or Get these
vendors OFF MY BACK!
Unfortunately, this observation is also about Allen, the
landscape maintenance executive described in
"A New Customer at Any
Cost?". Like my Brother-In-Law
("How could she do this to
me?”), Allen had no interest in
the debits and credits of his business. He really
watched the profit and loss statement – revenues by week
and by customer, special services, and special
purchases. He watched the labor-hours for each job and
kept good tabs on the equipment repairs and maintenance.
In addition, he was the licensed party for all of the
chemicals needed in the landscape maintenance business,
so he had to keep on top of that, too.
In other words, Allen was really busy. Being bright and
young, he was able to stay on top of all these areas. But
he really didn’t like to be bothered with the nitty-gritty
of accounting. Tracking which customer owed him money or
which vendor needed money was OK for him. Tracking job
costs and job profitability was fine, but he really didn’t
care for the “guts” of accounting.
As mentioned in "A New Customer at Any
Cost?", Allen had gone through a
tough cash flow period. Vendors had been hounding him
constantly and that really made his life miserable.
At it happened, he hired a new controller. In retrospect,
he must have told her to keep the vendors happy, because
for six months he had great vendor relationships. For
whatever reason they weren’t calling and harassing him or
whomever they could get on the phone. Things quieted down
with the vendors, and life was relatively good.
Until the IRS sent him a notice of
assessment for $250,000 for unpaid payroll taxes!
I can only imagine the impact that notice had to have on
him – literally taking his breath away in panic and fear.
He called me immediately, sure that his new controller had
stolen a quarter of a million dollars from him and that he
was financially doomed!
Of course, I was there immediately, and we began the
diagnostic process of figuring out what had gone wrong. The
good news was that there had been no theft. We found that
his accounts payable to vendors had declined by $250,000
over the prior six months, while his liability to the IRS
had grown by the same amount. The controller had simply
decided to allocate the available dollars to pay the
vendors, since they were the ones screaming every day.
Therefore, the amount owed to vendors was paid down. Since
the IRS wasn’t harassing for payments for the payroll tax
deposits, the IRS was not “a squeaky wheel” who needed
attention. The IRS wasn’t paid, and the company’s payroll
tax liability ballooned in neglect.
The IRS was silent until they were ignored for six months
and decided that they wanted their $250,000 immediately, or
else they would “levy” the business’ bank accounts. That
would mean that every time a customer payment came in, the
IRS would take that cash, until the entire $250,000 had
been paid. That also meant that the next $250,000 of
payroll and vendors would not be paid at all. No one would
work, and no vendors would continue to deliver – the
company would close within 30 days, period.
Thank goodness Allen had a frugal uncle who could help him
out. But the uncle did not loan him the money. Rather, the
uncle provided collateral for a bank loan of $250,000 to
immediately satisfy the IRS. Then the company proceeded to
pay off the bank loan over the next year. Allen watched the
company liabilities to make sure that neither the vendor
accounts payable nor the payroll taxes payable crept up
again while the bank loan was paid off. After a year, the
“uncle’s loan” was paid off, and the other vendor and IRS
liabilities were fairly flat, so that the company actually
ended up better off than when this whole adventure started.
Of course, there was another new controller in place, with
a greater oversight from Allen.
POINT: Why do some people fail to watch their money? It
simply cannot be taken for granted!