Accounts Receivable can cost you your business! Learn why.

[00:00:01.05] - Alice

Hello.

[00:00:02.11] - Alice

Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:33.24] - Dan Paulson

Alice is spot on every time. Never fails.

[00:00:37.01] - Rich Veltre

Never fails. Give her a raise.

[00:00:39.00] - Dan Paulson

No, no, we don't talk about raises. We're talking about receivables today. The other are.

[00:00:44.13] - Rich Veltre

Oh, boy, the other side. Oh, the semi-sexy, scary number of mystery.

[00:00:52.20] - Dan Paulson

Well, and I think the big mystery is how many business owners know what their receivables are. And as we were talking about this beforehand, I think you pointed out there's a lot that know their sales, their gross sales, but may not know where their receivables are at. And we both have stories where that can lead to problems.

[00:01:13.28] - Rich Veltre

Oh, yeah. I don't think there's We have time on today.

[00:01:18.02] - Alice

Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Beltré. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:01:47.14] - Dan Paulson

See, Alice heard you wanted to give her a raise and look at what she did.

[00:01:50.18] - Rich Veltre

I tell you what. I was thinking the exact same thing. I'm like, Don't touch anything. Don't touch anything.

[00:01:59.14] - Dan Paulson

So now Come back to receivables before Alice decides to pop her back in and demand more money. So, yeah, we were talking before this, and there's a number of situations where I think receivables come into play, and we both have stories on good receivables, bad receivables, and just downright ugly receivables.

[00:02:20.21] - Rich Veltre

It's amazing. You made the point that there's so many business owners out there. You ask them, so how's your business doing? And they quote the sales number. I mean, They just literally know the sales number. Why? Because that's the number that tells them I'm doing okay, because sales are coming in. But there's so many sides to how the business is doing. You're only looking at one. And if you got really, really good margins, then you can get away with that for a long time. But if you don't, and I know I'm talking margins, so I'm going to have to explain that. But if you're only going by the sales, you're running the company on gut only. As you get bigger, that doesn't work. So it just becomes one of those things that it really is important to talk about because everything in accounting has two sides.

[00:03:10.06] - Dan Paulson

I'd say, actually, I'd say it's even worse for a small business because it could be catastrophic, and it can be catastrophic much quicker. Just to give you an example, I've got a client. She has a good ongoing project that she's doing as a subcontractor through another company. And she's easily gross sales, earning probably better than six... Well, a good six figures a year anyway. But their terms are like 120 to 180 days. Wow. So she's paying people She's burning resources. She's doing all this stuff. And it could be six months before she sees a dime of it. And that's the quickest they're paying. So to your point, gross sales are wonderful, but you better have the money in in the bank account to support that. And if not, your receivables are really hurting.

[00:04:05.23] - Rich Veltre

Yeah. And the thing is, I think what people don't realize is working the timing, right? 180 days is six months, right? So let's put that in another... Because some people don't think days. They're like, okay. And then you put it in months and all of a sudden it hits them and like, wait a minute, that's half a year.

[00:04:23.22] - Dan Paulson

Perfect example. We're in June, right? Years half gone. If you made sales in January and you are just now Getting paid or next month getting paid, that's a difficult hill to climb.

[00:04:35.10] - Rich Veltre

Yeah. Every expense on that project has come out of your pocket. So you need to have six months of leeway in there. Now, the weird part, okay, is that now you have to switch your mindset a little bit and say, okay, now I've got monthly money coming in based on the six months prior, right? So now it'll feel like, oh, good. We made it through the storm, right? But somewhere along the line, that becomes the project's over. And then you have to realize that you have six months left, right? Because you shift. When you build it versus when you collected it, shift it. But you're still going to have those expenses beyond unless you realize when there's six months after the contract is over, you have to find stuff for those people to do, where those people are going to continue to pull on the money that's coming in now that you've already spent in the first six of the contract.

[00:05:31.03] - Dan Paulson

Exactly.

[00:05:32.00] - Rich Veltre

I hope I'm explaining that right, because that's the biggest piece. The income side of it is here, the cash side of it is here. But eventually, there's two lagered ends there that are the difference.

[00:05:43.16] - Dan Paulson

Well, what most people probably are more familiar dealing with is probably a 30 to 45 day window. Now, six months, is that concerning? Yes, it is. But do you have runway then to potentially clear the problem up? You have six months until that cash stops coming in. Most people, again, dealing with 30 days, you now have one month to fix a gap that's been made. And that for most companies, is very hard for them to pivot if they didn't know that was coming.

[00:06:14.28] - Rich Veltre

Yeah. And the thing is, like we said in the very beginning, most people look at the sales and go, okay, I'm doing great. So if you're not looking at the rest of it, if you're not looking at the receivables, if you're not making sure that you're collecting them, that's part of the mystery that causes the issue. The contract that says you've got six months until they're going to pay you, at least you signed on to it, you have to plan around it. What about the guy that takes six months to pay you and you didn't expect them to take six months to pay you? What about the guy who signed a contract that says, I'll pay you in 30 days, but then 60 days comes, 90 days comes? Did you pay attention And in addition to that? Did you react appropriately? Because the longer you wait, the customer sees it as an okay. They see it as a rubber stamp of, well, they let me go 30 days. Let me see if I can go 60 days. Let me see if I can go 90 days. So they push out the terms to see... They test your limit.

[00:07:18.29] - Rich Veltre

So again, mystery. You have to be on top of these numbers, and that's not a sales number. Because your sales number didn't change. The sales number got recorded when you build it. Exactly.

[00:07:31.05] - Dan Paulson

And in, I would say more medium-sized companies, typically your receivables are handled by something else or someone else. So you don't always have immediate visibility to it unless, of course, you planned it that way. And I would say most people I know don't. If I don't ask about it or point to it, they don't know what the receivables are when it's coming in. And that can create a huge issue. I look at some of the practice, medical practice stuff I've done. It's pretty easy for things to get stretched out, especially in the dental field, where maybe you're paying for a procedure that's going to be over several months. I'm just making orthodontics. It's pretty customary that you then establish a payment plan for that to be paid out. Well, there's a couple of problems there. What if treatment is done before you're completely paid up? That actually happened to us and our orthodontist basically said, well, your son has one more appointment before we can write off on this. You can't book that appointment until we're down to zero. We were within two months. So for us, it wasn't that big of a deal. But I also know through clients that they have some patients that are six months to a year in arrears.

[00:08:52.24] - Dan Paulson

That gets to be a chunk of money, especially if you have quite a few clients that are falling under that. Now, who's collecting that? Well, usually it's not the dentist Because we always want the dentists or the orthodontists to be the good guy. They're typically not the ones to talk about money. It's another member or a couple of members of their staff that are supposed to be doing that. Well, what if they're not doing that? And then this just snowballs and snowballs and snowballs And all of a sudden, you realize that you've got this huge pot in receivables that you should be collecting on, but you're not. And now that creates a whole another issue.

[00:09:23.23] - Rich Veltre

Absolutely. And then that's all stories on the people who actually are following it or have the ability to talk about it or understand that the clients get behind. I had one example where I couldn't believe it, but I walked in and the CEO was working a turnaround. I was trying to help her out. And She said, the only thing we have to do is we just get a little further and get these people on the phone and collect this seven million dollars that we're owed. And I went, you have receivables for seven million dollars that are current? And the answer number one was yes. And then I went to look into it and found out the seven million dollars was booked erroneously. So the sales number was off by seven million dollars. And that also meant that there's a bigger problem here, because how did something like that get booked and find out that it's not something that I can collect? So it's very difficult, because now you think this is my lifeline. I'm going to go, and I'm going to pull in these receivables, and I'm going to be totally fine. And unfortunately, you find out that $7 million dollars is not collectible.

[00:10:34.02] - Rich Veltre

You mentioned the medical world. If you didn't collect that already, the likelihood of you being able to collect it later, good luck.

[00:10:40.16] - Dan Paulson

Slim and nuts, yeah.

[00:10:40.28] - Rich Veltre

Especially if it's from an insurance company.

[00:10:42.26] - Dan Paulson

Well, here's another. Oh, yeah. We'll talk about the insurance in a Minute, because insurance is notorious for stretching out your receivables as far as they can, plus discounting it on top of that. But a similar situation with another company, they did a software changeover. And then months go by and they're like, we're doing all this business, but our cash flow is going to the floor. We're just not collecting anything. We kept talking about it, kept looking, and it's like, well, we can't figure out what's going on here. This is a sidebar related to the receivables. The receivables became the problem because of this tech glitch that it created. But basically what it had done was for most of their clients had thrown in this huge credit number. So they're doing work. They're billing for that work, but the billing going against the credit number that's under that account, and they're not collecting anything for it. So in their heads, to your point, gross sales. Hey, I'm busy. I'm doing all this work. I'm bringing all this stuff in. Checking account, there's no money left in the checking account. We're now delaying bills. We're now getting a financial situation.

[00:11:51.18] - Dan Paulson

And it all came down to the fact that these credits were in the system and somebody was applying these credits. So again, your receivables person is going, well, there's a credit here. I'll apply the credit to the bill. And the credit wasn't real. It was a ghost in the machine, if you will. So they had to really step it up. They basically had to rebuild their entire client database from scratch and line by line go in and say, this is a legit credit, this is not. This is a legit credit. This is not. Now, 99 % of them were not. But at the same point, they've had to completely rebuild that. And as far as I know, they're still working on that. So it's like having to hit the reset button. But can you imagine the hours of employee time, of I. T. Time, of everything else that goes into that, on top of the fact that you're already not collecting money you should be collecting. So it's the double whammy. Your cash flow is struggling, plus now you've got to make expenses to correct the problem so that you can get out of the hole that's been dug.

[00:12:57.29] - Rich Veltre

Now you get to This is where, in the last few weeks, I've had this conversation a few times, where people have said to me, talk about receivables, specifically. Talked about receivable terms. Essentially, I eventually said, Well, my industry does X, Y, or Z. My industry offers 60-day terms. And they look at me and they say, Is that okay? And I said, Well, you tell me if it's okay. And I hate to play that devil's advocate role, but I had a little bit because I want them to see, can you afford 60 day terms? The guy's offering the 60 day terms have planned it out a little bit somewhere. Okay? Hopefully. Maybe they haven't. Maybe they're lucky. But if you're understanding that I'm going to build today for work I did last month, right? Because up to this point, it could be work that I've done. So let's call it services first. So you do the services, you build the services. But you did that, and you If you paid somebody, anybody on your roster that's working for you got paid in the last month. Now you're going to go 60 days from there. So technically, you could be laying out as much as 90 days out of your pocket before you see a dime from the customer.

[00:14:15.03] - Rich Veltre

Now on a product, it's the same thing, right? You bought the product. Maybe you're lucky. Maybe you got terms from your supplier. So now you have to balance. When do I have to pay the supplier versus when do I get the money in?

[00:14:25.29] - Dan Paulson

Yeah, or you're built to order. Yeah. So you might be getting paid up front, you might be getting 50 % down, which usually covers material labor costs. And then you're getting basically the profits paid towards the end or most of the profits paid towards the end. You're taking most liability out.

[00:14:42.26] - Rich Veltre

Yeah. And like you said, if I'm buying something that's coming in in an import, I might have laid out more than half of that money before they even started. Maybe half. Sometimes I've seen people that had to pay 100 % of their bill before they would even start, and then they would put it on the boat 90 days later. Now you're going to wait another amount of time before it's going to hit your port. So totally things that you have to figure out for your business. This is where the individuality comes out. And you say, it's going to take me six months to get more product. But the company that's buying for me wants 90 day terms. So how do I accomplish the stretch? And I'll call it the stretch, right? How I accomplish the stretch from the time that I'm going to lay out money to the time I get the money back with some profit in it. And if you don't do that analysis, then you just sit there and say, well, I'm doing great. I have all the sales.

[00:15:41.29] - Dan Paulson

That goes back to your margin discussion right there. Because if you've got enough margin and you have enough client flow through, it affords you more to do that. So that gap between what that gross sale is versus what the actual cost is. I'm sure everyone here knows what margin is, but we'll explain it anyway. So you've got that gap to work with. I mean, that's basically free flowing money that you can then use to buy a new product, pay your employees, whatnot. But the concept is that by using that money, you're essentially credit ahead to the next order that comes in. And you brought up when you're ordering a product, maybe you're ordering a container of materials. Well, I can tell you for a fact that unless you have a long standing relationship with the company you're buying from, and it's pretty good standing, and also depending upon what country you're buying it from, most cases, they're going to demand full payment up front before they ship. Or at the very least, they'll demand partial payment up front and the remaining balance once it ships. And in a few cases, you can negotiate to where it's held more or less an escrow, and it would be paid out upon receipt of the product.

[00:16:53.07] - Dan Paulson

But for most small companies, they don't have that luxury. It's pretty much, well, you want 100,000 widgets from us, you pay us 100,000 for those 100,000 widgets today. And if you are manufacturing a product, well, maybe those are raw materials or maybe those products are for resale. But now you have to wait until you can sell that to recoup what losses you've taken on the materials cost.

[00:17:17.22] - Rich Veltre

Yeah. I mean, you add to that, too, right? If we, and I know I'm just making it more and more complicated, and I don't mean to do that. But I've seen some companies that they had to pay all the fees, every everything for the product up front before it would get shipped. And then when it was shipped, the manufacturer set it up so that not only did they get all their money at the time it hit the port, they stopped having any responsibility for the goods at the time it hit the port. The inventory was ours on the boat. So if the boat sank, heaven forbid, but if the boat sank, it was my money that was going to the bottom of the ocean. You know what I mean? So it becomes This is what you have to be thinking about if you're importing and selling goods. If you're providing services a little bit different, the services are technically either in your office or underneath you within a 30-day deal. You're not having as long of a stretch. But again, these are the things that have to go into the planning process that go into whether or not you can offer 60 day terms.

[00:18:27.09] - Rich Veltre

And if you can't, that's okay. And And I think that's the thing that everybody says, Well, everybody else in my industry is selling based on 60 day terms. But if you can't afford it, find another way. I told one guy, I said, Well, if your product is better than the other products. Okay, sell it as your product is the better product. And if they don't want to pay the 30 day terms that you want or even upfront terms, if your product is that good, go for the upfront terms. You don't know if they're going to pay you. You're taking a big risk.

[00:18:59.28] - Dan Paulson

Or at the very least, if they negotiate it down, they negotiate to something you can manage that's not the full 60 days. But that's what you're bringing up there is the perfect example of where companies get stuck on price, and price is not a competing factor. And what I mean by that is there's always going to be somebody who's going to be cheaper or offer something better, mainly because they have the resources to do so. Most companies do not. So then if you play that game, it's only costing you more and more in the long term. So you're better off figuring out what your differentiator is and sell on that, not sell on being the cheapest.

[00:19:36.14] - Rich Veltre

Yeah, I totally agree with that. The point, the definite point is the differentiator, right? I think there's other things in your contract, usually. I mean, if you're selling a widget off the shelf, that's not really what we're talking about. Usually, that's point of sale. We're talking about somebody took stuff, went and did something with it, and will pay you later, right? In a store, I don't know if anybody has ever gone in because it's been a long time since stores used to do this, but stores used to actually offer credit. You could go into a grocery store. I might be going back to the 1800s here, the 1700s, right? But the general store would have a list. I went into my coffee shop a week ago, and she has a book. There are people that know they're coming in every day, so every month, they settle up. They pay her once a month for all of the coffee that they go in because they're in there every day. How general store is that? I mean, literally, you think that doesn't happen, but that's a receivable. She's got a book. When you add that up, that's her account's receivable.

[00:20:43.01] - Rich Veltre

So now somebody who normally sells over the counter is selling on terms. But believe me, if 30 days goes by and there's no payment there, that guy is going to get the book thrown out of him.

[00:20:54.16] - Dan Paulson

Or what if that guy who came in every day and spent six dollars on coffee after 30 days dies of a heart attack? Who's collecting on that? You can't just go wave your three-ring binder at somebody and say, well, he owes me $400 for all the coffee he drink over last month that got his heart rate up and gave him a heart attack. It's going to be very hard to do.

[00:21:16.10] - Rich Veltre

Very hard to do. But yeah, even the smallest company has to think about, this is what I'm planning for. I know there's a chance I won't get that six bucks a day, 30 days, 180 There's a chance I might not get that $180. But notice what I said. At the end of 30 days, she should be looking at the book, and she probably is. She's tight. I know this woman. She's rough. And that person better pay $180 or they're going to hear from her. The guy that worries me is the guy who doesn't look at the book. The guy who doesn't look at the book doesn't know to ask for that $180 at the end of the month if he doesn't show up with it in hand. So that's the fear that you let that go. And now somebody who's coming in and doing turnarounds, which I've done, you walk in and you're looking at it and saying, okay, I need to turn this company around. The first thing you're looking for is cash. Where's the collectible cash. It's the receivables and maybe some inventory if you got excess inventory. So between those two, that's your first line of defense.

[00:22:23.22] - Rich Veltre

So don't let it get that way. Pay attention to your inventory level and your receivable level and see if you can collect the money before Can you pay somebody else to go do it?

[00:22:32.15] - Dan Paulson

And for those listening, here's a perfect quiz to ask yourself, when was the last time you checked on your receivables? Do you know how much you have? How long it's been outstanding? Who's past 30 days? Who's past 60 days? Who's past 90 days? Most people are using some form of accounting software. There are reports you can pull up that will show you your aging report. And that is something that not only should be looked at like your PnL, it should be monitored very closely. If not by you, you need to sign somebody else who's reviewing that and then reporting back to you on the performance. And if it's starting to lag, if you're seeing debts go out past that 30 day mark, that's the magic number for current. Well, what are we doing to collect on that debt, especially if it's companies we know that typically pay on time? Did they not get the bill or is something going on? Do we need to address it now? Most businesses are willing to give you an answer and work around it. If they hit a patch where they're falling behind. But the first one to get paid is going to be the squeaky Wheel.

[00:23:38.29] - Dan Paulson

So if you're not the Squeaky Wheel, it's like your coffee gal. If she's really on top of her numbers, the moment that guy walks in on July first, A, don't forget, you owe $250 for coffee for the past month. Please be sure to settle up before you leave today.

[00:23:55.08] - Rich Veltre

Right. That leads you to the communication part, right? So yes, there are software out there that'll tell you how old something is. Even QuickBooks, the simplest software out there, it has a report. That's the AR aging report. And each column is a bucket, zero to 30, 31 to 60, 61 to 90. Most softwares have that already in there. The bigger ones might have you customize it to match exactly what you want to see. But typically, you can see those. There's another little hack. This is where When we talk about KPIs or key performance indicators, one of the quick fixes, I won't do it here because I don't want to walk through the calculation, but Google it. Google days sales outstanding. Dso, days sales outstanding. It's a pretty simple calculation that you can do off your financials. What's my total receivables? Total sales, the days that I'm looking to calculate. These are the pieces that go into that formula. Not hard to figure out. And And you'll come up with a number that says your average collection is I invoice on one day, and 30 days later, I'm getting my money. The reason I tell people to look at that is, it's not that you calculated today and say, well, what does this tell me?

[00:25:15.10] - Rich Veltre

What you look at is you look at it over time. You do it more than once. You do it today, you do it next month, you do it in two months. Is the number changing? If the number is climbing and you don't know what to do, call someone. If the number is dropping, good for you. Don't pay anybody for anything. It's dropping. That means it's getting faster. That's a good deal. If it's going up, though, find out why. Ask if you don't have the ability to figure out or take a look, because if it's climbing, that means things are slowing down. People are paying you longer. That means you're paying more out of your pocket for something. So it's an indicator, and that's why they call it key performance indicators. It's look at this. This is something that's happening. Pay attention. Here's your warning sign.

[00:26:02.12] - Dan Paulson

Exactly. And this is a good opportunity, again, to get control of your numbers. It's the time of, I won't say time of year, but we are in a time right now of higher inflation. People are working more off of credit. Companies are working more off of credit, too. They're seeing sales start to dip. I'm hearing more and more companies saying, we're not in trouble, but things are slowing down. Well, guess what? If things are slowing down for you, they're probably slowing down maybe Could be for some of your suppliers, could be slowing down for some of your clients. You need to really take a look and say, well, okay, if things are slowing down, am I staying in front of this receivables issue? Or is this something that 90 days down the road, all of a sudden I've got clients that are going Our business is dried up. We don't have the cash to pay you right now. Can we extend terms? And nobody, nobody wants to have that discussion. Not the person giving it and not the person receiving it. That's for sure.

[00:26:59.09] - Rich Veltre

Yeah Definitely a good time taking hold of your numbers. Definitely a good time to get ahead of, is your business actually as good as you think it is? Don't assume. We know what happens when you assume, so don't do that. I know kids joke on a Thursday afternoon. But don't assume, because if you're assuming, that's where it comes back to bite you. Closing story, guy that I was watching, that I was doing some work for was a printing company. And the guy said to me, I run the company on the barrel theory. I said, There is no barrel theory. What are you talking about? He said, Well, I treat it like this. If I put all the money in a barrel that comes in, and I take all the money out of it to pay the bills out of the barrel, as long as there's money left in the barrel, good There you go. Here's the problem. That guy went bankrupt. The reason he went bankrupt is because he wasn't paying attention to the level of what's left in the barrel, and it didn't carry over to the next month. He was assuming that everything was good because the money coming in was going into this barrel.

[00:28:04.06] - Rich Veltre

The money going out was greater than the money coming in. So don't assume. Don't come up with a theory that nobody knows what you're talking about. Definitely take a look and get a hold of those numbers, real numbers, and that way you can move forward and say, I have a plan and I'm good.

[00:28:21.07] - Dan Paulson

There are a number of businesses out there that I guarantee don't know those numbers. You and I run into them. You brought up a perfect statement earlier where you said, if you don't know or unsure, they need to contact somebody. So if they were going to contact somebody, I. E. You, how do they get a hold of you?

[00:28:41.08] - Rich Veltre

Email is always the best. I check that all the time. And it's on my phone. So rveltre@veltregroup.com is the best way to get a hold of me.

[00:28:50.14] - Dan Paulson

Excellent. And then to get a hold of me is danpaulsonletsgo.com. There's a form on there you can fill out. Now be sure to follow up with you there. E-mail address is long, so we don't worry about that with me. But besides the receivables, the other end of this is how do you streamline your operations to put more money into your pocket. So that becomes the second part, and especially if you are in one of those stress situations, that's really becomes even more critical to make sure that you're firming up your operation to support the lower cash amount coming in. Got to consider that, too. Rich, as always, it's been fun. We took what is normally a very boring subject. I think we made some interesting points about, and hopefully somebody got something out of it. That's good. But wait, I'll see you next week.

[00:29:36.19] - Rich Veltre

Yeah, absolutely. I'll be there.

[00:29:37.26] - Dan Paulson

All right. We got another interview next week, so we will be talking with a guest about startup businesses. We'll go from there. Rich, we'll see you then.

[00:29:48.11] - Rich Veltre

All right. Take care, Dan.

[00:29:49.14] - Dan Paulson

You bet. Take care.