Getting Paid

How to make collecting bills as much a part of daily business as making sales.

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Sales without collections are worthless. And so are growth strategies, if they aren't supported by the kind of steady, predictable cash flow that can come only from an effective accounts-receivable strategy. Such strategies become essential in recessionary times. Customers are wont to drag out payments as long as possible, leaving fast-growing companies dangerously vulnerable to cash-flow crises. But whatever the economic climate, it's simply good business to address the issue, since healthy accounts receivable provide the locomotion to drive everything from sales operations to long-term growth plans.

To prime the collection engine, every chief executive should create an accounts-receivable system that brings in the cash necessary to run and grow the business. That's how Alan Burkhard, president of The Placers Inc., a Wilmington, Del., temporary personnel and permanent job-search firm, performed a major tune-up of his own deeply troubled billing-and-collection operations. Although it's far from being the only system that works, Burkhard's plan offers a successful, straight-forward blueprint for anyone who is concerned about this all-important financial issue.

Like most entrepreneurs, Burkhard didn't start off in business with anything resembling an interest in accounts receivable -- even his own. "I always told myself that accounts receivable didn't create sales, so they weren't worth paying attention to," he admits. Then, about a year ago, Burkhard realized he had a big problem. "Placers had been growing by about 100% a year for seven years straight. Then I woke up one morning and realized that I was having difficulty making any kind of business decisions."

After much soul-searching, Burkhard concluded that he was the root of the problem. Although he had a budget, he'd never developed a good cash-flow analysis for The Placers. Yet it had grown to more than $10 million in annual sales. "My forte is everything except finance," he says. "I had been so totally focused on sales that I was trying to run the company with all the wrong numbers."

Once he started paying attention to the company's cash flow, Burkhard discovered that his accounts-receivable department was out of control. "None of our customers paid us in any kind of timely fashion," he remembers. "And 60% to 70% of our delinquent accounts were actually owed by our regular customers." Only a very inefficient effort had ever been made to check the creditworthiness of the 600 or so companies who hired The Placers' temps each year. Even less was done to follow up on bills once they left the company's offices.

Burkhard didn't have to be an accounting whiz to realize just how financially vulnerable this left his business. "Every single week we had to pay salaries and payroll taxes for every temp we placed in a job. But it was taking us 60 or 90 days or longer to collect our bills from the companies that were hiring those temps," he says. "We were basically giving our customers an interest-free loan to cover their payroll costs. Because our industry is so competitive and profit margins are already very low, I could see that we were in precarious shape."

Burkhard's predicament was far from unique. For any service company, whose expenses are heavily front-loaded into labor costs, profits visibly shrink with every additional unnecessary week it takes to get those costs reimbursed. For manufacturers, the problem is every bit as -- if not more -- acute, since they often face a longer lag time between spending large amounts of money for raw materials, production, and inventory buildup and actually getting paid.

It's easy for CEOs to ignore the deadly effect that slow collections can have on profit margins unless they regularly review both their cash-flow statements and accounts-receivable updates, which go into detail about the so-called aging or delinquency of every single account. Once accounts receivable captured Burkhard's attention, he devoted the same kind of intensity to them that he had always directed to the rest of his business. That meant analyzing every single aspect of his billing-and-collection system, from the paperwork straight down to the working conditions of his accounting clerks.

What Burkhard found amazed him. "I'd never noticed that my accounting staff was working with six people crammed into 300 square feet of office space, while I gave my salespeople 300 square feet apiece!" The responsibility for handling some 200 invoices a week fell to the company's overloaded payroll supervisor. "That might have made sense when we were small, but now she had about 15 minutes every day to spend on collections," Burkhard confesses.

Making matters worse, Burkhard had always projected mixed messages about collections to his staff. "We were afraid of collections because even though we wanted our money, we didn't want to risk losing our customers. If getting our money quickly meant losing our customers, I didn't want to do it."

It's all too easy for sales- and growth-oriented company owners to fall into this kind of mental trap: get the sales now; work on improving profit margins tomorrow. But in fact, sales that are uncollectible -- or collectible only over an extended period -- are often far worse for a company than meager sales. Burkhard, for example, concluded that given his industry's low margins, he'd turn a profit only on payments brought in under 45 days; at 60 to 90 days, his previous average, he was losing money on every job he filled.

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