The Sale Isn't Complete Until the Cash Hits the Bank - Ep. 14

Hey guys, welcome back to another No Trade Secrets debrief session. Today we're going to be doing our first finance debrief session. So these episodes are going to be geared around all things accounting and finance in your business to help founders not trip over the same mistakes that I've seen time and time again across all of the different companies and startups and businesses and founders that we have served at our head strategy group in the accounting and finance realm. And so today we're gonna kick this off with one of my favorite topics and one of the biggest mistakes that founders make in their businesses that hurt their cash flow and hurt their business health financially so much that is so easy to fix but so often missed. And that is all about collections, invoicing, and receivables. So I would say that this is the most expensive delay in any small business, any business in general, right? So this was shown to me from a different perspective as the customer recently from my local lawn and landscaping company. So at our house we have a sprinkler system, and part of having a sprinkler system in a house means that we have to get our sprinklers winterized and dewinterized every year before it gets to the temperature where it can freeze the pipes and all that bad stuff can happen and be a more expensive problem. So we had our sprinklers de-winterized last March, and they come out, they did it the service, I wasn't home because the and they have access to the sprinkler system and everything they need on the outside of the house. And then I didn't receive an invoice in the mail until early July, right? So there's months in between. Now, this isn't a very extreme example, but I could be speaking to founders right now that have very, very similar collections invoicing processes out there right now. So I received the invoice in the mail, paper invoice, months later, and then I opened the invoice. The invoice was dated around the date of the service, uh, and then I think when I went back to check when they actually came, it was maybe dated a couple of weeks after, and it has net 30 terms, which is common, right? But that net 30 applies to the date that I received the invoice. So that is net 30 from you know July 10th, or whenever I received this invoice in the mail. I went to go and pay the invoice and I look on this paper invoice that I received, and there's no way to pay unless I mail back a check, or I call them and give them my card information for them to process it, my payment on the phone. Now, I wasn't going to mail a check, so I set this on my desk and I was with the intention of okay, over the next few days I will call when I have a spare moment and pay this invoice. And unintentionally, and I do this with a lot of these small things that need to be done that are just not priorities and that are just like you know, something very simple that is diff that is seemingly difficult to just go ahead and do, even though it doesn't take much time. The friction that it caused to be able to do it was enough that I didn't call for another two, two and a half weeks. No one answers the phone. So a week later I call back. Someone answers the phone, I give them my payment information. I asked them if they can store my payment information on file and just process it automatically when they have done the service the next time around automatically, and that they they said no, that they they're not able to do that. So this was maybe a hundred dollar service, right? So alone, this isn't really a huge problem to a business. But what about if you multiply that by hundreds or thousands of customers? That is a lot of money that you are not getting that you have performed the service for, and you have likely paid people and had paid the costs that are attributable to this revenue that you made already long before. Now, like I said, this is an extreme example, but it poses the question to founders out there how much money is trapped inside your business because of a slow invoicing and collections process. I feel like most founders focus on sales, marketing, hiring, and growth, but very few obsess over billing, collections, and cash conversion, which cash conversion is objectively one of the most important things responsible for the health of your business. Because you can do amazing work and still drive revenue and have sales, but still create cash flow problems because you don't get paid quick enough. You know, the the sale really isn't complete when the work is done and even when the revenue shows on your PL, the sale's complete when the cash hits your bank account, truly. So, like, why wait that long to receive your money? Like, what happens to your cash flow during the time between? So imagine my sprinkler example times a hundred customers, five hundred customers at a hundred dollars an invoice, that's fifty thousand dollars in accounts receivable that could have been collected months earlier. So there's this thing that you know, death by delay, right? And this is very typical in service businesses like a landscaping company, and you may be listening right now and have a very similar process where maybe you have like an office manager who sends invoices out once a week. So what if it wasn't the extreme example that I just gave you? But it was a service was provided to a customer on Monday, but your office manager sends invoices out every Friday. There's already five days lost right there. Then, over the weekend, nothing happens. Then the postal service delivers your invoice to your customer, maybe on Tuesday or Wednesday. So now you're at about 10 days lost. The invoice has net 30 terms, so the customer now has 30 more days to pay. So now you're at 40 plus days. Then if they don't have an easy way to pay immediately, the time that a check will have to come back to you in the mail, add another few days, and then your office manager has checks that maybe they go to the bank once a week, too, depending on when you receive the check. If it if the office manager also goes to the bank on Fridays but you receive the check on Monday, there's add another five days on. So you can see how quickly this can get quite out of control when it really doesn't have to. Where a company performs excellent work and then has to wait 40 plus days to collect this cash. And so why this matters more than you think, and it it's this thing that is so important called the cash conversion cycle. So, in simple terms, your cash conversion cycle measures how quickly cash leaves the business and how quickly cash returns. The shorter this cycle, the healthier your cash flow, the less you have to borrow, the more flexible you can be, and the more growth capacity you have. Because every unnecessary day that money sits in accounts receivable, it's another day that you have cash that you can't use. So that is really the what not to do. But what do great businesses do differently that have great cash flow and they have great invoicing and collections processes? Now, a few best practices. Great companies invoice immediately. Same day or even same hour if possible. Best practice number two, invoices are digital. Invoices are sent via email and or via text or a customer portal, no paper. Best practice number three, having online payment options. This one is so big. Make paying easy for your customers. Accept ACHs, credit cards, Apple Pay, digital wallets. Because customers don't delay payments because they're bad people, they delay payments because there's friction that exists, right? That that invoice didn't sit on my desk because I wanted to be an asshole and not pay this invoice. It's because I'm also a founder and I have a lot of things to do, and this seemed like the least of my priorities for two straight weeks. If this was easy, where I could just get online and pay it quick quickly and not have to get on the phone with someone, I guarantee you this would have been paid the same day. So the key here is remove the friction. So, like, think about this. Which invoice would get paid faster? Option A, a paper invoice that's mailed, that requires a check, that requires a stamp, which requires you to go to the post office to send, or option B, an email or text that arrives instantly with a link that you click on that you can pay in 30 seconds because you already have your payment information saved to your iPhone or your Apple wallet, and it will pre-fill and you can pay it. The answer is obvious, it's option B. Right? So friction destroys collection speed. Now, when pot when possible, I always recommend to our clients and to founders store payment methods. Think about Netflix or Spotify. You consume it, payment happens automatically. You never have to click a link, you never have to get an invoice, you sign up, you agree to the subscription or the service, and they take care of payment for you. It happens. So, service business parallel could be requesting to have a card on file and to have ACH authorization or automatic billing. Now I know some services, customers need to look at invoices and because the amounts are variable based on the job and they can't be large jobs, but having card information on file and something in if you have a contract that okay, if an invoice goes ignored after it's sent, after 30 days, if no communication is made or dispute is made about the invoice and the invoice amount or the service provided that you guys, you the company will automatically charge the card or payment information on file. So I'm gonna give you a side-by-side. We're gonna compare two fictitious companies, and it's gonna show you with easy to follow numbers, just how big the hidden costs are of slow collections. So imagine two landscaping companies. Both of them generate $100,000 of revenue every month. Both have $60,000 in monthly cost, and both earn $40,000 of monthly profit. The only difference, Company A invoices immediately and collects on an average of seven days. Company B invoices late and collects in 45 days. It's the only difference. After three months, and just let's pretend that the the revenue has been pretty evenly spread out over the course of the month so that it's not all happening on a single day or point of time in the month. So company A that collects seven days after service in month one, they're gonna collect about $75,000 of cash. Company B is gonna have collected zero because they collect 45 days after service, so they're not collecting any of that month one revenue in that month. So their cash flow is gonna be negative 60,000, but companies A is gonna be positive about 15,000, 16,000. In month two, company A is gonna collect about 100,000. So the remaining of remaining seven days of month one plus the first 23 days of month two, they're gonna have monthly cash flow about 40,000. But company B is gonna finally collect the first 15 days of month one, but they're gonna have additional costs going out. So they are going to collect about 50,000 and they're gonna cash flow negative 10,000. In month three, company A is gonna collect another 100,000, they're gonna have another 40,000 in cash, positive cash flow, and company B is gonna collect 100,000, and their monthly cash flow is gonna hit 40,000. So the summary of those three months both earned 300,000 in revenue, both paid 180,000 in costs, company A collected $270,000, company B collected $150,000. So assuming no other variables, the ending cash position, company A would be up about $95,000, $96,000. Company B would be negative $30,000 cash flow over that time period. So and so company A is $127,000 better off in cash by month three, simply because they collect money faster. So I know a lot of founders out there are gonna, you know, are of the mindset of I need more sales, and that generating revenue and generating sales is the most important thing, which it is very important. I'm not arguing that, but sometimes the issue is that you've already made the sale and you have a problem with collecting the cash. And this problem only compounds more the more sales you have. So remember, the faster revenue can become cash, the faster you convert your sales into cash, the healthier your business becomes. So please take a look at your collections and invoicing process and look at where you can make this better because your business will be so much better off if you can implement invoicing and collections processes that support good cash flow in your company.