How Your Accounts Payable Process May Sabotage Your Cash Flow

Could your process for paying other people sabotage your cash flow?Can streamlining your payables process lead to better job costing and faster billing? You might be surprised what a difference it can make.

Topics we cover in this episode include:

  • How does paying people affect your cash flow?
  • Why the accounts payable process is more complex for construction
  • What is the true cost to get one accounts payable invoice out the door?
  • Differences between a traditional company aond construction  accounts payable
  • The importance of a good accounts payable system
  • One billing mistake that could be wrecking your cash flow
  • 10 quick tips to consider if you’re fixing your accounts

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

TRANSCRIPT

[00:00:00] Wade Carpenter: Could your process for paying other people sabotage your cash flow? Can streamlining your payables process lead to better job costing and faster billing? What does paying people have to do with collecting your own money? You might be surprised what a difference it can make when you fix those problems. Come on in. Let’s talk about it.

This is the Contractor Success Forum. And if you’re new here, I’m Wade Carpenter with Carpenter Company CPAs. And here with me is my co host, Stephen Brown with McDaniel Whitley Bonding and Insurance.

Stephen, any initial thoughts on paying people and how that might sabotage their cash flow?

[00:00:33] Stephen Brown: It’s intriguing, topic, Wade, and thanks for bringing it up.

You would think it’s all about getting the money in. c

How does paying people affect your cash flow?

[00:00:40] Stephen Brown: What is it about paying people that affects your cash flow?

[00:00:43] Wade Carpenter:  If you think about increasing your cash flow, it’s quite logical to focus on the people that pay you, not–

[00:00:51] Stephen Brown: When you say increasing your cash flow, do you mean speeding it up?

[00:00:55] Wade Carpenter: Speeding it up, Right.

So, obviously you would focus on the people that pay you, not really the people you pay. So, I realize this is a little bit of a leap, but follow me here for a little bit. Have you ever thought about how those job costs you pay directly affect ultimately speeding up the cashflow and controlling your own cash?

So what goes into a bill that you send to your customer? Obviously it’s going to be those costs that you have to pay out. It’s your labor, yes, but also the materials, subcontractors, the equipment you rented for your job, right? But this is a huge pain point for many contractors.

And it’s surprising to me how many contractors still have a manual paper process in this day and age. Now, it’s not surprising the process is slow and manual. Just think about where these costs come from. They come from bills that you get and sometimes the bills are handwritten and given by their subs in the field to the superintendent.

And that bill rides around in that superintendent’s truck for a week before it gets into the system, they hand it in to Accounts Payable. Sometimes paper bills are sent by snail mail to the owner of the company when it should have gone directly to the Accounts Payable person. Other bills are emailed to a project manager who has to find the time to review it.

And when he finally gets around to it, he’s got to send it to an Accounts Payable person.

And I also recently had one contractor that still had a fax machine because he had two subcontractors faxing him invoices every month.

[00:02:30] Stephen Brown: Wow.

[00:02:30] Wade Carpenter: If the bills are all over the place, how are you supposed to know where you stand, what you have in a job? I’ve got a great story on this. I want to tell you about it, but stay tuned.

Stephen, do you see a lot of this in your subcontractors, your contractors? Does this make sense?

[00:02:44] Stephen Brown: I see it a lot and I want to hear your story. Right now, I’m thinking to myself that fast pay makes fast friends. You’ve heard that expression. So, greasing the wheels, keeping things going. What’s normal for paying or, or not paying?

And you’re right, you get the excuse all the time that the project manager just hadn’t turned in a bill or, or they’ll blame it on something. You have other situations in an organization where there isn’t a payables clerk, for example, or there is a payables clerk and they’re issuing all the checks and they’re sitting on the owner’s desk waiting, we’ll send this out now, depending on the cash that’s coming in.

[00:03:25] Wade Carpenter: Well, that’s part of it. So, one of the biggest challenges that contractors come to me about is they want better job costing, number one. They want reports that are accurate and that are up to date, and they realize what better job costing could mean if they had near real time information about the job so that they could adapt if a job goes off course, right?

So, if that’s the case, think about when we bill our jobs. We often bill on a time and materials basis, on a percentage of completion basis, work in place basis, whatever you want to call it. What are those components of our time and materials, or the work in place? It’s those subcontractor costs. It’s all those other costs we were just talking about.

Gut check, Stephen, does this logic make make sense?

[00:04:12] Stephen Brown: Yeah, yeah, keep going.

[00:04:14] Wade Carpenter: Okay,

Alright. Well, so, if so, then think about capturing all those costs. If we are missing those costs because the bill was riding around in the superintendent’s truck for a week, It wasn’t in the system, so you didn’t bill it, right?

A New client I had a little over a year ago, general contractor did 30 million dollars in the previous year. You would think a contractor that size would have this part figured out, right?

You would think that cash flow gets a lot easier the bigger you get, right?

[00:04:44] Stephen Brown: Right.

[00:04:45] Wade Carpenter: Right.

So, their payable system was pretty much a lot of what I described about, the inputs were coming from everywhere. Paper came in from everywhere. And usually they got it right around the 25th of the month. They had a cutoff, like you had to get it in by the 25th or you don’t get paid. That’s a smart practice, right?

Which, let’s see. I mean, you know, usually with a general contractor, they have to get their bills out by, say, the 30th of the month to get paid, or they have to wait another 30 days to submit.

So every month it was this accounts payable person, they had the controller, and they actually hired a person, a retired person that would come in for four or five days to get their bills out and get it done. It was a four to five day mad scramble to capture all these costs from all over the place and put it in the schedule of values. It was a paper based system that they would go to the files and they spent every minute of every single day manually compiling the backup for these bills to submit when they sent the pay apps in.

The information wasn’t in the system and nobody had a clue where they really were and everybody was frazzled. But the worst part of it was the cash flow was getting progressively worse. This contractor was borrowing from everybody he could beg and borrow and steal from.

He had no idea where he truly was, and he hadn’t taken a paycheck himself in almost a year. You’d think at a 30 million job that, you know, contractor, that wouldn’t be a problem. So what happened? Well, I’m going to come back to that in a minute.

Okay, Stephen, a few questions here.

Why the accounts payable process is more complex for construction

[00:06:23] Wade Carpenter: You ever consider what goes into the job costs that’s accumulated? Have you ever consider what it takes in the accounts payable process? And would you say a construction accounts payable is a little more complex than say, a local retail shop?

[00:06:36] Stephen Brown: Well, it most certainly is. There’s no doubt about it. I think about all the elements that go into your cost basis.

All the categories that you put them in. Making sure that when you send out an invoice, of course it has to be done the way your customer demands it’s presented to them in order for you to get paid. And your vendors may or may not be applying the exact same way. And then what happens when you have an agreement, a payment with them, and then you don’t meet it?

Not just all the elements that go into the job costing, but also, the psychological effect on the people that may need it. Your fellow that you were talking about, that was hurting for cash because his cash flow was literally non existent, had no idea how to fix it, and his understanding of all the processes, I can’t imagine the stress he had. The same stress as he was probably on pins and needles waiting to get paid from everyone he had done work for. Because he had payroll and everything else to meet.

So, there’s a hierarchy of what you pay when money is tight, right? There’s a hierarchy, of what you’re going to pay and how you’re going to pay. And it doesn’t need to be an art form, and it doesn’t need to unclear. You just need to have the right systems in place and the right mindset of how you operate.

So is that where the story’s going?

[00:07:58] Wade Carpenter: Well, that’s part of it. Yeah. And one more question for you before we really move on with the story and all.

What is the true cost to get one accounts payable invoice out the door?

[00:08:05] Wade Carpenter: Do you have any idea what it costs to get one accounts payable invoice out the door? Do you have any guess on average?

Well,

[00:08:11] Stephen Brown: I know it’s more than 55 cents

for postage.

[00:08:15] Wade Carpenter: That’s one thing.

I know it’s

[00:08:16] Stephen Brown: more than that, and it’s probably less, would you, do you want me to guess as a percentage?

[00:08:22] Wade Carpenter: No, what would it cost like between the people involved? The, overhead, the, the software, time involved at their rate.

[00:08:30] Stephen Brown: So now people aren’t issuing checks as much, so they’re going online. They’re setting everything up. They’re dealing with their banker. They’re reconciling everything. They’re verifying the time involved. And usually this person is fairly high paid because there’s some thinking and stress involved. Right? So, I’m going to say average invoice and time,

I’m gonna say $50.

[00:08:56] Wade Carpenter: Okay. All right. So, total —

[00:08:58] Stephen Brown: What is that number, Wade?

[00:09:00] Wade Carpenter: According to a study of the accounts payable industry in 2022, the average cost of an invoice to get one invoice out the door is $13.11.

[00:09:10] Stephen Brown: Okay.

[00:09:11] Wade Carpenter: Another study by Adobe, the people that created PDFs, the standard of electronic documents, they estimate the cost to be more like $15 to $40 per invoice. So your $50 wasn’t necessarily that far off. We could talk about the inputs that go in, but you know, those studies are really across all industries, and, for all of them, you really have to make sure that we got the information right and tied it to a purchase order. Usually there’s one approver, but with construction and accounts payable, there’s several different things to consider, such as collecting W-9s on subcontractors.

For 1099s, you’ve got lien waivers, certificates of insurance, and most of the time, you got multiple approvers. A project manager’s got to look at it, or the owner, so it’s not just one person before it even gets to the system.

[00:10:06] Stephen Brown: And your ability to pay is only as good as your people you’re paying getting you the information you need. to verify that you owe them.

Differences between a traditional company aond construction accounts payable

[00:10:14] Wade Carpenter: So, let’s talk about some of the other differences between, say, a traditional company and construction.

In traditional accounts payable, that tends to be centralized in one place. Right. With, the bills go into one person. We don’t have a superintendent and somebody in the field and somebody with a project manager that gets a bill handed to them at a construction meeting or whatever.

Construction accounts payable tends to be spread out throughout the organization. We already talked about it coming to the owner or whoever, and a lot of people in construction with your subs, sometimes they’re not as sophisticated. Still doing handwritten paper invoices.

And again, we talked about, it comes to the accounts payable sometimes all over the place, but as a result, the costs do not get into the system as rapidly. And we also have the added part that we have to put it to a job and code it to a job. And we need it as real time as we possibly can get so that we can cost out our jobs and know where we are, right? So that’s a big tall order.

Now, again, people that process invoices that do the time and materials of percentage based billing, they have to have all these inputs in, so a lot of them have to prove their bill to their owner or prime GC or bank, and provide them the backup when signing off on lien waivers. So that’s an additional step that most other accounts payable departments don’t have to deal with.

And any slowdown in getting that bill in may mean that bill doesn’t get invoiced for yet another 30 days, right?

So another gut check. I’ll take a breath here. Does it make sense, Stephen, why it’s a challenge for contractors to get this timely and have information for the job costing, know where they are and correct the course and, have all the inputs to completely build a job timely?

[00:12:08] Stephen Brown: Well, I mean, it’s everything, because how many times have we talked about the most fundamental example of a customer sitting on a big bank account and not knowing what has to be paid out of it, but feeling flush? That’s a very immature way of looking at things, isn’t it? And when you’re talking about your large contractor, the story that you were telling, in the situation that hit his cash flow, it was hard for him to see the forest through the trees. For him to see what the real problems were.

And I can tell you as a vendor, that my customers that pay me the fastest are my favorite customers. Because they value my time. If you don’t think it’s an emotional aspect, then I guess you’ve forgotten what it’s like to manage your own cash flow.

So, I guess you’ve got a system so good that it doesn’t matter to you what your vendors think of how you pay them. I’m gonna milk you. The whole key to being a contractor is to milking out that money so I can hold on to it as long as possible.

That’s not the game you’re playing. The game you’re playing is making profit and keeping profit throughout the project based on the work you do. It, it’s not screwing over other people.

So, you’re talking about emotional aspect. From a bonding company, a lot of bonding underwriters are going to look at a schedule of aged receivables and payables, 30, 60, 90 days. They’re going to be asked very pointed questions about a payable over 90 days. And any receivables over 120 days, they just toss out of the equation for underwriting.

So, the clock is ticking. 30, 60, 90, 120 days. The cash flow clock is tick, tick, tick, ticking. And so what are you doing about it to make sure that things are flowing? So flowing in works, and if it’s not flowing out, that doesn’t work either. That’s what I’m getting out of this.

[00:14:04] Wade Carpenter: Right. Well, like I said, you have to have the inputs to get the output of your cash flow, right?

I mean, there’s a lot that goes into construction accounts payable, and for so many contractors, this is one of the biggest leaps I have to overcome. When I talk about contractors outsourcing their books to me remotely, they do not understand how this possibly could work remotely and provide them job cost information and how we can streamline the whole process. And a lot of times it takes changing some things in their business.

But many can’t get past that thought of that physical piece of paper. Because of all the inputs, they don’t see how it’s even possible to get accurate or near real time books. And I’m going to get into that, but one of the biggest hurdles that people have to get fixed, whether you’re outsourcing it or doing it in house, is that they have to control the system. And we have the advantage of custom developing, we developed some software designed to get item level costs because we really just couldn’t find any software out there for the average general contractor that got on the cost code level. Didn’t spend thousands and thousands of dollars on expensive software that they never seemed to get set up right to begin with.

The importance of a good accounts payable system

[00:15:20] Wade Carpenter: I’ll talk about that more later, but I want to get back to my story on the 30 million contractor that was going bankrupt. He hired us to do their back office work after we explained how it worked and he put his faith in us.

And so what we did was we went in and watched their month end process. We actually flew down there and sat through while they did this for a couple of days and we quickly saw where all this information was coming in from and all over the place. Many times the process, we talked about it, the PM first, or it went all over the place, to the owner. But the rule was that the bill does not get into the payable system if it is not approved, which logically makes sense. But the first thing we had to do was centralize this bill collection and reverse the order of this whole thing.

We had to get the bills in the system first, or at least have a process for coding it and then approving it. And, that actually has to be sometimes outside of the payable system. But for many of the bills, this one step, when we implemented this, everything comes into one place, it significantly sped up the collection of the bills.

Now, I won’t lie. It took about three months for that GC to get most of his subcontractors in line and start doing the system. But when we got it in the system to where the PMs could look at their job on their phone, approve it, and cross code it all in one step– and we also had to implement tracking of these PMs because I think you alluded to it earlier, that it will sit on that PM’s desk forever. So, we had to track how long it sat on that PM’s desk and where it was held up in the…

But over the next month or two because of that, because we were getting more inputs into the bills, the process was getting easier and we digitized all the bills so that they could view them instantly and compile the backup for the jobs a lot faster than before.

So it was a huge step forward. But then we found another huge step they were missing in wrecking the cash flow.

I’m going to come back to the story,

[00:17:23] Stephen Brown: Whoa, whoa, whoa. That’s the most exciting part to me. What was wrecking their cash flow? Are you going to tell me later?

[00:17:29] Wade Carpenter: Oh, you got, yeah, you got to hold on, wait.

But Stephen, how many times have you seen this, in these contractors, resisting change, avoiding the technology, and getting proper help? And a lot of them are slowly dying like this contractor, this, you’re going bankrupt slowly.

[00:17:45] Stephen Brown: I can tell you I’ve seen a lot of contractors embrace different accounting software programs and systems that have just literally ripped their hearts out. They spent a ton of money, the sales pitch was great the features were great. It was going to do all the thinking for you, and everything.

And it was incredibly painful. So, yeah, embracing change. I can understand that. From their point of view, I can understand that. But then when you think about the payoff, what is the payoff to getting it flowing again?

[00:18:21] Wade Carpenter: Right.

[00:18:21] Stephen Brown: I think of all these analogies like an oil pipeline, not flowing from one place to another.

[00:18:28] Wade Carpenter: Right.

[00:18:29] Stephen Brown: And then nothing’s happening. No one’s getting the oil. No one’s getting paid. I’m, I’m thinking about those systems and I’m also thinking to myself, what’s the answer to your question about the end of this story?

[00:18:43] Wade Carpenter: Okay, well, let’s go back to the story then.

One billing mistake that could be wrecking your cash flow

[00:18:46] Wade Carpenter: So basically we realized this contractor was simply adding amounts that they owed on the bill that they currently had to pay on the schedule of values. But there was retainage on these bills, which meant they had more costs on the jobs and they were simply just not billing that part.

And remember, this is a $30 million contractor and they were missing billing, not only on the 10 percent retainage that they were being held on, but also the overhead and profit on that job.

Yes, they didn’t have to pay that subcontractor yet, but they did have work in place and they had the right to bill it. And they forgot that. The owners were basically holding their cashflow, that 10%, and, they didn’t get that either.

So long story short, the point where we discovered this, and I actually did a calculation to figure out how much, 2. 7 million dollars missed in cash flow, right?

So, after going through this and realizing what their accounts payable department was doing, it took some explaining not only to our client, but their owners about work in place. And what we actually realized later was a few of these owners or the, prime on it or whatever, they actually admitted to knowing that they weren’t including that part in their billing, but they obviously didn’t care because they were keeping the cash flow.

[00:20:07] Stephen Brown: Yeah, absolutely. That’s your problem, not mine.

I’m just thinking right now of having that knowledge and the breath of fresh air because he was scrambling for cash like a maniac to make ends meet. And now we’re talking about interest rates being so high. There goes whatever back end profit he had built into the job. It’s just eating away at it. It’s, it’s horrifying.

[00:20:30] Wade Carpenter: Well, to wrap up that, it took another two or three months, but after that adjustment, cash flow significantly increased and the owner was finally able to start taking regular paychecks, made a major dent in his line of credit and his borrowings. And finally has started being able to take a vacation. And he’s, he’s thriving. We’re more than half a year past that and he’s now–

[00:20:52] Stephen Brown: He pays you on time?

[00:20:53] Wade Carpenter: Oh, he always paid me on time, but anyway. But he’s expanding operations, and that’s great to see for, he’s spending less time in his business.

And as far as the process, getting a bill out went from a four day process to being able to give them their cost to build the job on the schedule of values in five minutes and another five to ten minutes per job to pull the backup, depending on the size of the job.

[00:21:20] Stephen Brown: Wow. So not only is the cash flowing, but you’ve driven down the price of each payable from, from $15 maybe to $3.

[00:21:29] Wade Carpenter: Well, I never did the cost analysis, and I also didn’t get into all the streamlining we did on paying the bills process. Because you also brought up the electronic payment process, and he loved that too, because he didn’t have to sign 30 checks at a time. We made it electronic, that saved him a ton of money, but, what they really appreciated was they were getting the best job costing information they had ever wanted.

They got all the you know, as best they could, all the inputs in, and could make decisions about the job if something was going south. So they also didn’t need this extra person and saved that salary. So they loved us and, they’re glad to outsource to us. But for me, after 30 plus years working with contractors, these kinds of results are so much more rewarding to me than doing somebody’s taxes.

And I feel like I made a difference in their life. So anyway, this is why we love to see this happen because contractors work so hard. But anyway.

[00:22:27] Stephen Brown: What a great story. What a happy ending to not only a horrific situation, but an all too common situation with our customers out there. And I felt bad about when I said do they pay you on time now? Because that’s a given. You’re the most important person to their organization.

Well, I hope they refer a lot of people to you. You did a great job for them and helped them out.

Thanks Wade. I was wondering where you were going with this.

[00:22:54] Wade Carpenter: Any lessons or takeaways in your mind that a contractor should take away from this case study? Am I putting you on the spot? You–

[00:23:00] Stephen Brown: The main thing is, is there is help. And also, I think of that old expression, you can’t see the forest through the trees. Things get there’s a lot of moving parts. As an owner of a construction company, you’ve got things coming at you in every direction. Literally, right before the podcast, I was talking to one of my contractors who wanted me to call him early this morning and he said, I’m swamped out of my mind.

And I guarantee you, he’s got a great accounting system in place. He’s got great systems in place. So, even in the best type of construction company, these are the things that need to be taking care of themselves. The stress has got to be unbelievable if you don’t have this in place.

10 quick tips to consider if you’re fixing your accounts

[00:23:41] Wade Carpenter: I did have 10 quick tips for our listener to consider if they’re looking to fix their own accounts. So, I’ll throw them out as quick as I can. Number one, do a self assessment. Reflect on your own processes. Is it efficient? Are there errors or delays that you’re seeing in your process?

Number two, measure the average time it takes to process a single bill. You might be surprised.

Number three, do a cost analysis. Calculate the cost of processing an invoice and consider the salary, benefits, software, all that stuff, overhead. It might be more than you realize.

Number four, get feedback from your vendors. Are there frequent disputes over bills or problems or whatever? That could play into what’s happening with your billing.

Number five, do a technology audit. Evaluate the software and the tools you use. If it’s still a manual process, are there options out there that you might need to be updating?

Number six, consider outsourcing it. Research potential outsourcing partners or their expertise or technology or software, whatever it is.

Number seven, like that retainage in the story, there was one missing big piece of the puzzle. One big input to getting paid. Are you missing some of those cost inputs?

Number eight, Accounts Payable team feedback. Talk to your Accounts Payable Team. Many times the slowness is not with them. Others could be causing the process to slow, like we talked about with the PMs sitting on their desk.

Number nine, Missing Discounts. Do suppliers and subs offer early payment discounts? That can be a lot more lucrative than you think. And a lot of times people miss the opportunity simply because the bills don’t get in on time.

And last one, number ten, think about future proofing your Accounts Payable process. Think about the growth trajectory of your company, and if your current Accounts Payable system can keep up and scale effectively.

So those are my quick 10 tips for fixing and streamlining cash flow. Any final thoughts?

[00:25:41] Stephen Brown: Fantastic.

[00:25:42] Wade Carpenter: All right. So I hope this has been helpful. Thank you all for listening to Contractor Success Forum. Check out the show notes at contractorsuccessforum.com or on the Carpenter CPA’s YouTube channel for more information, consider subscribing and follow us each week as we post a new episode, we will look forward to seeing you on the next show.