truly you earn from that client. So with the write-ups, write-downs within the client, and the project went over or under, what did you truly generate from that client with the bill average bill rate? And then the effective rate is the all-in rate. So as tracking time, if you do track time, or if you don't track time, you simply take the total revenue divided by the total hours paid, and that comes up with your effective rate. We're going to show you how that kind of plays into the mix. So in building our forecast, we're going to look at a 12-month period. And so with that, first thing we're going to look at is the days inside the month. And so in this case, we have working days. So in this case, for the month of January, we have 21 days. And we do that for every single month going across. And so it comes to the total of 260 days. We take that by the number of hours, and that comes in 2,080 hours. And you kind of see they vary month by month based on the available working days. Once we have that, then we take away consider culture hours. And here's where everything really changes from company to company, because everybody's culture hours are a lot different. For instance, this company right here we're giving an example with, it has nine holidays, three vacation days. Some people have unlimited vacation. In that case, you want to kind of take what you think is your average, your average team is actually taking on vacation. If you go to different events, Bureau of Digital, if you go to DrupalCon, company retreats, internal R&D culture, different things like that that you want the team to work on. Culture-wise, you slide in here, and then you add all those up. And your total culture hours comes out to again, 408 hours in this example here. And so what we do is we take that 2,080, subtract that your culture hours, and that's your total available hours that you have to actually work on client stuff. And so then we take that weekly expectation that we talked about. So in this case, this company is working 30 hours per week. We have 30 divided by 40, 75%. So we expect them to bill out 75% of the time that they actually have available to work. And so we take that, and we, oh, so we take that as we're going through, we take that 1672 times the 75%, and I'll show you in the next slide here, we'll come out to the available, or what we expect are billable hours. But to kind of go into our next poll question here, what is your firm's weekly expectation in hours? So what does your firm expect to be billed out on a 40-hour work week? So you can plug that in real quick. Again, again, an idea where everybody stands there. And normally what we see for this is somewhere between 30 and 35 hours. Some companies fall a little below that, some go a little above that, but normally that's right in line with what we see is 30 to 35. Great, so it looks like we're falling right in the middle of that, it's between 30 and 35. So kind of in line with what we normally see. So that's a very typical weekly expectation for people in this vertical. And so looking at that 1672 times 75%, your total billable hours here would be 1254. So again, that's gonna vary from client, from firm to firm, and it's gonna all be based on culture. And you kind of see the billable hours, they go back there, if you look at the billable hours, they're different in every single month up there. So you're looking at your expectations change. The overall billable hours for the whole year, it would be that 1254. And so now we look at what we call utilization. So we get to go through the calculation. We take the 2080 that we calculate in company hours, we subtract our culture hours, which is our available hours. We take that by the weekly expectation that we just calculated, that's the 1254. And then we take the 1254, divide that by the 2080, the hours available to work. And that comes out to our annual utilization. So when we're looking at utilization, that's what we're calculating right there. And with that, the annual utilization, you can kind of see changes from month to month. So for instance, February, we're expecting utilization of 71%, 48%, 65% in June, and then November is 38%. So if you're looking at November, you wanna expect that 38%. So you expect your team's gonna have maybe the holidays or whatever might be happening in November there that causes that utilization to go down so that you know exactly what it is. So it's important to actually know what these numbers are month to month as you're calculating and going through. And so next polling question, what is your firm's utilization rate? So if you know what your firm's utilization rate, let's go ahead and plug that in and kind of get an idea where everybody kind of falls in that bucket. And for this, normally what we see is somewhere between 60 and 70%. And so that's kind of the range that we're used to seeing. And then to kind of piggyback off Jody's point a little bit, it's important to look at it month by month because a lot of times November and December are your lowest months. And so you could get through October and have a 70% utilization and your goal is 66% and think you're gonna beat the year and have a great year. And then November and December come and you just drop off. So it's really important to look at it month by month because you can expect that drop off. Great, looks like we're over the average so far. Awesome, it's about 72%. That's pretty huge, that's great. So then looking at that, so that's basically taking in all the hours and the consideration when you're building your model and you're looking at your forecasting. The next thing you wanna look at is your rates. And we have what we call a standard rate and then an average bill rate we talked about before. The standard rate's obviously what you charge the client. The write up, write down will get you to the average bill rate. Now what we find is we find typically when we're billing, when we have a standard rate, we see a typically greater than a 10% write down and that means that your projects are going over what they should be going over or your estimations aren't close to where they need to be. 10% is okay. If you're between zero and 10%, that's an okay write down. When you get greater than 10%, that's when you know you've got some internal issues and you're leaking money out of the company. And the 10% is coming from, again, estimation and of course the people that are estimating never talk to the project managers, right? And so what happens is they promise something you can't provide, you know, that type of thing or the estimations is completely wrong or everything happens and the deal that just kind of goes south and you have to put a lot of extra time into here. That's where you see this going on. Now if you see it for one project or two projects, that's okay, but if it's kind of a chronic thing, then you really gotta dig in and figure out why that's going, you know, why that's happening. Cause you're gonna see, when we show our examples here, this is where you're gonna leak a lot of money out of the company right in this area right here. So with this example again, the 180 minus the write down of $16, which is 10% roughly. And then it gets your average bill rate about 164. So as we're going through the calculation. Have a quick question. How did you get the write down again? The write down is just simply, so you know what your standard rate is. And then when you calculate your average bill rate, the difference between that and your write down. So if you just simply take the amount of hours built into it divided by the revenue, divided into the revenue, that's your average bill rate. So that's your right, you can actually calculate your write down pretty easily. You can do it by job or you can do it overall. So it's really equal to the hours that you work that you weren't getting paid for. Essentially, so if you estimated a job at 2,000 hours and you put 2,200 in it, then you worked 200 extra hours. So that's the other way to look at it. Yeah, that's your write down, yep, exactly. And you don't want that to be more than 10%. 10%, like I said, is okay. A lot of times we'll see 25%, 30%. And then that's really a killer because that's gonna kill the profit margin of your company there. So kind of getting everybody here, could you go ahead and type in what your blended standard rate is? What do you actually charge clients to give everybody a good idea what their hourly rate would be? And if you're a flat fee or value based like we are, you know, how do you build into that quote? What's that standard rate you're looking at? And normally what we see for this is somewhere between 125 and 200. There's wide ranges in this, but a lot of times it's over the 150 price, but we do see some people who's down as low as 125. And a lot of this depends on market too. You know, if you're in a New York City and you're working with New York City companies or San Francisco, it's gonna be a little higher than if you are in some of the cheaper cities, Ohio. Fort Wayne, Indiana. Fort Wayne, Indiana. Okay, so right at about 150, so that's pretty funny. Okay, so then kind of thinking through just how I said there, what typically do you guys see as a write down? How far off are you from your standard rate? Some of you quoted a job at $200 an hour. What do you typically come in at over under there? How far off are you? What's your percentage of write downs? And as Jody mentioned, 10% is kind of the max is what we look for here, but it's amazing what you can see is how one client can really spike this up. If you have one job that's just going way over, it can get you to that 25% pretty quickly and that's something very common that we see is that one job will just blow you out of the water in terms of write offs. So yeah, so you see here, 22. So using the 22, your average billable rate would be around 117. So just took the 150 times the 22% gets you to that average billable rate of 117. So that's where that metric comes in at. Okay. Wow, we had some huge, huge distortion there. Okay, so yeah, in this case, here's where you'd want to dig into your numbers and find out why that would be the case. You know, why aren't you at 10%? You know, why aren't you, where the industry averages at? You know, around 10%-ish. Is it because that your design and development teams not working together properly? Is it because your project management's leaking out? What's the reason? Is it estimating? And then dig into it and figure out where you might be leaking the money out. Because that's a huge, huge money vampire right there. So now, as we continue on throughout our forecast here, what we're doing is we're looking at what an individual makes. So we take our billable hours that we just calculated month by month and then we take our average bill rate which we just calculated also and you multiply the two together. And in this case, for this company and this scenario, this individual per producer, we should generate about $205,000 per producer with this company. And as you kind of see, again, it varies month by month. So then if you take this by the number of producers, again, not employees, but producers there, you're looking at 17 producers for this company. So this forecasted revenue for the year should be about $3.5 million. You know, $3,397,232. And you kind of see it varies again month by month. So based on the culture hours, when everything hits, we know that February, we should hit about 351, 234 in May. June should have 317. And then our optimization there for November is down to 184. So we know that not every single month is equal to each other when we're looking at our team. The importance of this is, obviously, you're not gonna hit your numbers exactly throughout based on your capacity there, but this will tell you where your capacity is at, where your capacity is strong and where it's weak. So that when you go into the fact that you're going into a strong pipeline and you're looking at, well, I've got 184, but my pipeline is gonna say I'm gonna have about $300,000. Well, now you know, hey, now it's time that we need to maybe hire somebody. Maybe it's a contractor because it's gonna be a temporary issue as we're looking through, or maybe it's a permanent issue because we're continuing to grow and then we hire an employee. So the forecast is gonna be dynamic throughout the year. So as you're going through, you're replacing your actuals with your forecasted numbers and you're adjusting it based on the current team and the team that you're building as you go throughout that year. So if you lose a person, you bring it back down. If you gain a person, you build it up a little bit. So you kind of see where it goes there. So it goes to the very last calculation and the calculation here is the effective rate and this will monitor your forecast. So once you've got your forecasted revenue in place there, you look at your utilization, you look at your average bill rate, which are two strong key performance indicators there. You multiply them together and that's your effective rate. And so if you've got a month that has a high average bill rate of 180, but a low utilization rate, that could equal the same if you reverse the two. So you don't wanna fool yourself a little bit there, multiply them together and that's your effective rate. And your effective rate will change again month by month. In this case, you're looking at an effective rate of 117 for February. A low effective rate of 78 for May. June pops up to 106 and then 62. So your effective rate's gonna change month by month based on all the company culture and the average bill rate that you have throughout that period of time. And the one thing to mention here too is this will get into the next subject a little bit, but this is kind of where cruel accounting comes in and we'll talk about it in the next step, but this is all based on a cruel based accounting because if you're doing these metrics based on when the cash comes in, it's gonna look completely different than this because it doesn't match the hours that they're worked. Okay, so now we've built the revenue side of our model and looked at the metrics that go into that revenue side. Now here's where we look at the net income side. Typically with a development or design shop, especially in the Drupal world, you're gonna look at a break-even, what we call break-even, net income of 10%. So if you're not making at least 10%, you gotta get to that number no matter what. The 10%'s gonna allow you to move cash pretty easily throughout where you're not so dependent upon the terms of the agreement versus where you have to juggle your money there. So 10% makes the rule go around, that's what we call our break-even point. We typically see firms at 15%. That's a pretty typical number and then we see them as high as 20%. And if they're a smaller firm under probably about $2 million, you may see them as high as 25%. So the bigger firms have a little more overhead, a little more C team put in there. And so they're gonna weigh it down a little bit with the middle management where the smaller firms aren't gonna have that. They're gonna be closer to the 25%. So kind of going through, as we broke it down here, we're gonna cover this really quick for you there. But with that, we just covered the revenue. We're looking at the production now. So we're building that forecast there. And so what we see here, as we see in the production model here, here's where we stick all the people, all the worker bees, all the producers, dollars there. So we're looking at average, we're looking in this case, an average salary is $75,000, burden rate, and I'll explain what that is here in a second, of 28%. So in this case, it costs, for every person who hires $75,000, it truly costs the company about $96,000. Number of producers in this case would be 17. So our annual production in this scenario would be 1.6 million. Now again, you'd spread that out through the year just like we had our revenue. It's gonna be a little bit more flat because the revenue or the expense is not gonna change unless we add or subtract people. So then once we've calculated that, then let's look at the burden here. So the average burden, how do we calculate it? We take into all the consideration of everything that's in there. So for instance, in this case, we have health insurance, $8,000, life and disability insurance, 401k match, technology stipend, education stipend for firms or technology stipend. We find that distributed firms like ourselves will spend the same amount in technology that a brick and mortar firm will spend. We just give it to our team so that they can actually buy their own computers, keep their own office put together. If you have got a brick and mortar, you're gonna spend that pretty much a year through software updates, all the different things that go into that. You slide that into the burden of the employee. Education stipend, about $1,500. As typically what we see are lower, a little bit lower, and that's so that they can go to like Drupalcon and all the different events that the producers are gonna go to, to educate, to learn and that sort of thing. So we find about $1,500 there. And then of course in the United States, we've got the social security tax and Medicare tax, can't get rid of that. In this case for that $75,000 employee, the employer's paying about $5,000 in taxes there. And then so that total burden in this scenario would be about $20,000. So again, the 20 divided by the 75%, is that 20% that we calculated on the front page there. We find this being a pretty typical scenario that we see from company to company. And so when we calculate that, again we just simply go through the calculation. In this case the production costs about 1.6 million. We do the administrative the same way. The marketing, oh and the administrative costs, that goes to the employee, the administrative employees are in there. And the marketing costs, the marketing employees are in there, facility costs, just simply the repair. So when you break out your financial statements, you wanna make sure you have the revenue, production, admin, marketing and facility, your main areas, your main buckets. And those are the ones you wanna actually monitor as a group. And then we have net income, pretty simple. And then we have the owner's comp. So the owner's comp we split out separately because Uncle Sam requires us to do that. And so with this in this case, it's about two owners. We typically find that owners, we normalize our owner's comp at about $150,000. Whether they're making $150 or not, we wanna normalize it so we can compare it against the industry there. So if the owners are making $250,000, we wanna subtract out or add back $100,000 to the bottom line so we're not distorting our net income. Cause the owners could really distort net income if they pull all the money out of the company. And it looks like we're not making money or actually we're making a ton of money, they're just pulling a little bit too much out. Or the opposite, they're not pulling any out of the company that makes our net income look really strong when it really it's not, because they're not pulling. So we try to normalize it at the $150, in this case we have two owners. So what do we do with the owner's comp to really normalize it throughout? We look at the different owners and find out what their role is in the company. So is the owner a production person? Are they a marketing person? Or are they an administrative person? So with that, it's important to understand where that is so you can compare company to company, although it's split out separately. And then we kind of back into it off financial statement there. So in this case, our owners are 60% production, 10% marketing and 30% just kind of throw some numbers out there and show how it calculates. You can see we created a separate column there with that $300,000. And it flows all the way to the far right where you can see that we typically see in this industry gross profit being between 40% on the low side to 55% on the high side. Typically we see it right at about 50%. Very common right at the 50% mark. Administrative costs we see typically between 15 to 20%. And it really depends upon where that owner's at in the administrative side there. Marketing the same way, we see it typically between five to 11%. Five to 11% is very common. It's, again, it depends on where that owner's at if they actually hired a business development person there too, because again, that salary is gonna be in there as well. Facility cost is kind of funny. It comes in right at about 4.5% typically, which is kind of funny how it works between 4 to 5%. And for distributed companies, a lot of times they don't have this facility cost. Well, instead of facility cost, they're in place with what? Team retreats, right? So they've got team retreats that they're spending and bringing the team together. And they have team meetups throughout the year, which they're gonna spend roughly the same amount of money there. So we typically see distributed companies and brick and mortar companies are really the same financial statement. It's just spread a little differently between the team retreats and facility costs. And then again, we get down to that income where we see it's typically 10% of a bare minimum. And then you see it up to 20% is a pretty solid number. So if you're exceeding 20% bottom line adjusting it for owner's salary, you guys have done a great job. If you're below the 10%, then there's some issues we need to work on. More than likely it's leaking up in the production side. And those three, the admin marketing facility, you'll hear people talk about overhead all the time. That's what those three are. Those are your overhead. And the number to look at there, if Jody mentioned the 50% gross profit, you kind of look at total overhead of 35%. And so if you wanna group it all together and say as long as you could have higher facility costs, but then you might have to make up for it with lower marketing costs and really try to hit that 35% target for that. Okay. So kind of going through basically for that last quarter, to give everybody an idea of the feel of the market here, what's your last quarter look like net income-wise? So if everybody could go ahead and plug in what last quarter was net income-wise. Was everything going really well? Oops. Was everything going really well? And what percentage would that have been? And as Jody mentioned here, we've done this poll now twice at different events like this and also a lot of our clients are wrapping up the first quarter. We're seeing right about 15%, so people seem to be having good quarters about where we're expecting them to be. So we're looking at net income for that last quarter, so the first quarter of 2017. Okay, so if that looks like some really good quarters in this room. Yeah, so it's falling in, which was a little bit better than what we had- Yesterday or Monday. Monday, yep. That's awesome. And then kind of giving everybody an outlook for the second quarter. What's the second quarter shaping up to be? Is the pipeline pretty strong? We have a lot under contract. And very similar for the second quarter. I think you were seeing similar numbers for the first half of 2017 as people are optimistic and seeing not high rates other than this room, I guess, but just I think people are seeing very similar to that 15%, it's been a pretty good year after the election and a lot of people have their new budgets and stuff. Great, no? So with about six people polling there, looking about, everybody's as expected or better than, which is really good. And that's similar to what we had in the last discussion, we had 35 participants in that one. So real similar outlook there. Okay. All right, now we're gonna jump into contract capacity. So Jody talked a lot about doing the forecast based on employees and where this comes in is that forecast is great for the long-term forecast, but how do we know we're gonna meet that work? How do we know we actually have enough work in the pipeline to meet that? And so what we look at here is contract capacity. So it's a very simple formula, but the thing about this formula is it's really important to have a lot of data. If you just do this one month and kind of leave it, it's not gonna make sense for you and I'll explain why in a second, but all you're doing is taking your contracted work divided by your revenue capacity. So this next slide shows here, these are the contracts you currently have in place. So you have some pretty large contracts on there, some smaller contracts, but this is the work that you know you're gonna do. You've already signed the paperwork, you're already working on these contracts and this is how much revenue you're bringing in. Now as you can see, the first month, the next month is always a little bit higher and then it kind of goes down from there. But the overall number of 512-143, we're gonna compare back to the revenue capacity that we calculated earlier. So this is the number that we calculated on the first slide where Jody was going through the hours and the utilization. It gives you what is your capacity for the month? So you can see right here, the capacity, the contract compared to the capacity is at about 66% and so is that a good number? That's why it depends. You don't know what you normally make up. Some companies can make up as much as 50% in this number and if you're at 50%, you feel good because over the next three months, you're gonna pick up enough contracts to make up that difference. Some companies need the 80%. You only can make up 20% over that three month period so it's really important to track this over time and it takes about 12 months because you wanna see one full cycle come through and really to understand this metric. So that jumps us into pipeline and so another way to look at it is, what is a good pipeline? What is the pipeline you need in order to make up that capacity amount? And so this is a pretty complex formula but once you see the example, it loses its complexity a little bit and so there's a couple of items that go into it. The first is your average sale cycle. So this is, how long does it take for a qualified lead to come in to turn into an under contract? So if someone comes in on May 1st, how long until you start doing work on that contract? That's the first input for this calculation. Then we look at average contact length. If you have a million dollar contract, if that contract's gonna earn all that revenue over three months, that's much different than if it's gonna earn over 12 months. So we have to build that into this calculation because it depends on when that million dollars will come in. Close percentage. Here we're talking about qualified leads. So this isn't everybody that hits your website. It's really the ones we've actually talked to and have that initial conversation with. How many of those do you win? How often do you win those contracts that are coming to you as people are coming to you for work? So then here is the formula. We'll go into it in a second here, but this is just overall formula that takes all those factors into it. So going back to our contract capacity, if for this company there was 60 days is how long it takes for a sale cycle. That's about what we see is a 60 day sale cycle and so that's what we're using for this calculation. 90 days is the average contract length so that's obviously varies company to company or there's some companies that do recurring work and it lasts 12 months and there's some that can do things in three months and so we're using 90 days in this example. This is one part of the calculation I haven't talked about yet. The great thing about this calculation is you can do it at any time in the sale cycle. So the example we're using here, you're looking at the next quarter, but you're doing it outside of the quarter. So if you're looking at the fourth quarter, you're doing this calculation in August, there's still 90 days left to build that pipeline. You can also do this calculation halfway through the quarter to see how that quarter's gonna turn out. We usually don't recommend looking at more than a quarter because it's a lot harder to forecast out that far. You guys know it's, you don't really have your whole pipeline built for the whole year so we really try to focus on just the next quarter. And then last, a 50% close rate. That's also pretty standard for what we see. So here's the calculation. So the first important part here is we're not looking at your capacity. We're looking at the revenue needed. You already have all that other stuff under contract so you're not worried about that. You know you're gonna get that revenue. You really need to figure out how you're gonna make up that gap. So that's the first number there. Then we take the average sale cycle divided by that 90 days and then we also take the average contract length divided by 90 and then we divide all of that by the 50% win rate. And that gives you a pipeline needed of 354. So if your pipeline's below that, you might not make up the difference that you had in the contract capacity. If it's above that, you might need to do some hiring because you're gonna have a really strong quarter. You might not have the right staffing for because that's how capacity is calculated. Yeah, and keep in mind that's not an exact science but it kind of gives you an average through how to actually calculate what the pipeline needs to be in order to build your contract. And we use this dramatically. I mean, this is a game changer because what you can do is you can be really strong in cash. Your net income is really solid. Your production people are doing really great but then you look over your pipeline and you've got nothing for the next quarter. Well that's huge, that's bells and whistles time. You know, what are we doing? So it's really important to know what you have under contract, calculate it out, see what normal is for you and then take the sales pipeline as the proof. You know, hey, do I have enough of my pipeline that I can justify the contract? And so then what happens is if you find that you don't, let's say that your pipeline's really low, then you go back to your forecast and you adjust it downward because now we've got our optimization forecast out there based on what our team should do. We know we're not gonna hit it so let's not fool ourselves and think we're gonna have a ton of money or a ton of revenue coming out and we subtract out the revenue at the top line on our forecast so we can make those decisions based on solid information. So then just to kind of show you how this rate can change. So this is the 354 calculated out in a table form. One thing you can do and this is very common, companies try to do this all the time, try to close out, try to decrease how fast it takes you to close a contract. If you're closing 60 days, you drop down to 30, oh sorry, days remaining in the period, I'm not the wrong one. So if you, this is what I was talking about earlier where if you have only 30 days remaining in the period, so instead of looking at it in August, you're looking at this in November, then it's completely different. So you have a lot larger pipeline you need because you still have the same amount to make up, you still need to make up $265,000 but you only have 30 days to do it. So that's what I mentioned earlier. Next is what I was talking about with sales cycle. So if you decrease your sales cycle in half, you can see the amount of pipeline needed cuts in half. So if you can close things in 30 days instead of 60 days, we'd talk about someone emails you, contact them within four hours, that really helps doing something like that and getting that quick response makes your sales cycle go a little bit quicker. If you work in government or with universities, this time can take a lot slower. So increasing that as you can see or decreasing that as you can see really decreases your pipeline needed. And then the last is longer contracts. So I mentioned this earlier, if you had six month contracts instead of three month contracts, your pipeline needed is twice as large. So just showing you how those different inputs can change your pipeline and things that you can work on to make your pipeline a little bit better. So question, so we talked about the four metrics now. We're gonna move into how to use those metrics here in a second, but before we do that, we're just curious how many of these metrics do you currently use to monitor your business? So I expect to see the first two used quite a bit and then the third and the fourth not as often, but we'll see, this is interesting. Everybody's using most of them, which is great. Okay, so it sounds like you guys are all pretty familiar with these metrics we're talking about. And so now we're gonna talk a little bit more about how you actually can use them to make decisions. And then we call that levers. And so when you look at metrics, they're levers that go into your business. And so we're gonna talk about that. And of course, the most important one is cash. So here's a company, a company we talked about before. There's two different ways to look at this company. It could be the exact same business, but if your balance sheet looks different, you're gonna treat all of these decisions a little different. So the first company has the cash reserve in place. We call this a take a risk company. If you have your cash reserve in place, you can treat business decisions differently. If someone comes to you with an investment opportunity, or if you wanna try to make staffing changes, you can treat those a lot different if you have that cash reserve in place. You're a little bit more willing to take a risk. Where if you don't have your cash reserve in place, you have to turn down those decisions. You have to think about things differently because you don't have that cash in place. And so it's a really important metric and it's the first area I go to anytime someone asks me a question is how much cash do you have in the bank? It's very similar to your personal finance. Some people say, do you have your reserve in the place? If you do, then you can take a new job or you can try to start your own company and stuff like that. It's exact same as a person, individual person. So it's really important to understand that because when they come to us and say, hey, can we buy this building? Well, it depends on really what their cash position is. It depends if they've got everything in line before we can actually say, hey, yes or no. And it could be the same building, same great deal from one company to the next and the decision's gonna be completely different based on where they're at there. When we talk about cash, the one thing we didn't talk about and it's kind of funny how this works, but when everybody negotiates for terms, how that really impacts your cash is significant. Looking at a typical company here, and this is a typical company based on a 60-day term. So we're looking at cash in the different months. They have $20,000 in February that they're gonna be borrowing on their line of credit in March, April is 80 and 150 as in May. And just by changing that 15 days, so let's go to a 45-day term, you can see the cash position jumps. So now we still have the 20,000 starting, but now we're not in the line of credit. We're at 50,000 over, April's at 20 and then May is at 230. Just by changing the terms on there. If you change the terms to 15-day terms, look at the difference in cash. Man, you've got a lot of cash in the bank. You've got a 170 now, 360 and 390 in the terms there. So if you think terms don't matter, they really, really, really do. Terms are really huge and especially if you're trying to build that cash reserve that we talked about. Just by tweaking the terms a little bit's great. And then also in negotiating, you should be able to negotiate a little stronger. So if you have a small, if you don't have the cash reserve met, well then maybe take that 1.5% or whatever it is and give them a discount to get your cash in quicker to build that cash reserve up. A lot of companies are required to take that discount too, so that's something that everybody knows. If you're working with big companies, they're required to take any discount. So if you offer them a 1% discount to pay within 10 days, they're required to take that. And a lot of governments and schools as well. So, you know, paying on their client base, offering that 1% will do amazing results for your cash turnover. But if you get your cash reserve met, you don't need to. Have you guys seen a trend with your clients on the recurring side of the business? What, you know, areas they're kind of skewing towards to build up the recurring revenue model? To build up the recurring revenue model. A lot of maintenance contracts, we'll build it into the contract actually. So we'll have the contract with the maintenance program built into it to continue them on. To build recurring revenue, the trick there is to win the contract initially and then use the recurring revenue from that client versus going out and trying to get recurring revenue is really, really, really difficult. The basic hours. It varies, yeah, it varies. Usually it's a fixed dollar amount. Sometimes it's fixed plus hours, you know, if you go over a certain dollar amount. But it varies dramatically from client to client. But recurring revenue's huge. The higher you can get recurring revenue, the stronger your company is. And also people are trying to develop products as well to get recurring revenue. So if you have like a product, like an app or something like that, you can develop. That's what a lot of companies are doing as well, is trying to do that. The problem with that is the time it takes to develop it, it could not be worth it. It's a huge risk and only do that if you have cash. Yeah, exactly. And so in that model where there's a big contract with recurring revenue, so you would split that out and basically introduce two contracts regardless of whether it was negotiated all at once or through projections because the timelines are completely different. Yeah, exactly. You're gonna treat that as two separate contracts although it might be one. And would you always model recurring? So like just pretend it's an annual contract, even though it may be going on a lot longer than... Yep, absolutely. So when you're looking at that, you're taking your optimization, you know, what we calculated is your optimization. Subtract out the recurring, subtract out the contact or the under contract. And then that's the dollar amount that you've got left to build up. And that dollar amount gets smaller and smaller as the recurring revenue gets higher and higher, which is pretty awesome. Great question. Okay, so kind of going through that same scenario there, you can kind of see with our AR and our cash, we had cash at 60 days and AR was at the air balance at 60 days. We didn't do anything but just simply flip cash and AR. So you see the AR decreased cash increase. So in the example we used before, we didn't have any additional revenue earned. It was just simply flip flopping the cash and AR. So liquidity saved the same, but cash was huge. So the next scenario we're gonna go into is scaling up. And so this is a very common question in this industry is when can I add employees? And if I do add employees, how much revenue do I need to do to make up for those new employees? And so this is the exact same calculation that Jody went through in table format. So a little bit more detail on there. And you're gonna see this pretty much through the rest of the slides because it lays out the entire calculation. So for scaling up, it's essentially the exact same calculation up to the bottom two. And so when we talk about FTEs and one thing with FTEs is, it's sometimes that number is an odd number because you might have a half FTE. If someone does half production and then does half business development, they aren't a full FTE and we wanna make sure we take that into consideration. But if you wanna add three FTEs, you can see what it does to your revenue. It makes your revenue go up to 4.1 million. And then we also take into the cost which is the exact same cost we had before, the employee cost at an average rate plus the burden. And you can see your cash impact over one year, it's 323. But the big number to look at is that 4.1. So you need to make sure when you look at your pipeline, you look at the future, that you're gonna be able to hit that 4.1 on a monthly basis. And then we always get the question of when do I add that business development person? Can I afford that business development person? Well, with a business development person, you have to first of all, change your model a little bit because what that business development person is probably gonna do is replace the owner and when the owner's out there working or maybe supplement it. So you have to reallocate where that's at on the financial statement that we talked about earlier. And then adding the business development person, it's kind of funny on how much to spend on a business development person. We see they're all over the place. We see them as low as right at about 102, as high as over 200. Sometimes they make a lot more than even the owner. And if they're a really solid business development person, it's well worth it. Everybody knows how hard it is to find a business development person. That's one of the biggest challenges I see when I talk to people is sometimes I'll go through two or three guys because every business development person and resume looks great and they're salespeople. So they're great at selling you in an interview and then they get to work and you're like, wait a second, this isn't what I was promised. And so a lot of times you'll go through two or three BD people before you get the right one. Yeah. And so in this case, you're kind of looking through, we built the 125 in the model there, looking at the 15% net income. That's the number I'm really concentrating on. We bring those three people. Now that we've got the business development person, we bring the three people in to support that business development person and you kind of see them, the net income's closer to that 21%. So it really for a $125,000 business development person, it really takes three producers to add to your team to actually support that. So you've got to really look at it and say, hey, do I have the pipeline to support three producers? I definitely don't want to get the BD person without that pipeline. That's dangerous because that could go the other way. So hey, do I have a strong pipeline? As an owner, did I generate that or as an operations person, did I generate that? And if I did, maybe it's time to bring that on and then I can have the producers support them and I can maybe back out, the owner can back out, maybe go back into administration, work more on the business as opposed to in the business. Does that sound like a chicken or the eggs? What I typically find is that once the pipeline is built, then the business development person comes in as well as the producer will come in. Keeping in mind, the producers are gonna kind of get, you're not gonna bring in three at one time. They're gonna get stair stepped in there because it's gonna be a training curve, learning curve for those people. So pipeline definitely first, then you're gonna see producers being brought in at the same time that business development person's brought in. But it's gonna take you a long time to find that business development person, so continually look for that person and then bring them in right at the right time. Great, so the next scenario we're gonna go through is scaling down. This is the opposite. So pretend like you're looking at your pipeline and first off, you lose a big contract. You lose a contract that was $200,000 over the next quarter and you're like, oh wow, this is not good. What do we need to do? Going back to our first situation, if you have cash in the bank, you might be able to sit on this a little while and say, okay, yeah, we lost this big contract. We have these couple in the pipeline that might replace it. Let's see what happens and see if we can take a lower gain for a couple of periods. And that's what this first scenario shows here. So as you can see, annualize that 200,000, you don't want that. You don't want a 5% loss and to not have that. So you need to make some decisions here and what kind of decisions do you make? We go back to our original calculation. We talked about the equivalent revenue per FTE is 205,000. So if I take that $800,000 divided by the 205,000, that equals about four revenue producing people. And so if you have four revenue producing people and you cut those people, as you can see, your profit isn't where it was before, at least it jumps back up to out of that loss. And then hopefully you can bring that revenue back up over a period and get back to that 21, 19% you were at in the original scenario. And so the big thing there is what a lot of people say is hire slowly, fire quickly. That's the way to do it. You don't want to make rash decisions when it comes to hiring. You want to make sure you're ready for it. But then if you're in trouble, you don't want to run your business into the ground. And it's just not worth it because it will hurt the employees that are still there. So again, if you have the cash reserve in place, you have a little bit more time there. And this is something we take real seriously too. Because you want to make sure that you understand your numbers so that you don't make the wrong decision. Because maybe it's a short term blip in your forecast or maybe the pipeline is strong enough but you just on a gut decision, like I got to let people go. Because everybody knows here that's really hard to find really quality people and keep those quality people. So this is not something you take lightly. And this is something where that cash reserve is huge. We've had companies before that have had gone through an entire quarter because all their jobs get pushed off, pushed off, pushed off, and then it happens, anybody here I'm sure. They get pushed off, pushed off, pushed off. And had they not had that cash reserve in place, when those jobs did go, they wouldn't have the people to actually run them. Because they would have to let some people go. And so they were able to weather that storm. So going from a 15% cash reserve, they ate into it 5% which still brought it closer to 10%. But they were able to go an entire quarter without letting anybody go. And then boom, that job hit and they're sailing going forward there. So that's where it's really important to understand these numbers here so you don't make rash decisions based on bad information. Super, super important. Here's a scenario that kind of, I mentioned earlier about buying a building or this could even be building a cash reserve. You know, hey, I'm $450,000 away from my cash reserve. How do I get there? Or I want to buy a building. You know, how do I buy a building? And this is a very, this is a true scenario here where the person, we took over, we took over a client, they had $25,000 in the bank, not a whole lot of money. They had nothing on their line of credit. They really didn't have any debt and that sort of thing. And so how did we build, and they came and said, hey, I want to buy a building. I thought, buy a building, we need to build cash first. But they really insisted on buying a building. And so what did we do? We went through a little scenario here. We said, hey, let's add two people to that scenario. So we're gonna add two full-time equivalents and see how much that's going to be able to increase cash. And so we thought, well, that's gonna increase cash, $87,000 per year if we just hire two people and keep them busy. And that's after tax. So we need to tax burden that, yeah. And so with that, we knew that, hey, if we did that, it's gonna take us about five years to build that $450,000 in cash. And he's like, well, that's way too long. I want to get this building a lot quicker. So then we played with the numbers a little bit. And we said, hey, what if we increase that average bill rate by $5? You could either increase your standard rate or you could find out where you're leaking money out and really work on it. He didn't increase his standard rate. He looked and found out, hey, what am I quoting wrong? He had a percentage to his quote. You know, all these different things to get that average bill rate up. And he had actually suppressed that. It was about $10 per hour is what he increased it. But in this case, I'm using $5 as an example. So what did that impact the bottom line? About 50 grand a year. Pretty significant to the bottom line, just by changing that bill rate by five bucks. And so what did that do to the timeline? Well, that brought the timeline down to right at four years. So we thought, well, within four years, I'm thinking that's a pretty good deal. He's like, no, I need it faster than that. So we're like, okay, so what else can we do? Well, he had an unlimited vacation policy. And he thought, you know what, people aren't taking this. Why am I offering it? It's really kind of screwing things up. I'm gonna go ahead and give them a little bit more per hour and I'm gonna reduce their vacation to three weeks or two weeks or whatever that was. So he knew it in a set dollar amount there. It felt like I can actually get a little more production and the team loved it. It was great for morale, that's what they wanted. And some sort of circumstances, that would be the wrong way to go. It might be something else to do, but this worked for this company. And so with that, we reduced that a little bit and see how that impacted it. So that was another $38,000. So we kept working through, and you kind of see we're working through this to kind of get this lower. And so what did that do to the timeline? Well, it brought it down to two and a half years. And so we thought, well, that's not too bad. Still not where we wanted to do it. And the last thing we did, we worked on was the hours per week. So he was billing at 30 hours per week. That was the expectation for everybody. He's like, hey guys, we need everybody to work a little bit more, 32 hours, we need everybody to bill. And I need to fill that pipeline so you have work to work on. So there's a couple different things. And it brought it down to 32. And we looked at that, that had a significant change. That two hours generated after tax, $110,000 a year, pretty significant. Just those two hours. And so with that, that brought the timeline down to a year and a half. And he actually just moved into the building last month. It was really cool. And just on top of the two hours too, one of the things that one of my clients did I thought was kind of creative is they were doing the Fridays are our programming days. We're gonna do our programings on Friday where people can work on their own thing. Instead of doing every Friday, he said, let's just do a week during a quarter. So that's less hours on total per week. It added that two hours per week and he's seeing more revenue because he has in total more chargeable hours just by doing that. So it doesn't necessarily have to be a drastic change where you're pushing people to work more. It's just changing the culture a little bit. So you kind of see, if you're not at that cash reserve, it's not that far away. You just have to kind of tweak your numbers there and find out where you're leaking the numbers at. And you could actually, instead of buying a building, like I said, that could be building your cash reserve. And again, it all takes really hard work and really look at those numbers and understanding them to go through them. So that's kind of the basics of the metrics talk. We have, again, the four key ones are money in the bank, 10 to 30%. So what you need to have at all times, in addition to your taxes or your production, your effective rate should be somewhere around a hundred dollars per hour, depending upon what your cost is of your team. But the key there would be your average bill rate and your utilization. And then that income should be roughly around 15%. And then your contract capacity, you have to make sure that you have enough in the pipeline there to actually support your model there. Does anybody have any questions? Right. How have you guys managed that with your clients' forecasting and leverage that? Is that difficult to classify? I'm assuming you have to keep that separately allocated from any future funds going into the new year, correct? Right, yeah, that's actually a very common thing. You know, a lot of clients will dump their budget in the last month of the year and now they got this huge budget they're working on with no revenue coming or no cash coming in. So when we do that contract to capacity or we're filling that out, it's when the work is going to be performed not when the money's coming in. So that's what we're looking at there. Your foot revenue is tricky because it's great to get those prepayments and to get those retainers. But then sometimes once that bleeds out, you're worried about what's going to happen to cash because that is a revenue forecast. And so you kind of have to keep an eye on it. Like if you have a balance of $800,000 into foot revenue in December and you're forecasting it to go down to 100,000 in the next six months, you have to have that in your forecast and say, okay, what is this going to do to our cash situation? Because we still have to do that work. So it's a great question. Any other questions? How do you accommodate for subcontractors or sort of freelance capacity in the model? Because obviously if you're not using them, they don't have the cost. Yeah, subcontractors are great. The only problem with them is they cost a lot more than the employee, but you don't have all the extra utilization, right? And so we build them right into the production side. So they're built right in there and then subcontractors are 100% utilized at whatever the hourly rate is. But then their cost, again, is one for one. So it's real easy to use subcontractors and you build it in just like you would an employee but calculate it based on what you truly expect them to be. And they're some percent of the FTE. So if you have a subcontractor, they're only gonna work 16 hours a week, then you only count it as half an FTE. Right, yeah. We recommend subcontractors. Definitely use them as you need them for short-term blips. For long-term, obviously employee makes more sense. Any other questions? Right on time. Do you think QuickBooks can calculate all this? No, we wish it would. We're actually talking to FreshBooks right now with their development team to get them to calculate these metrics for us. So maybe FreshBooks will down the road, but these metrics, like Harvest, Harvest would be like a time in building software that might help with the production, the effective rate and all the different hours. Unfortunately, we use Excel. I mean, unfortunately, that's where the nerds, I guess, when it comes down to it. Nobody's really developed the system to look at all these different things effectively. And the reason being is that everybody's got all these other programs feeding into it. You might like Harvest, you might like something else, and someone else likes something else, and it's really difficult. We use Excel for modeling, and then we data dump everything from the QuickBooks or FreshBooks or whatever they're using. And Pipeline's the same thing. People use multiple apps or Pipeline. A lot of times we have to get that into Excel to figure out what's under contract, what's the future look like, and stuff like that. So a lot of times, whether we're using Salesforce or 10,000 feet or whatever, there are lots of different models that we use for that as well. Okay, great questions. Any others? Nope, well, thank you. Appreciate it. Thank you. Someone's coming in for us. Yeah, they were made for 20% right there. Yeah. It's difficult. You can't contemplate what we have. You know what we do, right? Of course there's a lot of things that we don't know. Yeah, there's a lot of things that we don't know. Yeah. Yeah. Yeah. That's what we do. Yeah. We're doing this for you. Let's try it for him. Okay. It's all right. We're doing it for you. Okay. I'll get the whole thing. I'm not even wanting to put the mic off. I think that we have a good digital network. So yeah, that's fine. Yeah. They could put it, you know, what you can do, you know what you can do, you know what you can do, and that's why you get six more calls. Yeah. Yeah. You're making it more. Yeah. It's amazing. Yeah. It's amazing. Yeah. I'm just confident. You can lean on it. Yeah, my God. I think that should be a good one. Well, we're going to do it. We're going to do it. We're going to do it. We're trying to centralize the rate of shot. We're going to do it. We're going to do it. Same thing with the ETL. The ETL, the ETL. I don't know what it says. It says, even the ETL, and the ETL. So, we're going to do it. I'm just just confident. It says, even the ETL, and the ETL, and the ETL, and the ETL, and the ETL, and the ETL, and the ETL, and the ETL, and the ETL, and the ETL,