Contractor’s Corner: Cash flow and accounts receivables collection - June 2021

By Dave Stafford

Every sale begins as an opportunity for profit; the amount depends on your negotiation and business acumen. However, unless you collect the full amount upfront, and there are few of those, there is the infuriating specter of seeing that profit dribble away through mistakes in performance or inept practices, the biggest of which may be in collection of monies owed. Many promising companies have been put out of business because of poor cash flow and large receivables that became uncollectible.

RISK AND REWARD
The astute business owner looks at business segment opportunities in retail/residential, general commercial, property management, developer/contractors, institutional, healthcare or government and rates them according to profit potential and collection risk. One needs a reasonable mix of all so that sales volume, percentage of gross profit, stress quotient of project management and difficulty of receiving payment is balanced among all to ensure viable cash flow. For example, with a nonrecurring commercial job, I was usually able to extract a deposit with balance due upon completion or within a few days; most healthcare had to be billed out and paid within 30 to 40 days; institutional and government in 45 to 60 days; property management and contractors in 50 to 75 days. Given those numbers, you can see where there might be a problem if you have to pay your suppliers in 30 to 45 days. And the above is based on actual experiences. Yes, there were some good companies that paid within 20 days, but there were also those that used us as their bank loan for 90+ days.

Therefore, when contemplating any sale, look at the risk potential of collection. Is the client willing to front any money, either as a deposit or as a fast-tracked payment once materials are received? I’ve had clients say, “Oh, we never pay a deposit” but quickly agree to accept advance billing for part or all of the materials delivered to our warehouse for them. They came in and inspected the pallets of product, I handed them the agreed-upon invoice and then picked up their check-before the materials left our warehouse. Now they had a vested interest.

When this is not possible, and when the potential sale is more than $10,000, get complete company information and run a credit check or the equivalent of a D&B report. If you don’t normally use such a service, enlist the help of your banker or a friendly supplier or competitor. I asked the mill rep for our largest supplier about a pending sale to a large condo complex. He said, “Just be sure you get a lot of money for the job, you’ll earn every penny of it. You’ll get paid, eventually, but they are tough to please and pinch every penny until it screams.” Having been forewarned, we extracted a large payment upon delivery of carpet, progress payments upon each building completion and insisted on payment before the next building was started. We were very open with them about how we had to pay our supplier and labor teams, “and at the price we’re giving you, we cannot also be your banker.” Effective project management and field supervision were key to making this approach work for everyone.

General contractors, developers and some property managers can give you big volume jobs but provide large headaches when it comes to paying their bills. Before you price their project bid, ask around about them. What’s the word on the street? I asked a fellow commercial dealer about one budding opportunity and he said, “I hope you feel lucky. They owe everyone in town and have already put old Joe (another flooring company) out of business.” News from other sources, including a bank manager (“I would be unable to approve any loan to them”) was just as bad. Rather than refuse to bid, I had a candid conversation with a principal and told him my concerns and what I’d heard. He said, “That’s old news. We had oversight issues with a couple of jobs. That’s been fixed; we’ve been paid and will pay you on time.” I took a chance on him, and he made sure we got paid. And I was able to give him a good reference to help rebuild his flagging reputation.

DEALING WITH SUPPLIERS
A good relationship with your banker and suppliers and a healthy financial balance sheet are crucial. When you plan for sales, cash flow is an integral part. Wooing your suppliers to help you succeed is often not done with the zeal it deserves; frequently the mill credit manager only hears from you when you’re complaining about a held shipment or requesting a credit line increase. “I only hear from you when there are problems.” Does this sound familiar? If so, shame on you because you are not romancing a valued partner.

The first conversation with a new mill or its sales rep should be about opening a credit line and what terms and prompt payment discounts are going to be available. When establishing an account, a critical part is a conversation with the mill’s credit manager after he has reviewed your financials or run a credit report. “Bob, what size credit limit did you have in mind for our account after your review?” Shut up and instead let him tell you what he has in mind; he may have a higher number than you would have expected. Always see if he might add an additional 10% to 20%, or you might say, “Bob, I had hoped for a little more, or perhaps you can adjust your discount period from 30 to 45 days.” It’s a negotiation. Also, be reasonable; don’t request a credit limit out of line with the business you’ll be sending his way. Much better to get a good credit line, fair terms and then show an increasing level of business and prompt payment.

Find a reason to have a follow-up conversation with the credit manager when you’ve done some business and he has experience with you. That’s the time to ask for a bump in credit limit. Be smart; when you are about to specify his mill’s product on a large job, have the mill rep call him and pave the way for a conversation about a credit line increase or a separate one for that particular project. If you’ve been paying on time or taking discounts, that will help your case. I found that when I had several large projects hit at one time, like multiple school projects in the summer, or there was a delay in payment from a client and our cash flow was tight, the credit manager could use his discretion to allow a delay in payment without affecting our credit standing. Like any banker, they hate ugly surprises.

When there is an unusually large potential project, say 40,000 yards of carpet tile, extended terms that dovetail with your client’s contract payment requirement should be part of the mill price negotiation. Stage delivery times to minimize your storage time and the mill’s billing to you. In one case, we had 120-day payment terms set with a discount; the mill was able to maximize its production run at one time and hold the product, releasing shipments a trailer load at a time, which accommodated our warehouse space, installation schedule and credit limit. When we had a payment glitch midway through the one-year project, we let them know we got a special dispensation for that one shipment. Without the mill’s help and extended terms, both we and the mill would have been unable to land this important project. This enhanced our reputation and cemented our key dealer standing.

BILLING, INVOICING AND REQUISITIONS
Good cash flow and effective collection starts at the beginning of any project with having a talented, well-organized, detail-oriented individual as part of the sales and project management team. Any large project has a lot of moving parts, and this project coordinator has to know contract terms, project details and how to submit requisitions and certifications on a timely basis. Tying together installation progress, change orders, installation scheduling and completion with internal job costing is crucial.

Anna was relentless in her zeal to get monthly requisitions in on time without errors and make sure the job costing reflected change orders and approvals. She came to me one day with the news that “there won’t be a check for us next week. Last month’s requisition is being held up.” I was furious because we had bills coming due. She suggested, “Why don’t I follow up with Sandy and see if I can take her to lunch; maybe she’ll help us out?” Great idea! After a liquid lunch, Sandy agreed to track down the missing signature and slip our requisition into the pile for check processing that week. She called to let Anna know that a check could be picked up on Friday. From then on, Sandy watched out for us and tipped us off when something else was needed or missing. Nothing beats the personal touch.

COLLECTION AND ARM-TWISTING
If you treat timely payment as a big deal, so will your client. This starts with your negotiation on that first sale or negotiated bid. After winning the bid with a large law firm, the deposit requirement came up. “We’ve never been asked for a deposit for work we’ve had done; why should we pay you a deposit?” I responded, “To get our best price, we have to be assured of timely payment. Your deposit will enable us to pay our suppliers promptly, take discounts and lower our overall costs and pass savings on to you. It’s not a question of your creditworthiness but one of timely payment. We’ve agreed that you have 20 days to pay the balance after completion. Fair enough?” Once they understood our reasons, they grudgingly paid the $30,000 deposit.

If you are not able to settle on the deposit issue, then advance billing, stored materials invoicing or ACH payment or even crypto might be an option to avoid delays. The prime reason is to avoid financing their job. Also, you want to be sure they have skin in the game; once they have turned loose some of their money, it becomes “our” project rather than just mine. For those big-volume complex jobs, especially with general contractors and developers, always inquire about the exact procedures for handling invoices, proof of delivery, who will sign off on job completion, method of determining discount periods and so forth. Many a payment has been derailed because it was to the wrong address or person. Hand delivery of an invoice and a time-stamped receipt is not a bad idea either.

I’ve heard all the excuses or reasons for delay: “We never received your invoice,” “The invoice was for the wrong amount,” “It arrived too late for this month’s check run,” “I thought we had already mailed the check,” “The owner shorted our requisition, so we are only able to pay 50% of the requisition to all trades,” “Yes, I know I signed off, but I have to have corporate approval on any amount over $25,000.” What’s even worse is when there are outright lies, or they don’t even bother to deny they are withholding payment.

In one memorable case, our project manager heard that the developer was in a cash crunch because his owner had lost

funding. They were slipping further behind in processing our requisitions with no explanation. A review of outstanding invoices and dates of performance showed we were still within the 120-day mechanic’s lien period. After a brief investigation by our attorney, he suggested sending a notice of intent to file a lien along with a demand for payment of all outstanding invoices. That generated a lot of shouting from our client, but also a check for payment-in-full with our waiver-of-lien release. We heard that others ended up settling for 20 cents on the dollar a year later.

Each company’s back-office administration is different. Some have a set method for tracking accounts receivables and are effective at in-house collection activities. Others are less so and may use a nationwide collection company working on a percentage charge for collection. This is usually more effective with retail, mainstreet or general commercial accounts and ineffective with contractors/developers/institutional or healthcare.

As an owner or CFO, you will have to train personnel to an acceptable standard or hire it out and use attorneys with a 30% to 40% collection rate. Your accounting software should age your receivables into 30/60/90/120/150-day categories. When you look at this, just remember the average value of the receivable in each category: 90/70/50/40/25 cents on the dollar depending on days outstanding. A sobering realization is that the $150,000 job you started with such high hopes and are now trying to collect now represents an average value at 120 days of only $60,000; instead of the profit you expected, it is now a potential loss of almost $50,000! ($150K – 25% profit = $112.5K cost- $60K value of receivable = $48,750.) This is not an isolated situation; ask any commercial flooring dealer about the skeletons in his closet.

Maximize your cash flow by understanding your risk, negotiate the best terms with your supplier, pursue accurate, timely billing, and handle any potential problem quickly. Bottom line: catch them while they’re fresh, don’t wait, and you have a better opportunity to collect without a substantial, eye-watering write-off.

Copyright 2021 Floor Focus 

Related Topics:Fuse, Fuse Alliance, RD Weis