When it’s Time to Say, ‘Enough is Enough!’
Oct 29, 2007
Orville Honstater was starting to sweat a little for the first time in a long time. His company, Honstater & Associates, had enjoyed a long run (more than 10 years) of profitability and good, if not great, cash flow. But, lately, things were going the other way.
A bunch of projects that failed to contribute to the bottom line, a few key staff defections with some litigation surrounding that, and a softening of the markets they served was starting to create a cash crunch for Honstater. With his line of credit maxed out at nearly $2 million, non-compliance on the firm’s “clean-up clause” covenant, and his personal guarantee on all of its debt, sleep was coming a little harder for Orville Honstater these days.
Yet, in spite of having an average collection period that was always somewhere in the 110- to 115-day range, every time Honstater raised the cash flow issue, his CFO Bernie Luker would say, “There’s no way we can do better.” Luker would often add, “With 100% interprofessional work, this kind of collection period is normal.” And when challenged on whether or not his staff ALWAYS followed the firm’s written collection procedures, Luker would claim that “they just don’t have the time.” On top of it, Luker insisted that they only do billing once a month— “that this is completely normal for firms in our business.”
Now that profits were non-existent and the line of credit was coming up for renewal, Honstater finally decided that enough was enough. As a classic entrepreneur, he successfully battled his engineer tendencies toward “analysis paralysis” and decided to take action on the cash flow problem. Here’s some of what he did:
He fired Luker. Even though Luker had been there for more than six years and done some good over that time, his “can’t-do” attitude was wearing thin. In his place, Luker brought in Joy Cai, a fresh-faced yet driven young CPA who thought nothing was impossible.
They immediately instituted continuous billing. Every day, bills went out along with deliverables. No longer would they wait for once a month to send out invoices! Waiting to get paid was one thing. Not even getting a bill out ‘til weeks after they should have was another, and it was completely under their control.
He hired a full-time bill collector. Luker insisted that PMs were the collection problem and that he didn’t have the staff to cover for them. Honstater changed the policy such that accounting did all of the early collection activities instead of the project managers. The new collector they hired was an older woman with excellent phone skills and a relentless tendency for follow-up.
He instituted a prime client initiative. There was some truth that had to be acknowledged in that their subconsulting relationship created payment problems. Honstater saw the future and set out a plan with a goal to have at least 20% of their work come from prime basis clients in the coming two years, and 50% by the end of the next five-year period.
The results of this program were fantastic. Average collection period dropped to 80 days. The credit line dropped to less than $800K the first year of the new program, and they were completely out of it by Year Two. Orville Honstater was back to sleeping without taking Tylenol PM every night, and back to daydreaming about his future dreams of month-long summer vacations in his vintage Airstream trailer.
Originally published 10/29/2007
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