On collections: "that doesn't mean our customers pay us every week"

Marcia Pledger's "My Biggest Mistake" feature from The Cleveland Plain Dealer remains one of the best resources of mistake learning you will find. This story is from Aaron Grossman of Alliance Staffing Solutions.

[A year after we opened] we picked up what we thought was a monster client. It was a famous restaurant chain opening a location in Michigan. We were so excited that we didn't pay attention to important details, like making sure we had a plan to manage accounts receivable.
My biggest mistake was not caring when or how I got paid. I cared only about closing the deal.

We were fortunate to have a strong credit line, which allowed us to concentrate more on growing our business and less on cash flow to operate our business. But our systems were not tight.
An accountant checked our books once a month, and that was it. Manage our receivables? Who needed to do that, right? Our business was growing and our investor significantly expanded our credit line, so we didn't spend time worrying whether people were going to pay us. We were so wrong.

The deal with the Michigan restaurant started out small, handling payroll for just three managers. We eventually persuaded the company to let us handle the payroll for all the staff. Part of our pitch was that we would be responsible for outsourcing all payroll services, including payroll taxes and workers' compensation, for all 160 employees.

Landing this deal meant doubling our business overnight to nearly $5 million in sales that year. Again, our focus was on sales. What we didn't know then is that most new businesses fail within the first five years. Restaurants fail at a higher rate.

We also didn't realize that sometimes companies use staffing agencies as if they were banks, to float their payroll costs. We pay our people every week. But that doesn't mean our customers pay us every week.

As we didn't have an in-house accountant, and no one was managing our receivables, by the time we realized what was happening, the restaurant owed us more than $400,000. The company's payroll costs were about $100,000 a month.

When we tried to collect on the money, we learned the restaurant was having problems and needed to make installment payments. They paid us $20,000, then filed for bankruptcy protection. We never saw another dime from them.

We were in trouble. Thankfully, our investor still believed in our potential and helped us work through this horrible mistake. The first thing we did was hire the best accountant we could find -- a former CFO of a $100 million company. Our receivables had to be managed appropriately if we wanted to be a growth company. It worked. Sales are a big part of building a business, but collecting is a close second.

Collections is a major learning area for every small businessperson; it should probably be the same for anyone involved in any business. I can tell you that from experience!