The Red Flags I Look For on Every Restoration Business's AR

If you can drive your DSO down, you keep more cash in your account and less on the street. Here's where to start looking.

I'll be honest, this might be one of the most boring topics I've ever talked to you about. But if you hang in there with me, I guarantee you it's going to pay off because it's all about collecting money. And if you can collect money faster, how would that make you feel? How do you feel in the business when your AR is ballooning versus when you're collecting money and things just get more comfortable, right?

So I'm going to point out to you different things that I see as red flags on this topic. Just keep track. How many of these would you say are present in your business? Then I'm going to give you some ideas on what you can do to change, just a simple process you can use to start making progress.

One of the acronyms that I'm going to refer to is DSO. If you don't know what that is, send me an email. I've got a couple of short documents and a short video where I'll explain it to you in more detail. It stands for Days of Sales Outstanding, and it's simply a measurement of how many days, on average, it takes to collect money in our businesses. So if you can drive that number down, it's better, right? More cash in your account, less out on the street. That's the idea here.

I want you to keep track. Send me an email. You don't have to post a response, but send me an email and let me know how you're doing. Then I'll gladly help you make progress. Maybe I can help you knock off a couple of them just in a short conversation.

You know how there are different columns on your aging report, right? Current, 0 to 30, 30 to 60, 60 to 90, and 90 plus.

Red flag is when I look at financials, and I always look at a bunch of different reports when I start working with a client. I've been doing this since 2009, so I've looked at a lot of aging reports, a lot of profit and loss statements, and a lot of balance sheets. I'm going to talk about the red flags that I see most commonly.

It's when that 90-plus column is growing. It's growing, and there are a lot of stories. "Oh, this one's not collectible." "This one is with a collections attorney." There are all these stories. So if your 90-plus column is growing, that's a red flag.

And if you don't know how to see if it's growing month after month, then that's a red flag too. Easy to fix. If you don't know how, just drop me an email.

Another red flag is negative balances on the aging report that don't belong there.

Do you know what a negative balance is? Do you know why there would be a negative balance on your aging report? Two reasons. One, you owe somebody money. Or two, it's a mistake. And a lot of times, it's a mistake.

I'll look at an aging report and I'll see these negative balances scattered throughout it. If there's one and it's a new client, I think to myself, okay, there's a chance that this customer just overpaid, or something changed and we owe the customer money. If the report has a bunch of them, I think it's a bookkeeping mistake.

The red flag is there are balances on the aging report that don't belong there because the work hasn't even been done.

When you look at your aging report, I want you, or whoever you have owning the function of making collection calls, to be able to rely on that report as being 100% accurate. If you can't use your AR report as a tool to hand to somebody so they can do the process of collecting money, then that's a problem.

So this is another red flag: balances on there that don't belong there. One example could be you sign a contract, say a $50,000 rebuild job for Mrs. Jones. You sign the contract, the bookkeeper invoices it, it now shows up on your aging report, and it doesn't belong there.

The next one is what I call customer concentration risk. If we can see that a huge amount of your work is coming from one client, or maybe two clients, that's a red flag. It's not a red flag that something is happening wrong in your business. It's just a red flag. Business health depends, in most cases, on a diverse customer base.

Something that we can't tell from the AR, but if we're looking at the AR on a regular basis, which we'll get into in a minute, we'll be able to tell whether this is happening or not. It's notes.

Is there a process where you're documenting all of your collection activity? Or would you say to me, "Oh yeah, I've got somebody. They make the collection calls, send out the emails, and they make some notes here and there on the job files."

I would argue that's a huge red flag. It's part of the reason why your DSO number, if we calculate it, is higher than it should be, higher than it would be if you were documenting the process. Documenting the calls along the way. Documenting the emails.

Here's how it all hangs together and starts to get better.

Have a weekly aging meeting.

I know. One more meeting. Really? You're saying, "Really, Scott? Another meeting?"

You have to have a collections meeting once a week. If you don't pay attention to it, it won't be seen as important in your business, and it won't get better. I'd argue it'll continue to get worse.

So make it important. As the leader, you've got to put emphasis on it. You've got to make it important.

So what will you do at this meeting?

Once a month, you're going to see where your DSO is. You're going to see that number. Is it getting higher or is it getting lower? Obviously, we want to keep driving it down. We want to take actions to make it better.

Is there a call going out, or an email, or a text, or something, a minimum of once a week? I would argue that, in many cases, once a week isn't enough.

If you don't have a documented collections process and you're not following it, you can absolutely do better. You can drive your DSO number down.

And what does that mean? It simply means you're going to have more money in your operating account instead of having it with somebody else, right? You've done the work. You might as well collect the money.

If you're paying attention to it, putting constant effort into it, and holding that person or those people accountable, it's absolutely going to get better.

Let me tie this all together with the bigger picture.

Your business gets better today if you do this, and your business gets more valuable for the future if you ever decide to sell.

I think everybody exits their business, right? One way or another, you're going to exit the business. It's either through a sale or by passing the torch to the next generation.

Here's the big picture.

If you pay attention to this, I guarantee your business is going to get better today. You're going to collect more money. You're going to get more disciplined about the approach. You're going to have more peace of mind. Everything gets better today.

Then let's talk about the future for a second.

Someday you're going to exit the business. You're either going to sell it or you're going to pass it to the next generation.

In my experience, I help multiple clients a year sell their businesses. I've started and sold multiple businesses. You'll exit. Most likely, as long as your business is sellable, it'll be through a sale.

Being disciplined like this is going to help you sell the business, and it's going to help you sell it for a bigger number.

So why not put a little bit of effort in now to make the business better, starting immediately, and also significantly improve the outcome in the future?

If you ever want to talk about this, just book a call with me. Why not? At the very least, you're going to come away with a very clear set of probably two or three next actions that you can take to start moving things in the right direction.