Laverton Advisory — Blog

AI Will Not Be Your Advantage for Long

2026-05-03T00:00:00Z

AI is not going to stay special.

Right now, plenty of business owners are treating AI like a secret weapon. That window will not last. Your competitors will use it. Your vendors will use it. Your customers will expect it. Your employees will bring it into the business whether you have a policy or not.

The question is not whether your company should use AI. It should.

The better question is this: where can AI help you make faster, cleaner, more profitable decisions than the company down the street?

That is where the advantage lives.

AI is becoming table stakes

Every business eventually gets access to the same basic tools.

Email used to be an edge. Then everyone had email. Cloud software used to be an edge. Then everyone moved to the cloud. Dashboards, online payments, CRM systems, mobile apps — same story.

AI is headed the same direction.

The first wave of advantage comes from simply using the tool. The second wave comes from using it better than everyone else. Most businesses will get stuck in the first wave. They will use AI to write emails, summarize meetings, clean up spreadsheets, and draft social posts.

That is fine. It saves time.

But time savings alone is not a strategy.

If ten competitors all save five hours a week using the same tools, nobody has built a moat. They have just raised the baseline for what normal productivity looks like.

The advantage is not the tool

The advantage is your process.

A good employee with bad data and unclear direction will still produce average work. AI is no different. If your pricing is messy, your job costing is late, your customer data is unreliable, and your chart of accounts looks like it was built by six different people over twelve years, AI will not magically fix that.

It will just help you move bad information faster.

Before a business owner asks, "How do we use AI?" I would rather ask:

What decisions are we making too slowly?

That is the practical starting point.

Are you slow to quote jobs? Slow to spot margin erosion? Slow to collect receivables? Slow to see labor overruns? Slow to understand which customers are worth keeping and which ones are draining the business?

AI should be pointed at real friction. Not novelty. Not demos. Not whatever software vendor gave the best webinar last week.

Start with decision points, not tasks

Most AI conversations start too low.

They start with tasks: write this, summarize that, build this report, draft this email.

Tasks matter, but owners should start one level higher. Look at the decisions that drive cash, margin, risk, and growth.

For a construction company, that might be estimating and job costing. If AI can help compare new bids against past projects, flag missing cost categories, and identify margin risk before the proposal goes out, that is useful.

For a manufacturer, it might be inventory planning, production scheduling, or customer profitability. If AI helps identify which SKUs tie up cash without earning their keep, that matters.

For an energy services business, it might be crew utilization, contract terms, or maintenance planning. If AI helps spot patterns in downtime or billing leakage, that can hit the bottom line.

For a real estate business, it might be lease review, operating expense trends, lender reporting, or property-level cash flow. AI can help organize the information, but management still has to decide what matters.

The goal is not to automate everything. The goal is to improve the decisions that move the business.

Your data will separate you from the pack

The businesses that get real value from AI will not be the ones with the most software. They will be the ones with the cleanest internal information.

That means customer history, job margins, vendor spend, payroll data, inventory records, equipment costs, payment trends, and operating metrics.

Most founder-led businesses already have this information somewhere. It is just scattered across accounting software, spreadsheets, email, project management tools, bank statements, and people's heads.

AI can help connect dots, but only if the dots exist and are reasonably accurate.

This is where owners need to be honest. If your financial reporting is always three weeks late, your project managers code costs inconsistently, and your sales team keeps customer notes in their own inboxes, AI will have a hard time producing anything useful.

Clean data is not an accounting preference. It is an operating advantage.

Use AI to tighten the feedback loop

The best operators learn faster than their competitors.

They quote a job, track performance, compare actual results to the estimate, learn what changed, and use that knowledge on the next bid. They do not wait until year-end to find out whether they made money.

AI can strengthen that loop.

It can help summarize project closeouts. It can find patterns in customer disputes. It can compare budget to actual results and flag outliers. It can scan contracts for unusual terms. It can turn messy notes into structured follow-up items. It can help management see weak signals earlier.

But there is a catch.

Someone still has to care about the feedback. Someone still has to ask the hard questions. Someone still has to change pricing, staffing, purchasing, collections, or customer terms when the data points in that direction.

AI can surface the issue. Leadership has to act.

Do not let AI become another shiny object

Founder-led businesses do not need an AI committee. They need a short list of practical use cases tied to money.

Start with three questions:

Where are we losing time?

Where are we losing margin?

Where are we making decisions with stale or incomplete information?

Pick one area. Build a simple workflow. Test it. Measure whether it improves speed, accuracy, cash flow, margin, or customer response time. If it does, expand it. If it does not, move on.

That is how this should work.

Not every process needs AI. Some need a better checklist. Some need cleaner accounting. Some need clearer accountability. Some need the owner to stop accepting bad habits because "that is how we have always done it."

AI is powerful, but it is not a substitute for management.

Where Laverton Advisory can help

This is where my work goes beyond traditional CFO services.

A traditional CFO can help with reporting, budgeting, forecasting, cash flow, and financial discipline. Those still matter. But for a founder-led business, the bigger opportunity is connecting the financial picture to what is actually happening in the field, on the shop floor, in the project pipeline, and across the customer base.

That requires more than a monthly financial package.

At Laverton Advisory, I help business owners use technology, analytics, and practical financial leadership to tie the big picture to operational insights. That can mean building better dashboards, cleaning up management reporting, identifying margin leaks, improving job or customer profitability analysis, and using AI-supported workflows where they make sense.

The goal is not to look more sophisticated. The goal is to run the business better.

When finance, operations, and data are connected, owners can see what is working, what is slipping, and where profit is hiding. That is where better decisions get made. That is where AI becomes useful. And that is where the business starts to create a real advantage.

The CFO view

From a CFO seat, I would not ask whether AI sounds impressive. I would ask whether it improves the economics of the business.

Does it help you quote faster without giving away margin?

Does it help you collect cash sooner?

Does it reduce rework?

Does it improve labor planning?

Does it help you see customer profitability more clearly?

Does it reduce the amount of time skilled people spend cleaning up avoidable messes?

Those are the questions that matter.

AI will become part of the normal business toolkit. The companies that win will not be the ones that merely adopt it. They will be the ones that combine AI with clean data, disciplined processes, and management willing to act on what the numbers show.

That is how you create an edge after everyone has the same tool.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

What Does a Fractional CFO Actually Cost vs. What They Actually Save?

2026-04-16T00:00:00Z

Most business owners ask the wrong question first.

They ask, "What does a fractional CFO cost?" That matters, but it is not the decision. The real question is whether the value is bigger than the fee. In a healthy business, it usually is. In a stressed business, it can be obvious within a quarter.

A fractional CFO is not a bookkeeper with a nicer title. It is not a part-time controller either. You are paying for judgment, financial structure, cash discipline, and someone who can help you make better decisions before small problems turn into expensive ones.

What a fractional CFO usually costs

Most founder-led businesses are not hiring a fractional CFO for forty hours a week. They are buying a set amount of senior financial leadership each month.

In the Houston market, most fractional CFO work lands in a practical middle range: a fixed monthly fee, often somewhere between a few thousand dollars and low five figures, depending on complexity, pace, and how much cleanup is needed at the start. A straightforward company with clean books, steady operations, and a narrow need may be at the low end. A company with job costing issues, lender reporting pressure, margin problems, or multiple entities will be higher.

That number can feel expensive until you compare it to the alternatives. A full-time CFO salary, payroll taxes, bonuses, benefits, and recruiting cost can easily put you well into six figures before you get a real return. Most lower middle-market businesses do not need that level of overhead every day. They need the thinking, the process, and the accountability.

That is what the fractional model solves. You get senior-level financial leadership without paying for idle capacity.

Why owners misjudge the return

Most owners look for savings in the wrong places. They expect a fractional CFO to "cut costs" like a purchasing manager or negotiate every vendor contract personally. That can happen, but it is not the main value.

The bigger savings usually come from avoiding expensive mistakes and tightening the basic financial engine of the business.

A fractional CFO often pays for themselves by improving pricing discipline, tightening collections, fixing forecasting, reducing avoidable borrowing, cleaning up inventory decisions, catching margin leaks, and helping the owner stop making cash decisions off instinct alone. None of that sounds flashy. All of it hits the bank account.

Where the actual savings show up

Start with cash flow. A business can show profit on paper and still run short on cash because receivables are slow, inventory is too heavy, or billing is sloppy. A good CFO sees that early. If they help you collect cash fifteen days faster on a $4 million business, the improvement is not theoretical. It changes how much working capital you need and how much interest you pay.

Next is pricing and margin. A lot of companies in energy services, construction, manufacturing, and real estate are underpricing work without realizing it. Not because they are careless, but because labor burden, equipment costs, rework, and overhead are not fully showing up in the numbers they use to quote jobs. One or two points of margin improvement can be worth far more than the monthly CFO fee.

Then there is decision quality. Should you buy equipment or lease it? Hire now or wait? Take on that big customer with ugly payment terms? Expand into a second location? Owners make these decisions every month. Bad calls here are expensive. A fractional CFO helps you run the math before you commit.

A simple way to think about ROI

Let's keep it plain.

Assume a business pays $6,000 a month for fractional CFO support. That is $72,000 a year.

Now assume that work helps the business do just four things:

improve gross margin by 1% on $5 million of revenue = $50,000
reduce interest and emergency borrowing costs by $15,000
prevent one bad hire, bad equipment buy, or bad contract decision = $20,000
improve collections enough to avoid one serious cash crunch = value varies, but easily $25,000 or more in financing pressure, distraction, and owner stress

That is already $110,000 in value, and that is a conservative case. In many businesses, the payoff is much bigger because the starting point is messier than the owner thinks.

When a fractional CFO is worth it

Not every company needs one.

If your books are clean, cash is strong, margins are stable, your controller is sharp, and you already have reliable reporting and forecasting, you may not need CFO support right now.

But if you are growing, borrowing, bidding jobs, managing uneven cash flow, carrying inventory, dealing with multiple entities, or making major decisions without timely numbers, you probably do.

The right time to bring in a fractional CFO is usually before the pain becomes obvious. Once payroll feels tight, the line of credit is always maxed, or tax surprises keep showing up, the business is already paying for weak financial leadership. It is just paying for it in hidden ways.

The better question to ask

Do not ask, "Can I afford a fractional CFO?"

Ask, "What is it costing me to run without one?"

That is the number that matters. For a lot of founder-led businesses, the real cost is not the fee. It is the missed margin, the bad timing, the weak forecast, the slow collections, and the expensive decisions that nobody challenged soon enough.

A good fractional CFO does not just hand you reports. They help you protect cash, improve decisions, and keep more of what your business already earns.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory LLC. He works with founder-led businesses in energy, manufacturing, construction, and real estate to build the financial clarity they need to make better decisions.

Tax Strategies Only a CFO Would Catch: Worth $40K to $150K Per Year

2026-03-27T00:00:00Z

Your CPA is good at what they do. They file accurate returns, keep you compliant, and answer your questions every April. But here's the problem: they see your business once a year, after everything has already happened. The biggest tax decisions aren't made in March — they're made in real-time, embedded in how you structure deals, time income, and deploy capital.

That's where a CFO pays for themselves several times over.

The timing problem with traditional tax planning

Most business owners treat taxes like a rearview mirror exercise. The year ends, you hand over your books, and your CPA tells you what you owe. By then, the decisions that actually drive your tax bill — when you invoiced that big project, how you structured that equipment purchase, whether you accelerated or deferred certain expenses — are locked in.

A CFO watching the numbers month-to-month can see opportunities before they close. In Q3, not Q1 of the following year.

I worked with a construction company owner who had a $600K equipment purchase planned for January. By pulling it into December and using Section 179, we moved $150K of tax liability into a year where his income was significantly higher. His CPA would have caught that — in February, when it was too late.

Three strategies that require real-time visibility

Cost segregation on real estate. If you own commercial property or are building out facilities, a cost segregation study can accelerate depreciation dramatically. But the ROI depends on your current income situation, your plans for the property, and how the bonus depreciation rules apply to your specific timeline. A CPA running the numbers after close won't have the context to optimize this. Last year, a manufacturing client saved $87K by timing a cost seg study with a high-income year.

R&D tax credits in non-obvious places. Most business owners think R&D credits are for tech companies. They're not. If you're developing new processes, improving manufacturing efficiency, or engineering custom solutions for clients — you likely qualify. Energy services companies routinely miss $30K–$80K in annual credits because nobody's looking at their project work through that lens.

Entity structure and income allocation. The difference between running everything through one S-corp versus splitting operations across entities can be six figures over time. But it's not a set-it-and-forget-it decision. As your revenue mix changes, as you add partners or investors, as you acquire assets — the optimal structure shifts. This needs quarterly attention, not annual review.

The compounding effect of proactive decisions

Tax savings aren't just about this year's bill. $75K saved in 2026, reinvested in the business, compounds. Over a decade, the difference between reactive and proactive tax planning can be $500K or more in retained capital.

The math is simple but the execution isn't. It requires someone who understands both the tax code and your business operations — and who's watching the numbers frequently enough to act when opportunities emerge.

This isn't about being aggressive or bending rules. It's about not leaving legitimate money on the table because nobody connected the dots between your operational decisions and their tax implications.

Where to start

Pull your last three tax returns and your current year-to-date financials. Look at your largest expenses and income items. Ask yourself: did anyone discuss the timing of these with you before they happened, or just report them afterward?

If the answer is "afterward," you're likely leaving real money behind.

At Laverton Advisory, this is core to what I do with clients — not replacing your CPA, but adding the real-time financial visibility that turns tax planning from an annual event into an ongoing advantage.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

Why Service Businesses Fail at Cost Tracking (And What to Track Instead)

2026-03-25T00:00:00Z

Every service business owner I work with can tell me their monthly rent, their insurance costs, their software subscriptions. They've got expense tracking down. What they can't tell me is why a $2 million revenue year left them with $80,000 in profit instead of $300,000.

The problem isn't that they're bad at tracking costs. It's that they're tracking the wrong things.

The expense trap

Service businesses don't fail because of runaway expenses. They fail because of invisible leakage in how they deliver work.

A construction management firm I worked with had immaculate expense reports. Every receipt categorized. Every vendor payment logged. They could tell you to the penny what they spent on truck maintenance last quarter.

But they had no idea that their project managers were spending 35% of their time on non-billable administrative work. That single blind spot was costing them $400,000 a year in unrealized revenue.

Expenses are easy to track because they show up on statements. The real cost drivers in a service business—time allocation, scope creep, pricing mismatches—don't send you invoices.

What actually drives service business profitability

Three metrics matter more than your expense line items:

Billable efficiency ratio. What percentage of your team's paid hours actually generate revenue? Most service businesses assume it's 75-80%. When we measure it, it's usually 55-65%. That 15-point gap represents hundreds of thousands in lost margin.

Effective hourly rate by client. Not your quoted rate—your actual rate after scope creep, rework, and "quick questions" that turn into two-hour calls. I've seen firms with $200/hour quoted rates earning $85/hour effective on their largest clients. Those relationships feel valuable because of top-line revenue, but they're destroying margin.

Cost of delivery variance. What did you estimate a project would cost to deliver versus what it actually cost? Track this by project type, by client, by project manager. Patterns emerge fast. One engineering firm discovered their municipal contracts consistently ran 40% over internal budget—not because of bad estimating, but because of approval delays they weren't pricing for.

Building the tracking system

You don't need expensive software. You need discipline around four weekly data points:

Hours logged by team member, by client, by billing status (billable/non-billable/administrative)
Revenue recognized that week by client
Any scope changes or client requests outside original agreement
Project completion percentage versus budget consumed

Most teams push back on time tracking. They see it as micromanagement. Reframe it: you're not tracking time to monitor people. You're tracking time to understand which work actually makes money.

One environmental consulting firm resisted detailed time tracking for years. Within 60 days of implementing it, they discovered that 28% of their hours went to three clients who represented 12% of revenue. They restructured those relationships—raised rates, tightened scope definitions—and added $180,000 to annual profit without adding a single new client.

The pricing connection

Cost tracking only matters if it changes decisions. The most important decision it should inform is pricing.

When you know your true cost of delivery by service type and client type, you stop guessing on proposals. You stop saying yes to work that feels busy but loses money. You start building pricing models based on what actually happens, not what you hope will happen.

This is where service businesses graduate from surviving to scaling. You can't grow profitably if you don't know which work is profitable.

Where to start

Pull your last ten completed projects. For each one, calculate total hours spent (be honest—include the follow-up calls, the revisions, the internal meetings) divided into total revenue collected. That's your effective hourly rate per project.

Rank them. The spread will surprise you. That ranking is your starting point for every pricing and client selection decision going forward.

If you want help building a cost tracking system that actually connects to profit, that's the work we do at Laverton Advisory.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

Owner Distributions vs. W-2 Wages: The $50,000 Question Most Owners Miss

2026-02-26T00:00:00Z

Every S-corp owner faces the same question: how much should I pay myself in W-2 wages versus taking the rest as distributions? Get it wrong, and you're either leaving money on the table or inviting an IRS audit. I see owners miss this by $50,000 or more every year—sometimes in both directions.

The basics (because your buddy at the golf course got this wrong)

S-corp distributions aren't subject to self-employment tax. W-2 wages are subject to payroll taxes. So the instinct is to minimize wages and maximize distributions.

Here's the problem: the IRS requires you to pay yourself "reasonable compensation" before taking distributions. There's no bright-line test for what's reasonable, but there are factors they look at—your role, the hours you work, what similar positions pay in your market, and how much revenue the business generates.

A $2 million revenue construction company owner paying himself $40,000 in W-2 wages? That's going to draw scrutiny. The IRS knows a project manager at a similar company makes $90,000+, and you're doing that job plus running the business.

The math that matters

Let's say you're trying to decide between $80,000 and $150,000 in W-2 wages, with the rest coming as distributions.

At $80,000 in wages, you're paying roughly $12,240 in combined payroll taxes (employer and employee share of Social Security and Medicare). Everything above that comes out as distributions with no additional payroll tax.

At $150,000 in wages, you're paying roughly $17,685 in payroll taxes. That's about $5,445 more per year.

So you should go with $80,000, right? Not necessarily.

Here's what gets missed: W-2 wages affect your qualified business income (QBI) deduction, your ability to contribute to retirement accounts, and your Social Security benefits down the road. A $150,000 salary lets you contribute up to $69,000 to a solo 401(k) in 2024 (with catch-up contributions if you're over 50). An $80,000 salary maxes out around $46,000.

That extra $23,000 in retirement contributions at a 32% marginal rate saves you $7,360 in income taxes—which more than offsets the additional payroll tax.

Where owners actually get burned

The real damage happens in two scenarios:

Scenario 1: Salary too low, audit risk too high. I worked with an oilfield services owner who'd been paying himself $48,000 for five years while the company did $3-4 million in revenue. His accountant never pushed back. When he went to sell the business, the buyer's diligence team flagged it immediately. The buyer adjusted EBITDA down by $120,000 annually to reflect "normalized" owner compensation—which cut his sale price by nearly $500,000.

Scenario 2: Salary set and forgotten. Your reasonable compensation changes as your business grows. The right salary when you're doing $800,000 in revenue isn't the right salary at $2.5 million. Most owners set their W-2 wages once and never revisit it. Five years later, they're either overpaying taxes or sitting on audit risk they don't even know about.

The framework I use with clients

Start with market data. What would you pay someone to do your job—not as an owner, but as an employee? Use salary surveys, job postings, and industry benchmarks. For most owner-operators in construction, manufacturing, or energy services, this lands between $100,000 and $200,000 depending on company size and complexity.

Then layer in the tax planning. How much do you want to contribute to retirement accounts? Are you maximizing the QBI deduction? What's your overall marginal rate?

The target isn't "lowest possible salary." The target is the salary that minimizes your total tax burden while keeping you defensible with the IRS. Those aren't always the same number.

Where to start

Pull your W-2 from last year and your Schedule K-1. Compare your wages to what a similar role pays in your market—spend 15 minutes on Indeed or LinkedIn for your area. If there's a gap of more than 20%, it's worth a conversation with someone who can run the full analysis.

At Laverton Advisory, this is one of the first things I look at with new clients. It's not glamorous work, but it's often worth $10,000-20,000 per year in tax savings or risk reduction.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

The Entrepreneur Playbook: Bookkeeper, Then CPA, Then CFO (In That Order)

2026-02-12T00:00:00Z

I talk to founders all the time who want to hire a fractional CFO when what they actually need is a bookkeeper. It's like hiring an architect when you don't have a foundation poured yet. You're paying premium rates for someone to tell you they can't help until the basics are in place.

The financial team you build matters. But the order you build it matters more.

Stage 1: The bookkeeper (revenue $0–$2M)

Your first financial hire should be a bookkeeper. Full stop.

A good bookkeeper does three things: records transactions accurately, reconciles accounts monthly, and keeps your books clean enough that someone else can actually use them. That's it. And that's everything.

Cost: $500–$2,000/month depending on transaction volume and complexity.

Most founders try to do this themselves for too long. You're not saving money — you're creating a mess that costs more to fix later. I've seen $15,000 cleanup projects that could have been avoided with a $750/month bookkeeper from day one.

The test for whether you need to move to stage two: Can you produce accurate financial statements within 10 days of month-end? If yes, you're ready. If your bookkeeper is also doing your taxes, preparing financial reports, and advising on business decisions, you've already blurred the lines.

Stage 2: The CPA (revenue $1M–$5M)

Once your books are clean, you need someone focused on compliance and tax strategy. That's your CPA.

A CPA handles tax planning, tax preparation, and keeps you out of trouble with the IRS and state agencies. They'll also review your bookkeeper's work — a second set of professional eyes that catches errors before they compound.

Cost: $5,000–$25,000/year depending on entity complexity and state filings.

The mistake I see here: founders treating their CPA like a CFO. Your CPA can tell you how to minimize taxes on the business you're running. They generally can't tell you whether to take that $2M contract, how to structure the deal, or what your cash position needs to be six months from now to fund the growth.

Different job. Different skillset.

Stage 3: The CFO (revenue $3M+)

Now we're talking strategy. A CFO — fractional or full-time — focuses on forward-looking financial decisions.

This means cash flow forecasting, scenario planning, capital structure, banking relationships, and the financial models that help you decide between competing opportunities. A CFO answers "what should we do?" not "what did we do?"

Cost: $3,000–$10,000/month for fractional, $150K–$300K+ for full-time.

You need a CFO when decisions get expensive enough that being wrong costs more than the CFO. A construction company deciding whether to bond a $5M project needs different analysis than reviewing last quarter's P&L. An energy services firm negotiating a line of credit needs someone who speaks banker.

The foundation matters though. I've walked into engagements where the books were 18 months behind and riddled with errors. Before I can model anything, we're spending the first three months on cleanup that should have been handled at stage one.

The overlap zones

These stages aren't perfectly sequential — there's overlap.

A $2.5M manufacturing company might have a bookkeeper, use a CPA for taxes, and bring in a fractional CFO quarterly for strategic planning sessions. A $4M real estate portfolio might need all three working in parallel.

The key is understanding what each role does and not paying CFO rates for bookkeeping work or expecting CPA-level tax strategy from your bookkeeper.

A simple test: If you're paying someone more than $200/hour to categorize expenses, something is wrong with your structure.

Where to start

Look at your current setup. Who's doing what? Are you paying the right rates for the right work?

If your books are a mess, start there. Find a bookkeeper who specializes in your industry — construction, energy, and real estate all have specific chart of accounts needs that a generalist might miss.

If your books are clean but you're flying blind on cash and strategy, it might be time for CFO-level support. At Laverton Advisory, I work with founders who've already built the foundation — they just need someone to help them see around corners.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

Debt Service Coverage Ratio: The One Metric Lenders Won't Let You Ignore

2026-01-17T00:00:00Z

You can have $10 million in revenue, a profitable P&L, and a decade of operating history. If your debt service coverage ratio falls below the bank's threshold, you're not getting that loan. DSCR is the metric that separates businesses that can borrow from businesses that can't—and most owners don't think about it until they're sitting across from a lender hearing "no."

What DSCR actually measures

The formula is simple: Net Operating Income ÷ Total Debt Service = DSCR

Net operating income is your EBITDA (or a variation of it, depending on the lender). Total debt service is all principal and interest payments on your debt for the period.

A DSCR of 1.0 means you generate exactly enough cash to cover your debt payments. Nothing left over. No margin for error.

Most lenders want to see 1.20 to 1.35 minimum, depending on the industry and loan type. Commercial real estate loans often require 1.25. Equipment financing might accept 1.15. SBA loans typically want 1.15 or higher.

That spread matters. A 1.25 DSCR means for every $1.00 in debt payments, you're generating $1.25 in operating cash flow. That extra $0.25 is the cushion that lets lenders sleep at night.

Why banks obsess over this number

Revenue doesn't repay loans. Profit on paper doesn't repay loans. Cash flow repays loans.

DSCR strips away the noise and answers one question: Can this business actually make the payments?

A construction company might show $500,000 in net income, but if they're carrying heavy equipment debt and a line of credit, that profit might not translate to enough cash to service everything. DSCR exposes that gap.

Banks also use DSCR covenants in loan agreements. You might close the loan with a 1.30 DSCR, but the covenant requires you to maintain 1.15 going forward. Drop below that, and you're in technical default—even if you've never missed a payment. That gives the bank leverage to renegotiate terms, demand additional collateral, or accelerate the loan.

How to calculate yours before the bank does

Pull your trailing twelve months of financials and work through this:

Calculate Net Operating Income: Start with EBITDA. Some lenders add back owner compensation above market rate, one-time expenses, or non-cash charges. Ask your lender how they calculate it—they'll tell you.
Total up Annual Debt Service: Every loan payment, every lease payment (if it's a capital lease), every line of credit with required monthly payments. Principal plus interest, annualized.
Divide: NOI ÷ Debt Service = DSCR

Here's a real example: A manufacturing company has $1.2 million in EBITDA. They're carrying $650,000 in annual debt service across equipment loans and a term note. Their DSCR is 1.85—healthy, with room to take on additional debt if needed.

Compare that to a real estate investor with $180,000 in NOI and $160,000 in mortgage payments. Their DSCR is 1.125—barely above the threshold. One bad quarter, one vacancy, and they're in covenant trouble.

What to do when your DSCR falls short

If you're below the threshold, you have three levers:

Increase net operating income. This is the hard one, but it's the real fix. Better margins, more volume, cutting overhead. Every dollar of EBITDA improvement flows directly to DSCR.

Reduce debt service. Refinance to extend terms, negotiate lower rates, or pay down principal to reduce required payments. A $500,000 loan over 5 years requires more annual debt service than the same loan over 7 years.

Time the measurement. If you're applying for a loan during a down quarter, wait if you can. DSCR is calculated on trailing performance—a few strong months can move the needle.

Some lenders will also accept a global DSCR that includes owner income outside the business, or they'll look at projections for newer companies. But those conversations go better when you know your numbers cold before walking in.

Where to start

Run your DSCR calculation today, even if you're not applying for a loan. Know where you stand, know what's dragging it down, and know what it would take to improve it. When opportunity shows up—a competitor's assets for sale, a real estate deal, new equipment—you'll already know whether the financing is realistic.

At Laverton Advisory, we help business owners understand their numbers before they matter most. If you want to know where you stand with lenders, that's a conversation worth having.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

Net Income, Earnings, and Profit: What's the Actual Difference?

2026-01-04T00:00:00Z

Business owners hear these terms thrown around constantly—net income, earnings, profit—and reasonably assume they mean different things. Accountants use them. Bankers use them. Your bookkeeper uses them. The short answer: they're usually the same number. The longer answer is where it gets useful.

The terms are (mostly) interchangeable

Net income, earnings, and profit all refer to what's left after you subtract all expenses from all revenue. On your income statement, the bottom line. The number that shows whether you actually made money.

When your CPA says "net income was $340,000," your banker says "earnings of $340,000," and you tell your spouse "we made $340,000 in profit"—you're all talking about the same thing.

The IRS doesn't care which word you use. Neither does your P&L. These terms evolved from different contexts (accounting standards, Wall Street, everyday English), but they landed in the same place.

The problem is the word "profit" by itself

Here's where owners get burned. "Profit" without a modifier can mean almost anything.

Gross profit: Revenue minus cost of goods sold. A contractor with $2M in revenue and $1.4M in direct job costs has $600K in gross profit—before paying a single overhead expense.
Operating profit: Gross profit minus overhead (rent, salaries, insurance, office costs). This is your profit from actually running the business.
Net profit: Operating profit minus interest, taxes, and any one-time items. The true bottom line.

When someone tells you their business "made $500K in profit," you have no idea what that means. Gross profit? Operating profit? Net? A subcontractor might quote gross profit because it sounds impressive. A business broker might quote EBITDA (earnings before interest, taxes, depreciation, and amortization) because it inflates the number for a sale.

Always ask: profit before or after what?

When the distinctions actually matter

For day-to-day decisions, net income is usually what you care about. It's the number that determines how much cash you can actually distribute, reinvest, or use to pay down debt.

But there are moments when the other numbers matter more:

Pricing and estimating: Gross profit margin tells you whether your jobs are priced correctly. If your gross margin is 25% but your overhead requires 30%, no amount of volume fixes that. You'll net-income yourself into bankruptcy.

Operational efficiency: Operating profit isolates how well you're running the business, separate from your financing decisions or tax situation. Two identical companies with different debt loads will have different net incomes but similar operating profits.

Selling your business: Buyers typically value companies on some version of adjusted EBITDA or seller's discretionary earnings. They're trying to see what the business earns independent of your specific debt, your specific tax elections, and your specific owner compensation. Net income isn't the number they'll multiply.

Banking relationships: Lenders often look at EBITDA for covenant calculations, not net income. A covenant that requires "debt to EBITDA below 3x" doesn't care about your depreciation expense or interest payments—those get added back.

The real issue: know which number you're looking at

I've seen owners make decisions based on numbers they didn't fully understand. A manufacturing client once celebrated "record profits" while cash was disappearing. They were looking at gross profit while ignoring that overhead had ballooned. Another owner turned down a good acquisition offer because the buyer's "lowball" EBITDA multiple actually translated to a strong price—he just didn't know how to convert between metrics.

The fix isn't memorizing accounting definitions. It's building the habit of asking one question: what's included and what's excluded from this number?

Where to start

Pull your most recent income statement. Find gross profit, operating income (or operating profit), and net income. If those three lines aren't clearly labeled, that's a conversation to have with whoever prepares your financials.

At Laverton Advisory, this is part of the baseline work we do with every client—making sure the numbers you're looking at actually mean what you think they mean.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

The Hidden Costs of PE Ownership: What Founders Don't See Until It's Too Late

2025-09-25T00:00:00Z

You sold 60% of your company to a private equity firm. The headline number looked great. The growth capital seemed like exactly what you needed. Then the invoices started arriving.

Most founders focus on valuation and deal structure during negotiations. That's understandable—those numbers are big and obvious. But the ongoing costs of PE ownership often surprise founders who didn't read the fine print carefully enough, or who assumed "standard terms" meant "reasonable terms."

The management fee drain

Most PE firms charge an annual management fee, typically 1.5-2% of committed capital. On a $20 million investment, that's $300,000-$400,000 per year flowing out of your company to the fund—regardless of whether they're adding value that year.

This fee exists on top of any board compensation, consulting arrangements, or "strategic advisory" fees the deal documents might include. I've seen situations where the total annual cost to the company exceeded $600,000 before the PE firm did anything beyond showing up to quarterly board meetings.

The math gets uncomfortable fast. If your business runs at 10% net margins, you need $6 million in additional revenue just to cover those fees. That's not growth capital working for you—that's growth capital paying for itself.

Transaction costs you absorb

Here's one that catches founders off guard: you're probably paying for both sides of the deal.

The PE firm's legal fees, due diligence costs, accounting reviews, and transaction advisory fees often get charged back to the company at closing. On a middle-market deal, this can easily run $500,000-$1.5 million. That money comes out of your proceeds or gets added to the company's debt—either way, it's your problem.

Then there's the refinancing. PE firms typically restructure the company's debt at closing, which means new loan origination fees, legal costs, and sometimes prepayment penalties on existing facilities. Another $100,000-$300,000 that wasn't in your mental model of the deal economics.

The monitoring overhead

PE ownership changes how you run your business operationally. Not always badly—but always expensively.

Expect to spend significantly more on financial reporting, audits, and compliance. Most PE firms require audited financials, quarterly reporting packages, and detailed KPI tracking that goes well beyond what a founder-led business typically produces. If you don't have a strong finance function, you'll need to build one—or outsource it at premium rates.

Board meetings become productions. Materials need to be prepared weeks in advance. Management spends days getting ready for each session. The opportunity cost of your leadership team's time is real, even if it doesn't show up on an invoice.

I've worked with companies where the CFO estimated 15-20% of their time went to PE-related reporting and communication that didn't exist before the transaction. That's a meaningful productivity hit on one of your most expensive employees.

The exit pressure costs

PE firms have fund timelines. They need to return capital to their investors within a defined window, usually 5-7 years. This creates pressure that shows up in unexpected ways.

You might be pushed toward acquisitions that don't make strategic sense but do make the company look more attractive for exit. You might underinvest in R&D or maintenance capex because it hurts short-term EBITDA. You might lose good employees who don't want to stick around for the uncertainty of another ownership transition.

These costs are hard to quantify, but they're real. The decisions you make under exit pressure often aren't the decisions you'd make if you were building for the long term.

Where to start

If you're considering a PE transaction, model the total cost of ownership, not just the headline valuation. Ask for specific numbers on management fees, transaction cost allocation, and expected reporting requirements. Build those into your financial projections and see if the deal still makes sense.

If you're already PE-owned and feeling squeezed, you're not alone. Understanding exactly where the money goes is the first step toward having productive conversations with your board about what's actually sustainable.

At Laverton Advisory, I help founders think through these economics before they sign—and navigate them after they do. Sometimes the deal is still worth doing. But you should know what you're signing up for.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

Working Capital Ratios Every Owner Should Monitor Monthly (Not Quarterly)

2025-09-01T00:00:00Z

Most business owners look at working capital when their accountant sends quarterly financials. By then, a cash crunch that started in February shows up in April reports—and you've already been scrambling for two months without knowing why.

Working capital problems don't announce themselves. They compound quietly. A customer stretches payment terms from 30 to 45 days. Your best supplier tightens theirs from 30 to 15. Inventory sits a little longer. None of these feel urgent in isolation. Together, they drain $200K from your operating cash in 90 days.

Monthly tracking catches these shifts while you can still do something about them.

The four ratios that actually matter

Forget the textbook list of 15 liquidity metrics. For an operating business doing $5M-$50M in revenue, four ratios tell you almost everything:

Days Sales Outstanding (DSO): How long it takes customers to pay you. Calculate it as (Accounts Receivable ÷ Revenue) × Days in Period. If your DSO moves from 35 to 42 days over three months, that's real money stuck in transit. On $500K monthly revenue, that 7-day shift ties up an extra $117K.

Days Payable Outstanding (DPO): How long you take to pay suppliers. Same formula, swap in Accounts Payable and Cost of Goods Sold. This is your free float—extending it (within terms) improves cash position. Shortening it does the opposite.

Days Inventory Outstanding (DIO): How long inventory sits before you sell it. Inventory ÷ COGS × Days in Period. For manufacturers and distributors, this is often where cash goes to hide. A construction materials supplier I worked with had $800K in "good inventory" that hadn't moved in 6 months. That's not inventory—that's a pile of cash earning zero.

Cash Conversion Cycle (CCC): DSO + DIO - DPO. This single number shows how many days your cash is tied up in operations. A CCC of 45 means every dollar you spend takes 45 days to cycle back as cash. If that number creeps from 45 to 60 without revenue growth to match, you're funding an extra 15 days of operations from somewhere.

What the trends tell you

The absolute numbers matter less than the direction. A construction company with DSO of 50 days might be fine—that's the industry. But if it was 42 days six months ago and has risen steadily each month, something changed. Maybe a key customer is struggling. Maybe your invoicing process slipped. Maybe you took on work with longer payment terms than your cost structure supports.

Monthly tracking gives you six data points in half a year instead of two. You see patterns, not snapshots.

Here's what I look for:

DSO rising while revenue flat: Collection problem or customer quality problem
DIO rising while sales flat: Purchasing too much or selling too slow
DPO falling: Suppliers tightening terms, often a sign they see risk you don't
CCC rising faster than revenue: Growth is eating cash, not generating it

How to actually do this

Pull these numbers on the same day each month. I use the 10th—far enough from month-end for books to be clean, close enough to act on what you find.

Build a simple spreadsheet that trends each ratio over 12 months. You're looking for sustained movement, not one-month blips. Two months in the same direction is a signal. Three months is a pattern that needs a response.

Set thresholds that trigger action. For most businesses: any ratio moving more than 10% from your 12-month average deserves investigation. You might find a reasonable explanation. You might catch a problem before it becomes a crisis.

Where to start

Pull your last six months of financial statements and calculate these four ratios for each month. Plot them. If you see a trend you can't explain—especially in CCC—figure out which component is driving it before next month's numbers come in.

If you're not sure what the numbers are telling you, or you want help building a monthly tracking system that fits your business, that's the kind of work we do at Laverton Advisory.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

The Difference Between Cash Profit and Real Profit

2025-08-04T00:00:00Z

Your income statement says you made $400,000 last year. Your bank account says you're scrambling to make payroll. Both numbers are accurate. Neither one is lying to you. But if you don't understand why they're different, you'll make decisions that slowly strangle your business.

What your P&L actually measures

Accounting profit—the number on your income statement—follows rules designed to match revenue with the expenses that created it. You bill a $50,000 project in December, it shows up as December revenue even if the client pays in February. You buy a $200,000 piece of equipment, only $40,000 hits your P&L this year as depreciation even though you wrote the check six months ago.

This isn't a flaw. It's the whole point. Accrual accounting shows you whether your business model works—whether the work you're doing generates more value than it costs to deliver. A construction company that completes a profitable project has earned that profit, regardless of when the draw requests get funded.

But here's the problem: you can't pay your electricians with accrual profit.

Where the cash actually goes

Real profit—the money you can actually touch—gets eaten by three things that never show up on your income statement:

Accounts receivable growth. Every dollar sitting in AR is a dollar you earned but can't spend. If you grew revenue from $2 million to $3 million this year and your customers pay in 45 days, you've got an extra $125,000 trapped in receivables. That's not a rounding error. That's a quarter of your reported profit for many businesses.

Inventory and work-in-progress. Manufacturers and contractors know this pain intimately. You buy materials, pay your crews, carry the job for 60 or 90 days before you can bill—and that entire investment is invisible on your P&L until the project closes.

Debt principal payments. Your income statement shows interest expense. It doesn't show the principal portion of your loan payments. A business paying $15,000 a month on equipment loans might only see $4,000 of that on the P&L. The other $11,000 comes straight out of cash.

A real example

Take a manufacturing company doing $5 million in revenue with a 12% net margin—$600,000 in profit. Solid business, right? Now look at what happened to the cash:

Receivables increased by $180,000 (customers paying slower as you grew)
Inventory increased by $120,000 (more raw materials on hand)
Loan principal payments totaled $140,000
Owner took $200,000 in distributions

That's $640,000 going out. The business is profitable on paper and broke in practice. The owner is wondering why growth feels like drowning.

Which number matters more

Neither. They answer different questions.

Accounting profit tells you whether your business model is sustainable—whether you're charging enough, controlling costs, and building something that creates value. If your P&L shows losses year after year, no amount of cash management will save you.

Cash profit tells you whether you can survive long enough to realize that value. A business can be profitable for years while slowly bleeding out because growth consumes more cash than operations generate.

The danger zone is when they diverge significantly. Strong accounting profit with weak cash flow means you're growing faster than your balance sheet can support. Strong cash flow with weak profit means you're liquidating the business—collecting old receivables, selling inventory, not replacing equipment—and the bill will come due.

Where to start

Pull your last twelve months of financials and calculate both numbers. Start with net income, then add back depreciation, subtract principal payments, and adjust for changes in receivables and inventory. The gap between those two numbers tells you how much stress your growth is putting on your cash.

If you're not sure how to do this—or if the gap is bigger than you expected—that's exactly the kind of financial clarity Laverton Advisory builds for founder-led businesses.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

The Connection Between Poor AR Management and Missed Growth Opportunities

2025-06-20T00:00:00Z

That piece of equipment you've been waiting to buy. The experienced project manager you can't quite afford to hire. The larger job you had to pass on because you couldn't float the materials. These aren't cash flow problems — they're AR problems wearing a disguise.

When I work with construction and manufacturing owners, they rarely connect the dots between their aging receivables and the growth they're leaving on the table. But the math is simple: every dollar sitting in a customer's bank account is a dollar you can't deploy.

The real cost of slow collections

Let's say you're running a $5M revenue business with 45-day average collections. That means you've got roughly $625K tied up in receivables at any given time.

Now imagine you tightened that to 30 days. You'd free up about $210K in working capital — not by borrowing, not by giving up equity, but by collecting what you've already earned.

That $210K could be a down payment on equipment that lets you take on bigger jobs. It could be three months of salary for a senior estimator who helps you win more profitable work. It could be the float you need to stock materials for a major project.

Instead, it's subsidizing your customers' cash flow.

How AR problems compound

The damage from loose AR management doesn't stay contained. It spreads.

You start cherry-picking jobs. When cash is tight, you take the work that pays fastest, not the work that pays best. I've seen contractors turn down $800K projects with great margins because they couldn't handle 60-day payment terms — while their receivables report showed $150K over 90 days that nobody was chasing.

You lose negotiating leverage. Suppliers offer better pricing for COD or quick-pay terms. But if your cash is trapped in receivables, you're stuck paying list price or worse. That 2–3% you're giving up on materials adds up fast.

You can't invest in capacity. Growth requires spending money before you earn it — hiring ahead of demand, buying equipment before the big job, building inventory. Poor AR management keeps you perpetually one step behind.

Why it happens

Most of the founders I work with aren't careless. They're just busy running the business, and AR management feels administrative. It gets delegated without clear accountability, or it becomes something everyone assumes someone else is handling.

A few patterns I see repeatedly:

No defined collection process. Invoices go out, and then... hope. No systematic follow-up at 30, 45, 60 days. No escalation path.

Invoicing delays. The work gets done, but the invoice doesn't go out for two weeks because someone's waiting on final numbers or job costing. That's two weeks of free financing for your customer.

Relationship fear. "I don't want to damage the relationship by asking for payment." Meanwhile, your customer is paying their other vendors on time because those vendors actually ask.

No visibility. The owner doesn't see the AR aging report weekly. Problems don't surface until they're severe.

Where to start

Pull your AR aging report right now and calculate your days sales outstanding. Divide your total receivables by your average daily revenue. If that number is higher than your standard payment terms, you've got a collection problem, not a terms problem.

Then pick your three largest past-due accounts and make a call — not an email, a call — this week. Find out what's holding up payment. Sometimes it's a dispute you didn't know about. Sometimes they're just waiting to be asked.

Build from there: weekly AR reviews, systematic follow-up cadences, invoicing within 48 hours of project completion. None of this is complicated, but it requires someone owning it.

If you're not sure where the gaps are, or you need help building a system that actually gets followed, that's exactly the kind of operational finance work we do at Laverton Advisory. Sometimes an outside perspective spots the patterns you're too close to see.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

Why Your Business Needs a 3-Year Financing Roadmap Before Taking One Dollar

2025-06-06T00:00:00Z

Most business owners start looking for financing when they need it. That's exactly backwards. By the time you're scrambling for capital, you've already lost negotiating leverage, limited your options, and probably missed the funding source that would have cost you the least.

A 3-year financing roadmap isn't about predicting the future perfectly. It's about knowing what kinds of capital you'll need, when you'll need it, and which sources make sense for each stage. Get this wrong and you'll pay 2-3x what you should — or worse, take money that forces decisions you'll regret.

The real cost of reactive financing

I've seen a manufacturing owner take a merchant cash advance at 45% effective APR because he needed $200K in 30 days for an equipment repair. If he'd planned six months ahead, he could have secured an equipment line of credit at 9%. That $200K cost him an extra $72,000 in the first year alone.

This happens constantly. Construction companies take expensive factoring because they didn't set up a bonding line before landing a big contract. Real estate developers lose deals because their capital stack takes 90 days to assemble when the opportunity window is 30.

Reactive financing means:

Higher rates because you're negotiating from weakness
Fewer options because some funding takes months to establish
Worse terms because lenders smell desperation
Mismatched capital because you grab what's available, not what fits

What a financing roadmap actually includes

A useful roadmap answers five questions for each major capital need over the next 36 months:

1. What's the capital for? Equipment, working capital, acquisition, real estate — each has different funding sources that work best.

2. How much and when? Not a vague range. A specific number tied to a specific trigger. "We'll need $400K for a second service truck fleet when monthly revenue hits $180K consistently."

3. What's the payback mechanism? Lenders care about this more than your projections. How does the money come back? Asset sale? Operating cash flow? Refinancing into permanent debt?

4. What collateral or guarantees are in play? Know what you're willing to pledge before you're in a negotiation. Some owners discover too late they've personally guaranteed more than they can cover.

5. What relationships need building now? Bank relationships, SBA lender contacts, equipment financing partners — these take 6–12 months to develop properly. Start before you need them.

Matching capital sources to uses

Here's a framework I use with clients:

Short-term working capital (under 12 months): Lines of credit, AR financing, inventory financing. Establish these when your financials look good, not when cash is tight.

Equipment and vehicles (2–7 year useful life): Equipment loans, leases, SBA loans. Match the loan term to the asset life. Don't finance a 10-year asset with a 3-year note.

Real estate and major facilities: Commercial mortgages, SBA 504 loans, sale-leasebacks. These take 60–120 days minimum. Start the conversation 6 months before you need to close.

Growth capital and acquisitions: SBA 7(a), private equity, seller financing, earnouts. Structure matters as much as rate here. A bad deal structure can sink an otherwise smart acquisition.

Bridge financing: Hard money, mezzanine debt. Know these exist and what they cost, so you're not surprised when a deal requires fast capital.

The 36-month view changes your behavior today

When you map out capital needs over three years, you make different decisions now. You keep cleaner books because you know a lender will review them. You maintain banking relationships even when you don't need anything. You structure early deals to preserve borrowing capacity for later.

One energy services client mapped out a plan to acquire two smaller competitors over 30 months. That roadmap meant he structured his first acquisition to minimize personal guarantees and preserve collateral for the second. Without the roadmap, he would have pledged everything on deal one and had nothing left for deal two.

Where to start

Pull your last two years of financials and list every capital need you can see in the next 36 months. Equipment replacements, facility expansion, working capital for growth, potential acquisitions. Assign rough numbers and timing to each.

Then look at what lending relationships you have today versus what you'd need. That gap is your to-do list.

If you want a structured approach to this, Laverton Advisory builds financing roadmaps as part of our fractional CFO work. We help you see what's coming and build the capital structure to handle it — before you're negotiating from a weak position.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

The Hidden Payroll Tax Trap: 5 Costs You're Forgetting When Budgeting New Hires

2025-03-16T00:00:00Z

You found the perfect project manager. She wants $80,000. You run the math: that's $6,667 a month, fits the budget. You make the offer.

Three months later, you're staring at your P&L wondering why labor costs are $25,000 higher than you projected. The answer isn't overtime or a surprise raise. It's the payroll costs you never budgeted in the first place.

The 20-35% rule nobody tells you

A salary is not what an employee costs. It's what an employee takes home. The gap between those two numbers catches founders every single time.

For most businesses I work with—construction, manufacturing, energy services—the true cost of a W-2 employee runs 20-35% above their base salary. That $80,000 project manager? She's really a $96,000 to $108,000 line item.

Here are the five costs that create that gap.

1. FICA taxes (the one you probably remembered)

Social Security tax is 6.2% of wages up to $176,100 in 2025. Medicare is 1.45% with no cap. That's 7.65% right off the top that you owe as the employer—separate from what you withhold from the employee's check.

On an $80,000 salary: $6,120.

Most founders know this one exists. Few budget it accurately.

2. FUTA and SUTA (the ones you forgot)

Federal Unemployment Tax (FUTA) is 6% on the first $7,000 of wages per employee. After the standard credit, you're paying 0.6%—so $42 per employee per year. Small number, easy to miss when you're adding five people.

State Unemployment Tax (SUTA) is where it gets expensive. In Texas, new employers pay around 2.7% on the first $9,000 of wages. That's $243 per employee. Your rate changes based on your claims history—if you've had layoffs, it can climb to 6% or higher.

On an $80,000 salary: $285 minimum, potentially $582 or more.

3. Workers' compensation insurance

This is the big variable. If you're running a professional services firm, you might pay $0.50 per $100 of payroll. If you're in construction or manufacturing, you could be paying $5-15 per $100 of payroll depending on the classification.

For a field employee at $80,000 in a moderate-risk classification (say, $8 per $100): $6,400.

I've seen founders miss this entirely because their first few hires were office staff. Then they add a crew and wonder why their insurance bill tripled.

4. Benefits you committed to

Health insurance averages $8,951 per year for single coverage (employer portion) according to KFF's 2024 survey. Family coverage? $17,393 employer share.

Add 401(k) matching (3-4% of salary is common), PTO accrual, and any other benefits you've promised. These aren't optional once you've offered them.

Conservative estimate for single coverage plus 3% match on $80,000: $11,351.

5. The costs you don't see on a tax form

Payroll processing fees, whether you're using Gusto, ADP, or your accountant. Training time. Equipment and software licenses. The productivity gap while they ramp up.

These vary too much to give you a number, but budget at least $1,000-2,000 per hire for the administrative friction alone.

What the real math looks like

Let's total it up for that $80,000 project manager:

Base salary: $80,000
FICA (7.65%): $6,120
FUTA/SUTA: $285
Workers' comp (office rate, $1.50/$100): $1,200
Benefits (health + 3% match): $11,351
Admin/onboarding: $1,500

Total: $100,456—a 25.6% markup.

Put her in a field role with higher workers' comp exposure, and you're over $104,000.

Where to start

Before your next hire, build a simple burden rate calculator. Take every cost above, estimate it for your specific situation, and divide by base salary. That percentage is your multiplier.

If your burden rate is 28%, every dollar of salary you budget should actually be $1.28. Apply that to your entire headcount plan and you'll stop being surprised by Q2.

If you're not sure where your numbers actually land—especially on workers' comp classifications or unemployment rates—that's exactly the kind of thing a fractional CFO can sort out in an afternoon. At Laverton Advisory, we build these models for clients so they can hire with confidence instead of crossed fingers.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

How to Price Your Services to Protect Margin

2025-03-08T00:00:00Z

Most service business owners set prices by looking at competitors, adding a small premium if they think they're better, and hoping the math works out. Then costs rise, they hold prices because they're afraid of losing customers, and six months later they're working harder for less money.

Pricing isn't a gut feel exercise. It's math. And the math has to start with the margin you need to hit, not the price you think the market will bear.

Start with your target margin, work backwards

If you need a 25% net margin to fund growth, pay yourself fairly, and build some cushion, that number drives everything else.

Say your fully-loaded cost to deliver a service is $7,500. That includes labor, materials, overhead allocation—everything. At a 25% margin, you need to charge $10,000. Not $9,500 because a competitor is at $9,200. Not $9,800 because you're nervous about the ask.

$10,000. That's the number.

If you can't get $10,000, you either need to cut delivery costs or accept that this particular service isn't worth offering at your required margin.

The cost increase trap

Here's where most owners get burned. Costs go up 10%, so they raise prices 10% and figure they're covered.

They're not.

If you're running a 25% margin and costs jump 10%, your $7,500 delivery cost becomes $8,250. A 10% price increase takes you from $10,000 to $11,000.

New margin: ($11,000 - $8,250) / $11,000 = 25%

Actually, that works in this case. But watch what happens at thinner margins.

At a 15% margin, your $8,500 cost becomes $9,350 after a 10% increase. A 10% price bump takes you to $11,000.

New margin: ($11,000 - $9,350) / $11,000 = 15%

Still fine. But here's the problem: most owners don't actually run these numbers. They estimate their costs, guess at the increase, and round down on the price bump because it feels safer. That's how 15% margins become 11% margins become "I don't understand why we're not making money."

Price for the cost environment you're entering, not the one you're leaving

Construction and manufacturing owners learned this the hard way in 2021-2022. Material costs moved 20-30% in months. The jobs they'd quoted at old prices ate their margins alive.

Build escalation into your pricing model. For project-based work, include material cost adjustment clauses. For recurring services, set annual price increase expectations upfront—don't surprise customers, but don't eat inflation either.

One contractor I work with now quotes projects with a simple line: "Material costs locked for 60 days from quote date. Projects starting after 60 days subject to material cost adjustment." His close rate didn't change. His margin protection improved dramatically.

Know your price elasticity before you need it

Some services have customers who will leave over a 5% increase. Others have customers who won't blink at 20%.

You need to know which one you have before costs force your hand.

The test is simple: raise prices on a small segment and measure the fallout. If you lose 5% of customers but increase revenue 12%, you should have raised prices a year ago. If you lose 25% of customers, you've found your ceiling.

Most owners never run this test because they're afraid of the answer. But knowing you have pricing power—or knowing you don't—changes every decision you make about growth, hiring, and investment.

Where to start

Pull your last 10 completed projects or service engagements. Calculate your actual fully-loaded cost for each one. Then calculate your actual margin.

If more than two of them came in below your target margin, you have a pricing problem, a cost problem, or both. The numbers will tell you which.

At Laverton Advisory, we build these margin models for clients so they can see exactly where their pricing breaks down—and fix it before it costs them another quarter of profit.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.

Why PE Investors Want Your Company (And What You're Actually Signing Up For)

2025-01-27T00:00:00Z

A private equity firm called. They're interested in your company. They mentioned a valuation that made you sit up straighter. This is validation, right? Proof you built something valuable.

It is. But before you start imagining your exit, you need to understand why they're calling and what the next five years actually look like if you say yes.

Why they're really calling

PE firms don't invest in potential. They invest in predictable cash flow they can amplify through leverage and operational changes.

If they're calling you, it's because your business shows:

Consistent EBITDA margins they can model forward
A fragmented market where they can bolt on acquisitions
Operational slack they believe they can tighten
Revenue that doesn't depend entirely on you

That last point matters. If you are the business—if every major customer relationship runs through you—you're not selling a company. You're selling a job with a complicated employment contract.

PE firms typically pay 5-8x EBITDA for businesses in the lower middle market. A company generating $2M in EBITDA might fetch $10-16M. Sounds great until you realize $4-6M of that might be tied to an earnout you have to stick around to collect.

What the deal structure actually looks like

Here's what most founders don't fully grasp until they're in the LOI: you're probably not walking away with a check and a handshake.

A typical deal structure might look like:

60-70% cash at close
10-20% rolled equity (you're reinvesting in the new entity)
10-20% earnout tied to hitting targets over 2-3 years

That rolled equity isn't charity. PE firms want you financially motivated to help them hit their return targets. They're planning to sell in 4-6 years, and they need you rowing in the same direction.

The earnout is where deals get complicated. If it's tied to revenue, you have some control. If it's tied to EBITDA after they've loaded the company with debt and management fees, you might be chasing a number that keeps moving away from you.

What changes after close

The Monday after closing feels different. You still run the business, but now you have a board. You have reporting requirements. You have a leverage ratio to maintain.

Expect these changes:

Financial reporting goes from quarterly to monthly, sometimes weekly for key metrics. If your books aren't clean, they will be—but you'll be the one cleaning them.

Capital expenditures need approval. That equipment purchase you would have made on Tuesday? Now it's a board presentation.

Hiring and compensation get scrutinized. Your management team might get upgraded, which is a polite way of saying replaced.

Debt service comes first. PE firms typically lever acquisitions at 3-5x EBITDA. A $2M EBITDA business might carry $6-10M in debt. That debt gets paid before distributions, bonuses, or reinvestment.

This isn't necessarily bad. Many founders find the discipline useful. But if you're used to running your company by gut feel and keeping cash in the business for a rainy day, the adjustment is real.

When it makes sense anyway

PE isn't a trap. For the right founder at the right time, it's a legitimate path to liquidity and growth.

It makes sense if:

You want partial liquidity now but aren't ready to fully retire
You've hit a ceiling and need capital and expertise to break through
You're realistic about working for someone else for 3-5 years
Your business genuinely has acquisition or operational upside you can't capture alone

It doesn't make sense if you're burned out and hoping a PE firm will buy you out of your problems. They won't. They'll buy your problems and expect you to fix them.

Where to start

Before you take another call from a PE firm, get clear on three numbers: your actual trailing twelve-month EBITDA (adjusted, defensible), your minimum acceptable net proceeds, and how many years you're genuinely willing to stay.

If you're not sure what your company looks like through a buyer's eyes, that's worth figuring out now—not during due diligence. At Laverton Advisory, we help founders understand their numbers before the negotiation starts, so they're making decisions from clarity, not flattery.

Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.