Getting Paid, Staying Sane: Working Capital, Late Payments, and the Reality of Cash Flow

Welcome back to another episode of Bought the Biz. Today we dive into some of these uncomfortable topics. Getting your customers to pay late payments. What do you do? Getting a collections agency, managing sort of the imbalance of expenses and revenue. What is the impact as a small business owner? How do you pay yourself? When you do that, when do you not? What is the difference emotionally between maybe the W-2 world and stepping into the leadership role of a small business like this? And then also a little bit of thoughts about working capital, days sales outstanding, maybe some things for searchers to look for, like what I found with negative days sales outstanding type of business. So a couple of really good gems for you in there. You're not going to want to miss it. Bought the Biz is a podcast for ETA entrepreneurs who've gone from searching for a business to actually running one. It tells the real story of what happens after the deal closes. The day-to-day operational, emotional, strategic, and leadership challenges that just don't show up in the highlight reels.

The show is story-driven and practical, sharing real experiences from operators along with clear, actionable takeaways you can use in your own business today.

I'm Garth Fossano.

I'm Christi Loucks. Welcome to Bought the Biz. Welcome to this week's episode of Bought the Biz. Today, Garth and I are talking money. We're talking working capital, late payments, inconsistent revenue. This is a topic that is— it gives me anxiety just bringing it up. So Garth's going to kick it up, kick it off and take it away because he's got quite an experience with this.

Yeah, I think that this is a really important topic for any small business owner to hear, any searcher to understand. You know, if you are leaving the W-2 world where you knew what your paycheck was going to be every month, you know what your 401(k) contribution would be, you knew your health all these things, that is all going to change in this world. And the business that I acquired actually had, because of the revenue share model, the revenue was incredibly unpredictable. You know, going into the next month, I knew that our payroll nut was $150,000, $200,000 for that month, but I had no line of sight into what the revenue would be. And that was sort of always a little bit scary. I knew there would be revenue. I knew it would be good, but I didn't, have the exact number just because of the revenue share component of our contracts. And for a lot of people, that could be really terrifying. I think it's also, you know, is what enabled us, our business to do well. So I think that was a really key part of the reason why I got involved in this business. But, you know, I just have to say that that's not really for the faint of heart. And, you know, while this might be like shocking to some people, you know, looking at the invoices as they would go out every 2 weeks, it was sort of like cheering it on, like, yes, we're going to make payroll. This is good. And And I think that that is sort of a level of uncertainty that a lot of people are not really prepared for but need to think through. Now, that was a pretty unique business and that probably isn't a good fit for everyone. It was something that I was comfortable with and it worked out incredibly well. But I think understanding that your personal income is going to vary a whole bunch is really, really sort of important. Yes, I still took a salary, so I knew that there was some amount coming in every month, but it was about— I mean, I think it was less than one-fifth my salary at my prior job.

Interesting. That feels hard. And then did you have line of sight to that ending? Like, how did you— Meaning, yeah, go ahead.

So, I'm now 3 years into this. Over 3 years, it is ending on December 31st, 2025. Now, to be clear, like, I actually developed a way to get a little bit more of a look ahead into what that revenue would look like, more so than what the other prior owner had ever done. But, you know, it still wasn't really going to be— it wasn't far enough ahead where we could actually, like, take significant corrective action. I think so. Yeah. You know, but that being said, the business performed really well and it was set up structurally in a way where we never got lopsided. So it was, it was totally fine.

That is one thing that I— so when, when we acquired our business, we basically inherited our bookkeeper and he had a really just like structured and clear way of mapping out cash flow, mapping out revenue in terms of cohorts. Now, our revenue was pretty cut and dry. We could see the contracts. There was no real confusion around that. But even just looking out, especially as we had debt payments now in the mix, which were not there prior to our ownership, it was so important for us to be able to see out far enough to know, okay, What's our runway? What's our cash flow look like? Do we need to make adjustments in the next 3 months or something like that? So we, even to this day, I still work with him and he's fantastic and we have the same approach. We do this 13-week cash flow exercise every single week to look out far enough to say, okay, based on all of our contracted revenue, like, do we have good line of sight into what's coming and are there any decisions that need to be made? And I am so grateful that I stepped into that because it was just there for me, like, immediately.

I think that that process and that sort of 13-week cash flow view is something every small business owner and searcher really needs to have. When I say every small business owner, I'm going to say every small business owner out of ETA with debt financing and a PG. I think some other ones, maybe some other circumstances where folks don't need that. I never did that in my business.

Interesting.

And part of the reason why—

Scary.

Okay. Okay. Part of the reason why is because we, when I acquired it, we had a negative days sales outstanding.

Ouch.

No, in the good way. We got paid literally before we even invoiced our customers. Yes. You can scratch your head on that.

What? How?

Exactly.

Exactly. Threw money at you.

I don't even know if I can describe, like, in a short enough period of time how wacky this process was. It was— there were some weird things that, you know, we just did an episode about sort of some of the crazy things you find in your business. This was one of those crazy things as well. But because we were selling on behalf of our customers, we would actually take a deposit for what we sold. And the way it was structured was that deposit would come directly into our bank account the next day. We would not invoice our customers for that sale until they delivered the service and accrued that revenue. And, um, and so we actually would get paid.

It's like a commission.

It was basically a commission, but we got paid on it basically, you know, 2 to 8 weeks prior to us invoicing for that.

Oh my gosh, that's awesome.

So every day, literally cash was coming into the business. And so there was never a, cash concern. And, you know, the sell, you know, in the diligence process on negotiating working capital, the seller told me in a statement that I was like, I don't know if I want to dig into this one. And I sort of took it at face value, which no searcher should ever do. She said, you don't need any working capital because you just get paid this money. And I didn't understand what she was saying. I was like, I don't want to fight this one. I don't believe it. I'm going to plan for the worst-case scenario here. And I did. And that never was an issue, actually. So I think I might be the only person that was like, you felt like that there was a landmine around working capital and there actually wasn't. I think most people don't realize there's a working capital landmine and stumble into one sort of opposite way. But this worked out pretty well. I think it was also because in the asset purchase agreement, I don't think the seller actually fully understood, like, work in progress and like, yeah, where balances stood. It was sort of done like I— it sort of ended up working just mostly on a cash basis.

Yeah.

And I think that sort of did mean I did not need working capital.

Yeah, we— I remember during— and, you know, obviously we're talking like post-acquisition mostly, but like, I do remember in the diligence process that working capital conversation was lengthy. It was educational to the seller, not in like a demeaning way, but just my husband is like Mr. Finance. So he took on this whole part of the diligence process. But I remember it was just a lot of like explaining how it worked. And now being where we are, I'm so like glad that we took that time to like really make sure that everything around working capital was set. For when we stepped into the business.

And just so important, just to be clear, like I stepped into business, I did not think that that working capital calculation was going to work out in my favor.

Yeah.

And so I drew down on a line of credit and put infused cash into the business and just said, I don't need to worry about this. And so that was also why I didn't do this, these 13-week cash plans, because I was just like, I've got a backup plan. It's covered. We're good. And I knew that the amount was far exceeding what I might need. And that I, that I infused in the business in terms of working capital, and I ended up not needing it.

Yeah, yeah, well, that's great.

Yeah, but I don't think that that's normal. I think working capital is something a lot more people get tripped up on, and is, you know, neither of us had particularly asset-heavy businesses that we acquired, and like, that's where it's much, much more important.

Yeah, absolutely. Um, so let's talk about the, uh, The whole payment thing. Oh, I mean, it sounds like you got like a lot of— you guys had a crazy payment situation with your customers, but did you have any hiccups, we'll call them?

So I could take this two ways. One, this is like your business making payments and, you know, a common tactic is to defer payments as long as possible. And the other one is like getting paid in money. Yeah. And so businesses' accounts receivable was always less than 1% of revenue. It was general. In fact, for the majority of the time I ran the business, it was $0.

Amazing.

It is laughable. Like, how is that even possible? I don't, I don't really know. Yeah.

So wait, so like, walk me through though. Like, okay, so what did you do? Where is it now? Like, give us the journey.

Okay. It's a great question. It was because of that sort of pretty crazy deposit process, which actually caused a ton of work on billing and invoicing and accounting. But, you know, essentially we would always get paid, which was fantastic.

Nothing to collect.

Nothing to collect. I do. I changed that process. You might be like, what? Are you kidding? That is a miracle. Like, how did you even have that to begin with? I think there were a couple structural issues with the way that that was set up. And so as payment facilitator SaaS platforms emerged, We adopted one of those so we could take payments and manage essentially hundreds of merchant accounts as an administrator and take payments on their behalf and send those directly to our clients. And so over time, we did get out of that. You know, we get paid 2 to 8 weeks in advance essentially, and sort of got into a little bit more of a more normal billing cycle. But yeah, I, I'll be honest, I had customers that I set up this, you know, more, more secure, more robust system of this. And I had some that would not sign up for it. They were like, I don't put my Social Security number in anything on the internet. I'm not signing up for that.

Yeah.

Because it was a merchant processor account to get it. Like, like if you sign up for Stripe, it was basically the same process and they just wouldn't do it.

I know this is like, well, okay, so we don't have $0 in accounts at Well, we have more dollars than that. Being an agency, that's just the nature of it. And we historically have done a lot of ACH, but now just because it is such a pain to track down payments and like, I hate being the person that hounds my clients because eventually it's going to come down to me being like, hey, you know, this invoice is 45 days outstanding. And so we are looking to go like we're going to make a move towards probably Stripe, um, in 2026. But yeah, people are so averse to it, and I'm like, I'm gonna eat— I'm gonna eat your— the fees. Like, you don't even have to pay the fees. I'm gonna take that off your plate.

We're switching to Stripe now too. Yeah, we're ACH, and it's— yes, that's a mess.

Yeah, ACH is the worst. I hate it. So if you can get off of that as fast as possible. But I do think that there are other challenges with getting people to input a credit card. They don't want to do it because they think you're going to charge them whenever you want. Yeah, I think so.

It doesn't quite work that way, but yeah, but it's a perception.

It's right, like it's that it's, it's less about the actual legalities and functionality, more about like, oh, if I'm going to put my card in, yeah, they have, they have access to my money.

You can do that with ACH too, just so people know.

Okay.

One thing that we touched on a little bit, but didn't hit on this enough, I think, and it's a really important one, is also the sort of ups and downs of your personal income every month. Like, how did you feel about that? Or maybe this is just me because of sort of the bizarre nature of, you know, the contractual structure of the business I acquired. But I think like, but your, your husband owns a seasonal business. And so, you know, you guys must feel this in, in some way or another across your portfolio. So. Give us some thoughts on that.

Yeah, I mean, I feel like my income has— I have taken my salary up, I have taken my salary down, I have not paid myself commission, I have paid myself commission. I have like, I have used my income as the lever to do what's necessary for the business.

But let's also, to be clear on this too, like, so So W-2 folks can hear this like you generally pay yourself a salary and then as the owner, if you don't have investors depending on the structure, then you would take payments as disbursements. And there is a reason to do those in sort of irregular ways so that they don't appear as income. That's the way you're doing it. But also a lot of these small businesses, you can't make them regular because things are up and down anyway.

Yeah. Yeah. And truthfully, like we have even so when we got, when we acquired, we we had so much— our debt was so stupid with that 19% interest rate that like— and yeah, we couldn't refinance it. Again, long saga. Go back and listen to one of the earlier episodes if you want the full story. Um, so like there were no disbursements, like it was just salary and it was just a matter of toggling that up. And subsequently I think I took it a little bit back down towards the end of the year, slowly or incrementally, where I felt we had the cash wiggle room. Now let's be clear, I was not paying myself much. This was still like hovering around $100K, so we're not talking like, oh, I bumped myself up to $250K, you know, annual. Like, these are, these are meager dollars at the end of the day. Um, so that's what we were doing. With that business. So now we kind of transformed that whole entity into what we're doing today, and now we've got a little bit different structure. I am almost done paying back my working capital to our investors that pitched in to kind of help us get going at the beginning of this year. And then once we're kind of at that point, then we've got no debt and only only like, yeah, pro rata disbursements to make. So amazing. Find me in 6 months, let's say, when we're there.

So, but I think the point is this is like almost never ending in your first bunch of years.

Yeah, never.

And that's what people need to expect. Like, oh, we take a working capital loan for this that we're doing, so that's going to affect it here. And, you know, some, some months it's going to feel like you're making hay, and others are going to feel pretty scary and tight. And, you know, that, that is just of the nature of it, especially at the smaller side of the market.

Which is where, yeah, for sure where we are right now with these kind of newer endeavors. But I think too, like, even like as a business owner, and I think most are, but like I didn't really, I don't know, when you look at the numbers on a spreadsheet, you're like, oh, EBITDA, SDE, wow, like I'm going to get this money. Like that's sort of like, maybe it was just me, but it just seemed a little bit more black and white than what reality actually is. Like, when you're in it, you know, I had— I, I have a, you know, there's a situation where a client of ours recently hit their own financial challenges, small business. So like, I have a lot of empathy for what he's dealing with. It was a whole tax situation. He is unable to— he's been unable to pay, um, the two invoices that he does owe right now. Well, I paid myself commission on that contract that he can no longer pay. Now, he's been awesome and very— given the situation, he's not just ghosting me. He's like, yeah, we're gonna fix this over time. But now if you look at that, right, you're like, well, I paid myself all this money and now I'm not gonna get that money because he's got his own financial stress. So then the next deal that I closed, from a sales perspective, I was like, don't pay me commission on this one, right? Because now I'm trying to make up for the— like, it's just those kind of top, like, things that you have to toggle randomly and all, like, without notice, um, to, to keep things, I don't know, like, moving along the way you want them to. Now, I probably could have paid myself that commission, right? But it's just because I'm It's even wild.

You're the owner and you're talking about paying yourself commission. It's—

but that's—

I think part of it is too, like, I always wanted to be fair with my team. So like, literally I kept a track of, you know, what were, you know, you know, I take a flight that I could have done it cheaper. What's the difference on that? And like, I backed— I would back that out of like my team's bonus structures and things like that. Like, that was just sort of for my own personal honesty.

Yeah.

I mean, it sounds like you sort of have sort of a similar approach to this in some ways also. So yeah, I think, yeah, the moral of the story is there's going to be a lot of ups and downs. There's a lot of social media and, you know, momentum behind search and ETA is this fast-track way to making money. But I think it really is more, much more of a 10-year journey to that sort of those, those bigger outcomes.

Yeah. Have you ever had to employ a collections agency?

No, but we are now, as the business has continued to shift, as we sort of expanded quickly and got new customers, they were not the same customer profile that we had before. And so we will be sending collection notices. Yes.

How does that work?

So the world is changing. We are still I mean, collection, it's the right thing to do. You should not feel guilty about sending these things. Like, that's part of the way I feel. We delivered a service and you haven't paid. Like, that's pretty simple. It's unfortunate, but it's also, I think, something you just have to get used to. Like, you know, this is the part of running a business. This is the expectation. There is a standard number of what your AR is. And, you know, as long as it's within the bounds, which we're still below the targets for our business type and size, you know, that's, that's how it operates.

Yeah, we had to— we, uh, this was maybe a year and a half ago now. We had a client just— I have never seen anything like it— ghost hard, like just drop off the radar mid-engagement. And I mean, we went from having like regular check-in calls and like touchpoints, just completely unavailable. And I mean, I sent them probably 50 emails, LinkedIn, like, messages, you know, just persistent and direct, not like mean, but like, hey, your invoice is now 90 days late.

Um, and we had late fees in there.

Oh yeah, but honestly, Garth, we never got the money. We had a collections agency. They couldn't get ahold of them. I mean, we did everything we could and it was— we had to write it as bad debt. It was so painful and so maddening. It was probably like 5 months of chasing, chasing, chasing, chasing, chasing.

Yeah. We're done with that. Um, you know, we are now fully moving to platform. You pay monthly in advance and we're done with that.

But I think that's like, you know, coming into the business, right, as, as the owner, like you have to look at all that and decide, is this structure, the contractual structure, the payment structure Is it one, best for the business? And two, like, is it what I want to deal with? Because exactly like I was talking to the collections agency, I was handling that as the business owner. And yeah, I don't want to do that.

I, I know customers that, hey, I have one. Our CFO told me that they reached out to you over 30 times and he has now started paying. It worked though. Like, so sometimes that is actually what you have to do.

Yeah. Yeah. You have to be persistent, but I think it is like, to your point, like you have to also stand your ground on like, no, we gave you, we gave you a service. You contractually signed for that service.

Yeah.

This is fair.

We did have, um, once in the contracts, there were sort of two forms of late fees. And so there, I do remember during my period where I had very low AR. One time where it's, I have one client who started to get AR up. I gave him a bunch of notices and I just said, hey, like we've been charging you sort of the nice version of the late fees. We're not going to do that anymore. And I moved them up to the highest one that was allowed by law and by the contract. And it was pretty rough. Yeah. But eventually he paid it. Yeah. Yeah. Welcome to the world of small business ownership. Hopefully this gives some people some thoughts on the stability differences between the W-2 world and small business ownership. Definitely put a lot of thought into working capital. If you somehow find a business where you get paid before you invoice, that could be magical. I'm just going to say, I don't think there are many of them out there, but if you can find them—

unicorns—

let me know, actually.

Look, I want another one.

And yeah, payments. But we didn't really talk as much about paying vendors, but I think what you're going to see a lot more is you know, what is the AR percentage, find out if that's in the right sort of, you know, guidelines that you can find. And then also, you know, what is the process for collecting? Because at some point you're going to have to have those tough conversations and you need to be prepared for that. It's going to come to you as the owner. So yeah, we'll wrap this one up and yeah.

Awesome.

Thanks, Christi.

Mm-hmm.