Lawn Care Blueprint: Lawn Care Retained Earnings That Build Stability

Ezra McCarthy

Welcome back to the lawn care blueprint. Today we’ve got another great episode coming to you about an important topic. So I’ll start with this question. What would happen if you stopped treating profit merely like a paycheck and started using it like fuel for your business and also for your future?

So today, Wena and I are going to unpack the power of one retained earnings and then something we probably don’t necessarily think about a whole lot, or maybe you do, IRAs, Roth IRAs, and how they can help build long term wealth for you, your future, and even your business while providing stability.

So those listening in, I know we’re trying to grow that lawn landscape business. We’re getting into the slower part of the year, but this is a good time to start thinking ahead and wondering, okay, what are some moves maybe we didn’t make this year, but we could start planning for next year to help our business.

So, Wena, let’s hop right in.

Wena

So this is an interesting topic for a lot of business owners, all of the business owners. What exactly are retained earnings and why do they matter for small business owners?

Ezra McCarthy

So this is a concept I kind of stole from the phrasing. I don’t know where Dave Ramsey got it, but Dave Ramsey talks a lot about retained earnings for business. Now, of course, I think all of us are familiar with a personal setting in having an emergency fund. So basically saying, hey, we want, if something happens, that we’re not strapped for just like $500, $1,000, whatever it is. And Dave Ramsey, he recommends oftentimes a three to six month emergency fund for personnel.

But here’s the thing, as we start growing in business, as our business starts to grow, we’ve got team members. We’ve got people that are relying on us. And all of us know, great team members are hard to come by. And so we can’t be hiring and laying off and just seesawing with our team member count. We need stability in our business. And so one way to help with that is to have retained earnings, or basically like an emergency fund for a business. And they matter a lot for small business owners.

And just the other day I was talking to a business owner and I was asking how they’re doing. They’re like, oh man, basically trying to pay off their taxes. Well, they hadn’t had a separate account obviously and saved enough all throughout the year, and then they got this monster tax bill. Now there’s some benefits to being self-employed and that’s you don’t have the government taking money every month. But the problem is at the end of the year, they’re going to want their share or what they think is their fair share.

And so unless we’re planning ahead of time for these taxes, and I guess that’s really besides retained earnings, but unless we’re, I would even recommend having a separate bank account. And I’m trying to remember, I believe it’s profit first by Michael McCowatts. He recommends having these separate bank accounts. And so if a certain amount comes in, we automatically allocate whatever is maybe 20% of taxes, maybe 30% depending on your bracket. Say, hey, 20%, I’m going to just write off the top, everything that comes in.

This week, I’ll just do round numbers to make it easy. So, hey, $1,000 came in this week, hopefully more than that, but we’re just using a round number. $1,000 came in, 20% to taxes. So right off the top, we take $200 and put in our tax fund. Let’s say, okay, expenses, whether that’s team members, whether that’s equipment, gas. I’m just throwing out numbers here at 40%. So we take that 40%, put another bank account. Retained earnings, say it’s 10%. We take that, put it in the account.

And then obviously your owner draws, et cetera. So what we’re doing is systematizing it. So it’s not like we got a bunch of money in the account. Hopefully you’re not there. Then we spend it, or if you’re not budgeting. And I’d recommend, I actually do this for our business. We have a bookkeeper that keeps track of it after the effect. But literally at the first of the month, I’ll literally make up a budget. It’s not what it’s made for, but I’ll use the budget app every dollar.

And then I’ll project out and I can say, okay, this is what we’re looking like we’re going to do in labor this month. This is what our projected expenses are. This is what we’re looking to do for marketing. Obviously there’s going to be some variables, but we’re planning out ahead so that I can look and say, okay, this is what we’re buying. Just recently we bought a new vehicle for the business, a decent expense, but we had planned out ahead. We had figured, okay, we don’t know where to buy it, but this is how we’re going to buy it. This is our plan, et cetera, et cetera. So we’re thinking ahead and this helps build long-term stability so we’re not two years down the road, our accounting is out of whack. We haven’t filed taxes and no one likes to be there.

So these retained earnings are really just zero-based budgeting ahead of time saying, hey, this is where every single dollar is going to go because you know our business is not like the federal government. We can’t just keep spending and spending and taxing other people. We have to have the money to spend it. I think most people listening in would realize that, but budgeting ahead of time, having that zero based budget. And then on top of that, just having that, maybe we describe it as that business aversion, see fund that retained earnings really is going to help take a lot of the bite out. Maybe we’re in the slower month and try to project ahead. And it really acts, we might describe it like a financial cushion.

I remember in grade school, I did a high jump where you’d have those two poles, then a pole through the middle. And then you jump over the pole and try to knock it over. And you land on this big, probably like two, two and a half foot thick cushion because you’re kind of sprawled out. And in business, we really need that cushion. We don’t want to be using razor thin margins, or if anything happens, we’re just toast. So this retained earnings, some of the savings helps to cover the slow seasons, or maybe there’s an emergency, there’s an accident. Maybe we all know how things are, maybe you break a window. Maybe a team member breaks a window, blows a rock into a window. I may or may not have done that on a door before.

So emergencies like that, what are you going to do if it’s, oh man, we have nothing in the account or behind on taxes, like no one wants to be there. And this really helps create peace of mind when the cash flow does dip because our businesses are seasonal. They’re not consistent all year long and except maybe you’re in Florida and there’s going to be some seasonality there. And it helps create confidence in our decision making as we’re thinking ahead, because we know, hey, we’ve got a plan. Things don’t have to go perfect 100% of the time or our business is going to die and no one wants to be there.

Wena

That’s the reality of every business owner. Cash flow might dip in a certain period of the year. So preparing for the season and having an umbrella fund is a good strategy. So what’s the difference between retained earnings and just having cash in the bank?

Ezra McCarthy

That’s a good differentiation here is some people say, well, I’ve got a couple thousand in the bank and that’s my retained earnings. Well, our retained earnings isn’t our cash flow. As we know, hopefully you’re tracking your bank account to know how much is in there over the month. And you know there’s certain times of the month, maybe the first of the month, there’s a quote unquote negative balance where more goes out at the first of the month, but then it evens out in the middle. And then there’s a flow, an inflow and outflow.

And obviously you’re not going to want to start the month at zero and end it at zero. You’re going to have to have some basically, we’ll call it, to play to even out the lumps in the middle of the month. And depending on how you’re doing your billing, if you’re doing biweekly, if you’re just doing it per service and cash is really just the liquid part, having cash in the bank. Hopefully you have several grand in there, it depends on the size of your business, just to kind of even out the lumps. And that’s going to depend on your business size. But retained earnings is not that, is not what I’m talking about.

Retained earnings is something separate that we don’t touch month over month in the normal ups and downs of a normal month besides even the seasonality of it. We know that, of course, there’s ebbs and flows even in the month. Like personally in our business, the beginning of the month is slower, the middle of the month it comes up, and then near the end it goes up as well. But the beginning is a little slower and we have more expenses there. So we have some consistency there in the checking to even out that. But we do have something that’s retained earnings that’s completely separate from our cash in the bank, just for expenses, for investments (including ways to invest in the business).

So we’ll get into that. So you may say, okay, we talked about retained earnings. How much should we retain? Looking at some different rules of thumb, I’ve seen some different examples. Some have said 20 to 30% of annual profit you should keep in retained earnings. Some have said, okay, three to six months. And it kind of depends on the stage of your business. I would say it depends. That’s something you’re going to have to sit down, think about your team members, how many you have, what’s your work situation, what your contracts are like, and really how much experience you’ve had.

But it’s really just enough, it’s supposed to be at least enough funds to grow or even survive just the down quarters because obviously these past five years with COVID, we’ve seen some crazy fluctuations. I know talking to some landscapers in some different areas of the country, some of them, they’re just still going gangbusters, they can’t get enough team members to fulfill the work, and then some, it’s just slow.

And so, realizing that things aren’t always going to be great, I remember every spring you feel like it’s going to be like this all year, work coming out of your ears. And then in the fall you wonder, is it like this every year? And I think we’ve all been through those ups and downs in the normal vicissitudes of our industry, but these retained earnings can really help.

Wena

How can retained earnings be used strategically for growth.

Ezra McCarthy

So it’s a great tool because if you ever went to go buy equipment, wow, is it expensive. And so having some retained earnings in the bank that we say, okay, maybe we’re going to upgrade our equipment, maybe our vehicles, maybe we’re going to do a wrap around our truck. Maybe we’re going to invest in a new trailer. All of these things, we got to have cash in the bank. And I don’t recommend using credit card debt, just being unwise, because you don’t want to be borrowing money, 15, 20% interest rate on a credit card. And obviously vehicle loans aren’t necessarily that.

You want to be wise with what you have. We want compounding to be working for us and not against us. Maybe you said, hey, we’re going to do some training. And so I realized that for the first couple months, this team member isn’t going to be as profitable as they could be. Maybe you’re saying, hey, we’re going to be funding some marketing, some search and optimization. Maybe we’re having to hire a head of growth rising that hey, our spring rush is three months, maybe up two months ahead.

We can’t wait to train someone in the middle. So we’re going to use some of our retained earnings to get them up to speed so that when time comes, we’re going to be ready and our team members are going to be up to speed.

Wena

What’s the danger of pulling out too much profit too soon?

Ezra McCarthy

This is something I see as well. The business is just strapped for cash. There’s no cash to invest. You haven’t set aside the money for taxes and you’re really starving the business of future growth, and illustrate like this. I remember my mom used to love lighting candles and well now I’m forgetting what it’s called, but there’s a little object that’s kind of like a circle that you can put on top of the flame that basically cuts off the oxygen and without blowing out the candle, you can literally just snuff it out by starving it of oxygen.

And growth requires cash because before we ever get the customer, we’re going to have to market, we’re going to have to do Google ads, LSA, you’re going to have to do market. And so we’re having to literally spend ahead of demand. We can’t wait until the business season and then say, well, I should have started three months ago, but I’m going to start now. No, we have to spend ahead. And so that’s just how it works.

And so growth requires cash. It requires cash for a new fertilization, a weed control truck. It requires a new landscaping truck, a new trailer, new equipment to hire that team member. And as we grow, we’re going to have to learn. So everything’s not going to be 100%. Our team members probably aren’t going to be optimized. We’re going to have to learn. And so the danger is we try to pull out too much profit too early and we starve the business of cash. And so retained earning is really part of the business stability. It helps give you confidence when you go to quote, to hire team members. And it really helps the business long term survive.

It’s really important as your business grows continually to add to that, just so you have some stability in the business. And so now I’d like to pivot a little bit into personal retained earnings, we might say, or two things that are really important. So one thing that I don’t hear a lot of people talking about, and of course the obligatory, this is not investment advice, you should do what you need to do, but something to that effect. You have to think for yourself here.

There’s something really important that most people don’t talk a whole lot about, and it’s personal investing. Now I’m not telling you what to invest in or where, but especially if you’re listening in, you’re growing, we know your business needs cash to survive, we just talked about not pulling out too much, but there’s something I don’t think many people do or really understand, the power of compounding personally.

So there’s something called a Roth IRA or traditional IRA. And this is something that’s really important. So you can put into, well, let’s first describe what they are. So let’s describe the difference between a Roth IRA and then traditional. So a traditional IRA is tax deferred. What that means is, and at this point in 2025, unless you’re over 55, I believe it’s $7,000 you can put per year into a traditional IRA. This is tax deferred. So you can pay into that now and whatever you put in there, you’re not going to get taxed on your rate, whether that’s 15, 20, 30, 35%. You don’t pay taxes on that until you withdraw it in retirement. And in that traditional IRA, you can invest into stocks, etc.

And then there’s a Roth IRA. Now what this is, is you’re paying taxes on it before you put it in there. But when you withdraw it and the interest, the compounding, you don’t have to pay taxes on it. And so this is something really important for small businesses because it’s crazy, the stats. Let’s do a comparison. Let’s give you some real numbers. Now you may say, okay, I don’t have a whole lot of money to put into a retirement account. And I don’t really know that it’s going to work anyway. And double check the statistics, but I believe that some place, somewhere around the numbers of since the 50s, the average annualized return for stock markets like SP 500 is between like 10 and 11%.

So I ran some numbers for you to give you an idea. So you said, okay, I don’t have a whole lot of money to invest, but I can put in $200 per month. Now you can hardly do much with $200 a month. So that really isn’t a whole lot. If you said, hey, for the next 30 years, I can invest $200 a month. At the end of 30 years at $200 a month, literally you cannot do anything with that. I don’t even know if it’s really a decent truck payment, like that’s nothing. $200 a month for 30 years. By the end of that after interest, that’s the power of compounding. You’ve had $560,000.

Now let’s say, hey, maybe you’re in your 20s and you said, hey, it’s going to be 40 years for me. For 40 years, if you invested $200 at an average analyzed return of 11%, that will be $1,720,000. You say, okay, well, 200 is not much. Let’s say you just did 500 for 30 years, you would have 1.4 million. You had 40 years at 500, that’s over $4 million. Now those numbers are pretty crazy. And so as business owners, I think we’re crazy not to say, hey, I’m going to set aside $200, $500. And if you can go to the max of like six, six something, then literally that right there, that small amount in the scheme of things. You just look at what you’re spending for gas each month, you just look at some of these bills we have as business owners, this small amount, the compounding is what’s insane.

Someone has said compounding is the eighth or seventh wonder of the world. And it really is. A Roth IRA or IRA is worth it. And the contribution limits for both of these in 2025 is 8,000 if you’re over 50. And so I would just work with someone and there’s something simple, just like Robinhood. You can get it set up in probably like 20 to 30 minutes and you can be investing. I just recommend some mutual funds, which are basically a bunch of companies. Think of it all in one. So your risk is spread out to whether you index funds, ETFs, mutual funds. It’s a set it and forget it sort of thing. You’re not having to think about it. You’re not having to watch it, but yet it compounds consistently. And then I’d encourage you to set as much as you can on autopay.

Set your deposit on autopay, set your investment. And so you can focus on growing the business, but you know I’ve got this set up. If something happens to me, my family’s taken care of, and it’s a great way to help provide for your future at a low cost. And I don’t hear a lot of people talking about that. I read through some of the numbers. Hopefully your eyes didn’t glaze over, but look at the numbers. Look at some of these charts on how little, if you add in over time, how it can help.

And there’s even some tax advantages to both of these. So for the Roth, it’s tax regrowth. So I talked about compounding and the benefits of that. Everything that you would withdraw is tax free and you’re taxed up front. Now the traditional IRA actually gives you a tax deduction upfront. Now once whatever you pull out after you’re 55 plus or it’s 60, 59 and half, you are taxed on that, but there’s benefits to each of those. I encourage you to do something. Start. If you have never even thought about it, go talk to someone who’s done it before, find out some more information, and read about it. As a business owner, we don’t have pensions, we don’t have these things to work on. So we’ve got to plan ahead. We’ve got to think, set clear targets, set a goal, and don’t neglect this side of the equation.

Wena

So connecting the two between business and personal wealth. How do retained earnings and retirement savings work together?

Ezra McCarthy

Yeah, it’s a great question, Wena, and we’ll divide it into two parts. Retained earnings for your business side is really, we’ll call it the growth engine for your business. You cannot have growth without cash. If you’re broke, you’re going to struggle to grow. Retirement, the IRA, the Roth IRA, whatever you choose to do, it’s kind of like a safety net for retirement in your old age, because as we know, we cannot rely on the government. Someone said some of the worst words to hear is I’m here from the government and I’m here to help. And that never ends well.

And so, one, you’re building stability in the business. And then the other, you’re building stability, personal for the long-term. And a lot of entrepreneurs really need help, maybe in their mindset to build this long-term freedom, because many people just think of it, they move from the owner just to pulling out all the income we can to spend. And unfortunately in our consumer culture to really build an asset, something that’s worth something. And so a business shouldn’t just be about making money, but it should be about making your money work for you.

And it’s really easy to think in months, especially with seasonal, or spring and then summer and then survive the winter and then survive the spring rush, whether we’re trying to help, our team members are growing. But instead, if we could start to think in terms of decades and not just months, it’ll really change our perspective and how we pursue our goals.

Wena

Nobody wants to be in survival mode, right? What are common mistakes owners make with profits?

Ezra McCarthy

Yeah, we talked some about this already, but a lot of the mistakes we see is spending all their profits on lifestyle. The dreaded lifestyle creeps in where our business makes more, but then we’re spending more and then there’s no more to invest in our team members. There’s no more to invest in our business, to upgrade equipment, marketing, et cetera. And one I see really frequently is neglecting tax planning. And then they’re failing to invest in their business. So I would encourage you to start implementing something today. Start a profit allocation plan or go read Michael Gerber’s book profit first.

Start putting in a certain number in retained earnings. If it’s not 10%, maybe it’s just two to start out and you say, well, that’s nothing. Well, it’s not. But it’s a start. And then say, hey, we need to consistently put X amount of taxes. Like they say, the only two things that are sure are death and taxes. And taxes normally come first. So plan for that. And then I would encourage you to put a certain amount of percentage wise into retirement and then automate it. You don’t want to think about it every time because then you’re going to have the time, not going to do it. Set it on auto and then forget it. And there’s going to be some great long-term impacts for these things. You’re going to feel a lot more financial peace. You’re going to feel independence and you’re going to feel business can thrive without the constant money stresses and a future where you can serve instead of just working all the time.

And so many people say, well, I’m doing this for my family, but then you’re not, you’re neglecting them and not taking time for them. So setting up ourselves through retained earnings, through retirement planning, I think this is a really necessary piece because every dollar your business earns should have a job. Some of them should be to grow the company. Some should be to secure your future, to secure the future of your team members. And while retained earnings will help them strengthen your business and a Roth IRA and IRAs can help safeguard your retirements.

So, let’s be sure to use it as a steward wisely. And hopefully you’ve got a lot of value from this episode. Something that I’ve really been thinking about lately is hopefully each one listening in has a CRM. We’ve been working with Jabber. It’s a great CRM for our team members. A lot of our customers use it. If you don’t know what Jabber is, maybe you say, hey, I don’t even know what a CRM is. What is a CRM, customer relationship manager? I’d encourage you to go to the link below in the podcast description.

Click that link there. Find out maybe the CRM. Maybe you’re on a certain unnamed CRM that keeps glitching and isn’t very good. You say, hey, I need something to actually send out the invoices once and not twice. Go check out Jabber and make sure to tell Green Frog and Ezra sent you and we’ll catch you on the next episode.