HCHTech
Well-Known Member
- Reaction score
- 4,213
- Location
- Pittsburgh, PA - USA
I'm about to get a line of credit for the first time in my 13+ year business history, and I'm NOT happy about it.
I'm two years into a three year buyout of another business. This process basically doubled my annual revenue, and added 120 commercial clients to my roster. I'm paying a declining percentage of revenue to the previous owner. After this month, there will be 12 months to go (I'm counting the days, believe me).
This has largely been a very positive thing, except for cash flow. Prior to this acquisition, I was about 70% residential and 30% commercial by revenue. My commercial customers were all on net-30 terms, and I never had any real problem getting paid. Unless I got a big order (my line in the sand was $5,000), I never charged upfront for hardware for commercial customers. For big orders, customers would pay 50% of the hardware cost upfront and 50% on delivery.
Now, I'm about 50% residential and 50% commercial by revenue. All of the new commercial clients were used to having net-30 terms, so I wrongly assumed that basically nothing would change w/r/t my ability to get paid. They were also used to NOT paying upfront for hardware. I didn't put my foot down initially because I was worried about giving them a reason to leave. I've retained all but 2 of the new customers 24 months in, so that initial worry about retention is over.
I've found that some customers pay as soon as they get the bill, most of them pay 30-days on the dot (but that varies as well), and some of them drag it out as long as they can. We do aggressive follow-up, but still... We average about a half-a-months revenue in accounts receivable.
Year end is tough, though. Folks want to use up their hardware budget, but not their cash reserves. Right now, we have almost two months revenue in receivables, and we're maxing out our vendor credit lines. We're making a steady profit, but a large percentage of that is going to the previous owner, which leaves us cash-strapped much of the time (vendors always want paid before we receive the income for the items we purchased).
Worse, because we recorded a note payable at the point of purchase for the estimated total payments to the previous owner, none of those monthly payments reduce my profit, so tax time is not very happy. Lots of profit and no cash. Uncle Sam took a pretty big bite last year. In the old days, I would pay bonuses to use up leftover profit at the end of the year. That option is off of the table unless you have the necessary cash reserves.
Because I didn't take the "there's a new sheriff in town" opportunity to force some more favorable (to me) terms with clients, I've found it hard to do anything but stick it out. I've finally given in and applied for a line of credit to help with cash flow, even though it makes me feel like a failure at the acquisition.
I've done a better job at managing profit this year so I won't have such a nasty surprise next April, but it's still a daily struggle to manage cash flow.
I guess there isn't really a question here, but maybe someone will avoid the traps I set for myself. If I were to do it over again knowing what I know now, I would have laid down some new rules for all commercial clients as soon as possible after the acquisition. I would have gotten a line of credit almost immediately as well.
In my case, the acquisition was an opportunity that fell into my lap, I wasn't looking to expand my business in that fashion. Had I been looking, I would have made sure I had WAY more cash reserves before jumping in.
I'm two years into a three year buyout of another business. This process basically doubled my annual revenue, and added 120 commercial clients to my roster. I'm paying a declining percentage of revenue to the previous owner. After this month, there will be 12 months to go (I'm counting the days, believe me).
This has largely been a very positive thing, except for cash flow. Prior to this acquisition, I was about 70% residential and 30% commercial by revenue. My commercial customers were all on net-30 terms, and I never had any real problem getting paid. Unless I got a big order (my line in the sand was $5,000), I never charged upfront for hardware for commercial customers. For big orders, customers would pay 50% of the hardware cost upfront and 50% on delivery.
Now, I'm about 50% residential and 50% commercial by revenue. All of the new commercial clients were used to having net-30 terms, so I wrongly assumed that basically nothing would change w/r/t my ability to get paid. They were also used to NOT paying upfront for hardware. I didn't put my foot down initially because I was worried about giving them a reason to leave. I've retained all but 2 of the new customers 24 months in, so that initial worry about retention is over.
I've found that some customers pay as soon as they get the bill, most of them pay 30-days on the dot (but that varies as well), and some of them drag it out as long as they can. We do aggressive follow-up, but still... We average about a half-a-months revenue in accounts receivable.
Year end is tough, though. Folks want to use up their hardware budget, but not their cash reserves. Right now, we have almost two months revenue in receivables, and we're maxing out our vendor credit lines. We're making a steady profit, but a large percentage of that is going to the previous owner, which leaves us cash-strapped much of the time (vendors always want paid before we receive the income for the items we purchased).
Worse, because we recorded a note payable at the point of purchase for the estimated total payments to the previous owner, none of those monthly payments reduce my profit, so tax time is not very happy. Lots of profit and no cash. Uncle Sam took a pretty big bite last year. In the old days, I would pay bonuses to use up leftover profit at the end of the year. That option is off of the table unless you have the necessary cash reserves.
Because I didn't take the "there's a new sheriff in town" opportunity to force some more favorable (to me) terms with clients, I've found it hard to do anything but stick it out. I've finally given in and applied for a line of credit to help with cash flow, even though it makes me feel like a failure at the acquisition.
I've done a better job at managing profit this year so I won't have such a nasty surprise next April, but it's still a daily struggle to manage cash flow.
I guess there isn't really a question here, but maybe someone will avoid the traps I set for myself. If I were to do it over again knowing what I know now, I would have laid down some new rules for all commercial clients as soon as possible after the acquisition. I would have gotten a line of credit almost immediately as well.
In my case, the acquisition was an opportunity that fell into my lap, I wasn't looking to expand my business in that fashion. Had I been looking, I would have made sure I had WAY more cash reserves before jumping in.
