Would you bond your own company? Lessons from a Lemonade Stand

Would you bond a lemonade stand with no working capital, no profit history, and a cigar box for bookkeeping? Probably not. And neither would a bonding company looking at your construction business.

In this episode, Wade Carpenter and Stephen Brown break down the financial fundamentals bonding companies and banks use to evaluate your business — working capital, equity, cash flow, profit history, and reliable books — through the surprisingly relatable lens of a kid’s lemonade stand.

Simple lessons, serious impact for your bottom line.

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Topics covered on this episode include:

• 00:00 Would You Fund It
• 01:46 Working Capital Basics
• 03:13 Cash Keeps Jobs Moving
• 04:12 Equity Skin in Game
• 06:13 Profit History Matters
• 08:00 Profit vs Cash Flow
• 08:35 Billing Over Under
• 12:15 Capacity Quality Delivery
• 14:48 Backlog Costs Growth
• 16:24 Books Records Trust
• 19:40 Build Bill Bank Bond
• 20:13 Wrap Up Key Takeaways

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

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TRANSCRIPT

Wade Carpenter: [00:00:00] Your five-year-old wants to open a lemonade stand. Would you put up the money? What if they promised lemonade for 500 people with one pitcher and no money for [00:00:10] lemons?

And what if they told you, “Don’t worry, we’ll pay for everything after we get paid”? You’d have a few questions before opening your wallet. So does the company being [00:00:20] asked to back your next construction job.

Today we’re taking a few simple business lessons from a lemonade stand and asking: would you bond your own company?

This is the [00:00:30] Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance.

Stephen, sometimes simple life lessons can put things [00:00:40] in a different perspective. Kick us off with your thoughts on today’s approach.

Stephen Brown: Here’s the thing. You might first of all try to apply logic to this. [00:00:50] Five-year-old lemonade stand? Of course I bankroll it.

And there’s no such thing as creditors or overcommitment, allowing a five-year-old to promise lemonade for 500 people.

But let’s just [00:01:00] keep this analogy simple. You’re stuck operating a lemonade stand or any other simple business. Everybody starts off with a lemonade stand. That’s kinda how you [00:01:10] learn how to be an entrepreneur.

The kids across the street from me, they will gladly take a $10 bill for a glass of lemonade and say, “We have [00:01:20] no change.”

And then just hold onto that, my $10 bill and I’ll say are you gonna bring me change?” And then they’re just looking at that $10 bill. They have no intentions of [00:01:30] giving me change.

Then we have to talk about entrepreneurship. But nevertheless, I think it’s a great analogy because, Wade, a lemonade stand, there’s just basic [00:01:40] fundamentals, right? And they apply to construction as well.

Wade Carpenter: That’s what I was hoping to do, is simple concepts. Would you buy the lemons before you get paid? Lemons maybe are cheap. [00:01:50] Yes, absolutely, and yes, maybe it’s a silly analogy, but it goes back to one thing: banks and bonding companies want working capital.

You gotta pay for supplies [00:02:00] and the helpers, your little brother Jimmy and maybe Susie goes gets you some ice and more water, you know, you’ve gotta pay for the supplies and that kind of stuff.

Why is it they [00:02:10] worry about a contractor having working capital? I think it’s asking like, could you carry this job without the money coming in?

Does that resonate to you? 

Stephen Brown: It most certainly [00:02:20] does. Because, working capital is just allows you to work, and the definition of it is your current assets, that’s cash, receivables, anything that’s gonna be turned [00:02:30] into cash relatively quickly, and then how much money you owe over the next 12 months. How much are you indebted? And that includes your materials and your equipment and everything else.[00:02:40] 

So from a Lemonade stand standpoint, you look at it and you say “What elements are missing here to make it work, to make it successful?”.

And from a [00:02:50] bonding company’s point of view, you’re exactly right. No working capital, then they’re really worried you’re gonna be able to finish the job.

What else could you tell? “Oh, we don’t need [00:03:00] working capital.” No. You cannot convince a bonding company of that when working capital seems to be what causes a lot of contractors to go under, having no working [00:03:10] capital. And default on the job and not finish the job.

Wade Carpenter: Yeah, and I think, going back to our analogy of the lemonade stand, you got a nice stand and like we were talking about before, [00:03:20] like Wimpy will pay you Tuesday for a hamburger today. Maybe Sally says “I get my allowance on Friday.” But your little brother Jimmy still wants to get paid, and he says he’s [00:03:30] not coming back tomorrow if you don’t have cash.

Why is it that bonding companies worry about cash? Do you get it? I mean, Jimmy’s not gonna come back, just like your subcontractors aren’t [00:03:40] gonna come back if you can’t get paid, and sometimes that cash talks, right? 

Stephen Brown: That’s right. That old expression money talks and BS walks is true in a [00:03:50] lemonade stand as it’s true in the construction industry.

Wade Carpenter: Why do they insist on having some cash? 

Stephen Brown: They want you to be able to weather the storms when you [00:04:00] have cash flow issues. When you’ve got things you have to pay for when you lose money on a job and you’ve got other jobs to complete, is that just gonna [00:04:10] snowball and put you out of business?

Wade Carpenter: Another concept that we talk about in construction is equity.

Let’s just say, yeah, I don’t know, little Bobby was doing pretty well, he’s got $1,000 in [00:04:20] assets, but he owes 900 plus.

The owner’s stake is he’s still got $100 in the pot, right? So if something happened and the supply of lemons [00:04:30] dried up and the prices went through the roof, why is it that we need some equity and skin in the game?

From a construction standpoint, for that lemonade stand, I mean, [00:04:40] why do bonding companies or banks care if there is skin in the game?

Stephen Brown: Because they’ve got to know that they can partner up with you. Banks [00:04:50] don’t want to lose money. They cannot lose their principal. They gotta make money on their interest.

Bonding companies don’t get paid if you don’t complete the [00:05:00] job. They have to pay out on bond claims then they lose money.

Remember in bonding, Wade, it’s not insurance. You’re not buying an insurance policy of protection. You’re buying a [00:05:10] guarantee from a big corporation that you’re gonna pay your bills and do your project exactly the way it is.

And I was thinking, skin in the game. My lemonade stand [00:05:20] kids across the street from me they have them every time they want money, they have it. And they have gotten better. They have their stand. They know who the easy mark is, [00:05:30] that’s me. And I’m number one, and they’ll run my car down.

They will run me down, “Mr. Brown, Mr. Brown.” I’m never gonna say no to them. And they’re [00:05:40] great salespeople. They are really energetic. There’s no way I can say no. But at the same time, I’ll taste their lemonade and they don’t care whether it tastes [00:05:50] good or not once they have my money.

Wade Carpenter: Maybe you got warranty work on that. But anyway, I mean, also I thought you were gonna say they got my credit card [00:06:00] for it, and I was like, “Okay, they really are getting…” But let’s just say, let’s say– 

Stephen Brown: I’m not financing them yet but

Wade Carpenter: Just let’s say we were financing, and so Bobby wants to buy a [00:06:10] shiny new stand and take out a loan to do that.

Things like profit history, they’ve invested heavily in this lemonade empire for this stand, and [00:06:20] now, you as the bank or you as the bonding company, why do they care about profit history? Do they actually stand to make that money back? Why is that? 

Stephen Brown: They want to know that you can produce the [00:06:30] lemonade, that you’ve done it before, and you’ve made money doing it. If we’re gonna stick to the lemonade analogy I think that’s as simple as it can be, isn’t it? 

Do you want [00:06:40] it to be more complicated? Because I mean, honestly, have you sold lemonade before? Have you made money selling lemonade? ” Oh I haven’t built this project before, and [00:06:50] we’re brand new to the business, but we have a lot of experience in this.”

Yeah, but it’s a brand new business and we have all these what ifs we’ve got to figure out.

What’s the thing that’s [00:07:00] gonna help you get over the hump? If you got some cash sitting there to help finance whatever’s gonna happen.

It’s like the bonding company says, “I don’t want to finance your mistakes and your [00:07:10] losses. You gotta have the working capital or the cash to be able to finance this risk that you’re taking on.

It’s not something we’re gonna undertake. We’re just [00:07:20] gonna say yes or no to your bond request.

Wade Carpenter: To me, I think it says, okay, if we saw every cup was losing money, would that instill [00:07:30] a little bit of hesitation on your part?

Stephen Brown: Yeah. I like your analogy. It doesn’t matter if you have 1,000 people waiting in line to buy your lemonade. If you sell it [00:07:40] for a dollar a cup and it costs you a $1.10 to produce, all those people in line are just costing you more and more money.

I loved it because it’s so [00:07:50] simple, but it is so true, Wade. It’s why we talk all the time about growth and sales going through the roof doesn’t necessarily equate to [00:08:00] profit.

Wade Carpenter: Well, and again, I know we’re getting a little silly with this one, but let’s just say, Sally and all the whole neighborhood said, ” we get our allowance once a month now.” [00:08:10] What’s the difference between profit and cash?

Maybe Bobby sold a whole bunch of lemonade, but he’s still waiting on Sally and the rest of them to get their allowance. From [00:08:20] Bobby’s standpoint, can he buy lemons with profit?

Stephen Brown: Can he buy lemons with promises?

Wade Carpenter: Yeah. 

Stephen Brown: Yeah.

Wade Carpenter: How does that translate to construction?

Stephen Brown: You [00:08:30] wonder who’s gonna bail them out there. They either get the lemons or they can’t sell lemonade.

Wade Carpenter: Well, taking that one a little further, let’s just say Bobby came to you for a loan [00:08:40] because he knows you got a fat wallet and, he’s chasing your car and he got your credit card, I guess now.

You know, let’s say he’s got a $1,000 contract for [00:08:50] lemonade, and he’s got all these people that is going to buy it, but he’s only sold just in our you know, Sally and the rest of them owes him a bunch of money, [00:09:00] but they’ve committed to doing that.

Okay we gave them a bill for this month and some of next month, so they’re overbilled. Does that make sense?

So in the construction [00:09:10] market, how does that translate to understanding revenue versus what you’ve billed, and how that truly affects your bonding [00:09:20] relationship and ability to get bonds based on overbilling or underbillings, either way?

Stephen Brown: That’s huge. When you under-bill a job, you’re not billing [00:09:30] for stuff that you’ve already had the cost for. And if you over-bill a job that’s good if you can get away with it. But then is that money gonna be there to buy more lemonade when [00:09:40] you need the cash to do it? Or have you taken that cash and done something else with it?

I love the whole analogy of the lemonade stand because I think to myself, okay, let’s just think [00:09:50] like a contractor, very simply. My lemonade stand, I use Country Time lemonade mix, okay? And I buy it in bulk from the Dollar General [00:10:00] store.

I sell it for a dollar, and I’ve advertised it, and people are coming in, and I go to buy some more supplies, and that price has gone up. And then the water I need to [00:10:10] mix to make the Country Time lemonade, you know, there’s a, problem at my house with the water supply. Then I gotta go buy bottled water to mix my lemonade, and I hadn’t planned on [00:10:20] that.

How would you relate that to the construction industry?

Wade Carpenter: Well, It’s the same thing as like, the overbilling. Okay, Bobby says “I got a contract for $1,500 worth of lemonade” but he tells you [00:10:30] he’s got 1,500, but he’s only really got billed $1,000. I don’t know.

Same thing with underbillings. We’ve earned some money, but Sally’s gonna [00:10:40] pay us Tuesday, but we haven’t reflected that in our lemonade stand general ledger.

Anyway, same kind of thing. Maybe now because the water had gotten bad and you’re using Country [00:10:50] Time knockoff brand from the Dollar General.

So Sally starts holding back 10%. It’s like, “I’m gonna make sure this lemonade’s really good before I pay you, [00:11:00] and if I get sick from your lemonade later, then…” I know we’re getting a little silly with this one, but that’s retainage here.

So how is that affecting Bobby’s cash flow? 

Stephen Brown: Yeah. [00:11:10] It’s just not allowing him to continue to operate a lemonade stand. And I can just stop for a minute and say I would hate to be your kid saying, “Dad, I want to open a lemonade [00:11:20] stand,” because the whole idea of open lemonade stand is get out of the house. Yeah, get out of my hair. Go do it.

Then you worry that they’re gonna be out in the middle of the street or you got to [00:11:30] look out the window, make sure they don’t get kidnapped. And then you got to take the time to explain to them the principles of business, the principles of how to [00:11:40] operate this business.

And so it seems like an easy way to get them out of the house, but it takes work, it takes planning, and it takes leadership.

And I’d say those [00:11:50] same things, when you think about it, not as the little kid operating the lemonade stand, but you think of it as the parent that lets the kids go operate that lemonade stand.

That’s all [00:12:00] we’re trying to do in the Contractor Success Forum is be those parents to help guide you to think the way you need to think about this.

I know right now if you needed some [00:12:10] great salespeople, I got some mercenaries across the street, and they’re relentless. 

Wade Carpenter: Let’s say those mercenaries They’re driving by and then you were putting on an event and [00:12:20] so you said, ” Okay, can you cater an event for 1,000 people?” And Bobby’s like, “Oh, yeah, I can do that.”

Stephen Brown: Absolutely, they would agree.

Wade Carpenter: Absolutely.” But what if [00:12:30] Bobby only has one pitcher and, he’s got to serve a wedding or something like that.

He’s like I’ve done that before Mr. Bond Brown, and we got the best lemonade and [00:12:40] all that stuff. I can definitely do 1,000.”

Tell me, Bobby, why should I care about your capacity or experience to do something like that for me? In the construction [00:12:50] industry, how does that relate?

Stephen Brown: It relates incredibly, the two go together. Because, “hey, think about it, Bobby. Last time I had your lemonade, [00:13:00] it just really wasn’t as good as the first time I had it. I know you heard I’m having a big party. I’d be open to letting you be the lemonade supplier, but how do I know it’s [00:13:10] gonna be what I expect it to be in order to pay you.”

From a contractor’s point of view, you know how restaurants cannot stay in business unless they offer the exact same [00:13:20] amount of quality that customers like and repeat it over and over again.

I just wanna take that lemonade analogy and tie it to construction. You want a project, you [00:13:30] want it to be perfect, i’m thinking of a ribbon-cutting on a big project that is literally buffed and polished.

There are generals and [00:13:40] bigwigs and everybody coming to look at this project. The floors are waxed and glistening. The windows are spotless. It’s never gonna look better than [00:13:50] it’s gonna be at this ribbon-cutting ceremony.

And that’s what you have to think about as a contractor. Am I putting out consistent, perfect product? Because that’s what everybody expects. [00:14:00] If you’re a subcontractor, that’s what your general contractors expect, and you gotta do it fast.

Wade Carpenter: Right. Again, I think a lot of that goes back to what really has to [00:14:10] change before you can do this bigger job. Whether it’s a lemonade stand or a contractor here.

But beyond that, I mean, let’s just say, the wedding’s now, [00:14:20] two hours away and you’re gonna need extra help and all that stuff. And then we’re gonna make you sign a contract that if you screw this up, you owe us damages or something like [00:14:30] that. 

Stephen Brown: Yeah. Okay, Bobby.

Wade Carpenter: Yeah. So Bobby–

Stephen Brown: Now is Bobby 18? Can he legally sign a contract at this point?

Wade Carpenter: No, he’s still what, seven? I [00:14:40] think–

Stephen Brown: So you gotta get the parents to sign the– 

Wade Carpenter: Well, I don’t know. Bobby’s an entrepreneur, so he’s pretty ambitious. But so maybe he’s got that and, he’s got another one across [00:14:50] the town that’s a $500 wedding, because now he’s done heard that Bond Brown has hired him. And he’s got some backlog going on.

The other one, they’re not [00:15:00] paying as much. What should Bobby be doing, looking at, like he’s got some backlog.

From a construction contractor standpoint, what does that mean, like looking at the upcoming work [00:15:10] to you?

Stephen Brown: What if the $500 commitment is not as good as the thousand dollar commitment looking right now to you?

And Bobby’s thinking I’ve [00:15:20] signed a contract for both of them, but 500 can wait because I’m gonna make more profit on the thousand dollar contract, or I can get paid faster.

Wade Carpenter: Let’s just say, [00:15:30] Bobby does that $1,000 contract, but he didn’t factor in having to get somebody to drive him a couple hours away and hire all these extra people to help him. All the ice [00:15:40] melted on the way, so he had to buy extra ice all that kind of stuff.

And that one job went wrong, and so he’s going back to you like, ” Mr. Bond Brown, please give me some more money.” [00:15:50] And you start looking at his profit fades. What happens in construction when the job costs more than expected?

Stephen Brown: Yeah. And also from a perspective of Bobby [00:16:00] saying, “Hey, I’m tired of stirring up this lemonade with my arm in a pickle bucket or paint bucket. I’m gonna buy a mixer to make it go faster.” And he’s [00:16:10] like I didn’t really plan the cost of this mixer into the future of my business.”

I think we could take this analogy and go on pretty much forever, couldn’t we?

Wade Carpenter: Maybe a little [00:16:20] bit. Those… One more point here that 

Stephen Brown: Yeah, no I want to stick to the points. I’m sorry

Wade Carpenter: We don’t necessarily have to, ’cause I think we’ve gone off the rails already on this one, but, Bobby, [00:16:30] you’re coming back to him and Bobby says here’s my ledger. This is what I wrote down.”

But Bobby wasn’t keeping really good track. And all of a sudden the money [00:16:40] starts missing. Bobby liked to go buy some baseball cards and I would say play pinball and stuff like that, but I don’t think people do that anymore. Go to the arcade or whatever.

But, he wasn’t [00:16:50] showing any profit. He didn’t have good records. He can say, “The stand is doing great,” but he’s not convincing anybody if he can’t show that he’s got a lot of [00:17:00] cash there.

Stephen Brown: Yeah.

Wade Carpenter: Maybe he can from you ’cause he, you– know,

you- He can open a cigar box and show you all that cash in there and tell you, “I’m doing great.” 

But he did run out [00:17:10] and buy a bunch of baseball cards and went to the candy store too. So it’s not in the box.

Stephen Brown: I think Bobby’s parents are gonna hold onto his allowance and [00:17:20] make him do extra chores for them to get reimbursed for their outlay of capital

Wade Carpenter: From a contractor standpoint, so Bobby was just keeping it in the cigar box, [00:17:30] but he took some out here and there and he couldn’t trace it now.

Same kind of thing for a contractor. Having reliable books, being able to find out where that money went and what [00:17:40] happened, why does that matter to a bond agent or a bank?

Stephen Brown: Well, from a banker’s standpoint, they’re gonna say, Bobby, I’m not gonna capitalize your business ventures anymore. And [00:17:50] furthermore, I’m gonna enforce my contract with you to reimburse me every penny I lent you, plus my lost profit, plus penalties,” and [00:18:00] so forth and so on.

And however you look at it Bobby’s gotta pay the piper at some time and learn his lesson about taking that money and buying the [00:18:10] baseball cards for example.

Okay, so this is a bummer. It doesn’t have to be that way. What if Bobby embraces what you’re saying? What if he [00:18:20] goes, “Okay, so I’ll go to school to learn how to read and write and do math, and I can get a piece of paper and start keeping track of these things, and it’ll help me [00:18:30] make more money.”

That’s just a great point, Wade. It’s so simple, isn’t it?

Good information means good decisions. Bad information means bad [00:18:40] decisions.

But I tell you what, Bobby’s a go-getter. He makes money. He keeps good books. What can I do? He wants to open five more lemonade stands.[00:18:50] 

Oh, he wants to open one in Texas. And another one in New Jersey. Heck, he makes tons of money. He knows what he’s doing. Yeah, I’ll roll the dice. Yeah, I’ll bond that new lemonade [00:19:00] stand for Bobby.

And I tell you what, the bank is making money on his expansion plans. Remember, banks don’t make money unless they charge you interest on the [00:19:10] money they lend you and you pay them back.

However you want to get that capital, Bobby, for all these stands you wanna open across the country, you might just [00:19:20] say, “Hey, man I’m moving this operation to California where I can grow my own lemons, or Florida. And then I gotta ship them to New Jersey,” however you look at [00:19:30] this scenario, remember that anybody that’s doing business with you wants to have confidence, and you have to measure it, and you have to show it, and it’s gotta be [00:19:40] there.

Wade, what’s the slogan of Carpenter & Company CPAs again?

Wade Carpenter: Well, We want you to build it. We want you to bill it. We want you to make sure you have [00:19:50] good books so that you can bank it, and then go bond it, right? So we’re gonna tack that part on there, right? 

Stephen Brown: yeah, and I appreciate the adding the bond at part in the back. But no [00:20:00] matter how you look at it build it, bill it, book it and bank it. I love it.

Wade Carpenter: And bond it.

Stephen Brown: Yeah. Same with Bobby and his lemonade stands.

Wade Carpenter: Hopefully Bobby learned some [00:20:10] lessons and Bobby doesn’t declare bankruptcy before age 10.

Anyway, I know a lot of these are simple little lessons, but the idea here, I think, you know, hopefully [00:20:20] resonates with our listeners is that, if any of these analogies made you think about why you need to pay attention to your working capital, your [00:20:30] equity, and not drain all the money out and focus on your profits and not the profit fades.

That’s what this is all about. The idea here is would you [00:20:40] bond your own company? And making it easier for Stephen, the bonding company, to say yes to what you wanna do. That’s exactly [00:20:50] what we’re going for here.

Stephen Brown: I like it, Wade. 

Wade Carpenter: Well, I know this has been a little silly, but hopefully there’s some lessons in there.

We appreciate you hanging out with us all this time. [00:21:00] If you’re still with us.

You know, If you would like, share, subscribe. It always helps us out. We do this every single week, and we will see you on the next show.