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Friday, Mar 29, 2024

Getting Paid Grows Problematic

By THOM SENZEE Contributing Reporter Businesses are facing a big problem these days: getting paid. The words “aging” and “receivables” are creeping into conversations among business owners across the Valleys. “Companies call us because they need our help,” said Sandy Kadekian, tax partner at accounting firm Grant Thornton. “No one is immune,” Kadekian said. “We are experiencing some clients, perhaps more in the manufacturing and distribution side, taking much longer to pay.” Accounting professionals have a unique perspective regarding the topic of receivables. Not only are they aware of the impact on their own cash flows, they also witness how aging invoices distress the companies for whom they work. “For now, the good news is most companies are getting paid,” Kadekian said. Kadekian offered a couple of pieces of advice for companies noticing their receivables aging more than usual. “This trend isn’t going to be devastating for companies that monitor their accounts closely,” she said. In recent years, Kadekian believes, businesspeople were less concerned about having some aging receivables, because the economy was growing. Now, with the specter of bankruptcy looming in some quarters, attitudes are different. “Once a company goes into bankruptcy you’re lucky to collect ten cents on a dollar,” she said. So far during this economic slowdown, Kadekian has not had any clients go into bankruptcy. She recommends all firms carefully screen new and existing clients for indications of insolvency or poor credit. “They have to resist the temptation of saying, ‘well this company has been a client for a long time; they will eventually pay,'” Kadekian said. Her suggestion: if a longtime customer is taking more time than usual to pay, it is time to look at the company’s financial health, and take seriously any chatter about bankruptcy. Kadekian said the situation with receivables has not yet become an epidemic. “The trend is really about 20 to 30 days in arrears,” she said. “I’d be really worried if it were more like 30 to 45, or 30 to 60.” Some companies are already past those milestones. “I’ve got receivables that are over a year old,” said James “Jamie” Cordaro, owner of All-Phase Electric, which has revenues of more than $500,000. “I’ve got one company that owes me $41,000. We’ve had him for years, but this is an issue.” Cordaro said he hears a litany of excuses and complaints about his prices nowadays. “They say, ‘You charged me more than Home Depot,'” he said. “I say, I don’t buy those parts by the trainload, I bought two for your job.” Cordaro laments the rise of what he calls trunk-slammers, so named because their entire operation can be packed into the trunks of their cars. “These trunk slammers sniff out jobs in hard times because people are looking for a bargain,” Cordaro said. “They’re working for wages, not for a profit like an actual electrical company.” Without maintaining the kind of overhead All Phase Electric and similar enterprises do, one-person operations are able win contracts with lower bids. “But eventually they still do come to us,” Cordaro said. “That’s because even though these guys can charge less because they don’t have a brick-and-mortar company with a secretary and employees who get health benefits like our people do or the expense of keeping a license, or the cost of continuing education they’re not a bargain in the long run.” One of All Phase’s many aging receivables is that of a Ventura Boulevard building owner who Cordaro said hired an independent (possibly unlicensed) contractor to do some wiring. “By the time we got there to fix what the guy had messed up, the electricity was literally flying out of the frickin’ building,” Cordaro said. “The current was trying to find a ground; it was heating up the wood behind a metal plate to the point of it starting to smolder.” That was last July, and even though Cordaro purports to have saved the customer’s building, he has only been paid $2,000 of a $6,000 invoice. Jamie Cordaro said he can’t afford the 33 1/3 percent attorneys charge for collection services, so he hired a collection agency, which charges 18 percent for collections more than $500. In turn, he is starting to see some results. “Doing collections is still costing me more time and energy these days,” Cordaro said. “A couple months ago I had to create a folder in my Outlook (e-mail program) called ‘Collections.’ I’m always putting stuff in that folder now.” Wayne Eddington is an account representative with global recovery firm, Transworld Systems, Inc. in Woodland Hills. “Business is, unfortunately, booming,” Eddington said. According to him, as the rest of the economy sinks people need his company’s service more. “We help get the money back,” Eddington said. “But when it’s six to eight months old, you only have a 10 to 15 percent chance of recovery.” With that low rate of recovery in mind, Eddington urges companies to consider using third-party collectors sooner rather than later. “If you start working profit recovery at 60 to 90 days, we can guarantee a 50- to 60-percent recovery rate,” he said. Using branding terms such as pre-collection, or early profit recovery, such services are provided by companies like Transworld for a flat fee, rather than a percentage of the amount collected. But, is there a chance of offending a longtime customer with correspondence from a collection agency for an invoice that is less than 90 days old? “Of course there’s a risk,” Eddington said. “But, we find with a doctor’s office for example, the way our initial courtesy letter is worded advising the customer to call the doctor’s office if they have any problems the doctor gets to be the hero and say, ‘oh I don’t know why that happened. It must have been an Accounting Department error. I’ll take care of it.'” The net result of that good cop-bad cop approach to aging receivables, Eddington said, is faster payments. Chief Economist Jack Kyser, of the Los Angeles Economic Development (LAEDC) said now is a very difficult time for companies as the problem of aging receivables reverberates through the local economy. “It’s affecting everything from getting a loan to paying for supplies, and even keeping employees,” he said. Kyser said supply chains are particularly vulnerable to slow-pay trends in the broad economy. “Companies will write down everything they need to because everybody is expecting poor earnings, and it doesn’t matter how crappy the numbers look.” Nevertheless, Kyser advises managers look at the numbers and identify the low performers on their customer rolls. “On the slow-pay issue, there’s no silver lining,” he said. “It’s just a big, black cloud that’s causing big problems.” If there were a silver lining, said Kyser, it would be companies that have slimmed down and evolved to be more nimble will come out strong, especially if the next recovery comes soon than expected. Indeed, recovery couldn’t come soon enough for most businesses. “I have no regrets, but I have to ask myself if I was ignorant for doing this,” said Noemi Prado, president of Southwest Moulding’s, Inc. of Sun Valley. With $4.2 million in sales, Southwest makes picture-framing products for distribution to retailers such as Costco, Wal-Mart, and until recently Mervyns, as well as to small frame shops. “When I took over this business that I was managing for 28 years, I also took out a $1 million loan, in addition to my own money I invested,” she said. “But the problems really started two months ago.” The two-month old problem Prado is facing is a growing stack of outstanding invoices that are older than 60 days. “It’s affecting my business,” she said. ” Because I’m not able to pay my vendors and suppliers.” Prado, who employs 40 people, worries that if some of her delinquent customers don’t start paying on time, she may have to make drastic decisions. “It’s tough for everybody. I understand that. But it’s especially tough for those of us who started in the last two of years with no capital.” She said she is spending four times more hours on collections now than a year ago. Prado is sure she would have already had to shut down Southwest Moulding if she had not diversified the product line to include shelving and other products as well as starting a custom framing business for higher-end customers. It is getting harder for Prado to stay on top of her aging receivables. But according to LAEDC’s Jack Kyser, the problem is just a sign of the times. “There are certain things that are going to happen in a downturn, and this is one of them.”

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