Management Lessons No One Taught You: Companies Don't Break Suddenly, They Break Little by Little. Episode 2: The Sale Was Made. The Money Hasn't Come In.

Episode 2: The Sale Was Made. The Money Hasn't Come In.

Monthly sales rankings were posted in the office.

The person in first place was always the same.

Makoto Harada, Manager of Sales Division 1.

He had been with the company for twenty years. It would be no exaggeration to say he had carried the sales department on his shoulders alone. He had developed numerous major accounts and closed new deals one after another. He also had the deep trust of the president.

The young staff in the sales department looked up to Harada. I had heard the president say "Follow Harada's example" at morning meetings many times.

Within the company, Harada was a hero.

There was only one department that saw a different picture: accounting.

This company was a specialized trading firm with about thirty employees.

We purchased construction materials and equipment parts and sold them to construction firms and subcontractors for general contractors. Annual sales were just over 300 million yen.

The profit margin was not that high.

The cost of goods sold accounted for over 80 percent of sales.

In other words, even with 300 million in sales, the gross profit was only around 50 million yen. Once you subtracted personnel costs, rent, vehicle expenses, and other overhead, the remaining profit was thin.

Within this structure, it was certainly important for sales to increase revenue.

However, increasing sales and having money enter the company were not the same thing.

I realized this because of a conversation I had with Murase-san, who was in charge of accounting.

Murase-san was a woman in her fifties who had been running the company's accounting department by herself for over fifteen years.

Payroll, payments to suppliers, management of accounts receivable, dealing with banks, tax payments—everything was in her hands.

Every month, at the end of the month, a stack of invoices would line up on Murase-san's desk. Payments to suppliers, outsourcing costs, lease fees, insurance premiums. She would check them one by one, create transfer data, and take it to the bank.

Payments do not wait.

That is why Mr. Murase was more concerned about payment schedules than anyone else. Which client would pay, when, and how much? That was the source of funds for payments. If payments were delayed, the cash flow would clog. If the cash flow clogged, he would lose the trust of his suppliers.

For Mr. Murase, accounts receivable were not just numbers on a ledger. They were a lifeline to keep next month's payments moving.

One day, before our monthly meeting, Mr. Murase came to see me.

He is usually a calm person. But today, he was a little different.

"Sensei, do you have a moment?"

He said this as he handed me a report.

It was a list of accounts receivable balances by client.

For each client, the balance of accounts receivable and the number of months elapsed since the transaction were listed.

Most clients paid within one to two months. This is a standard collection cycle for the construction industry.

However, there was one company with an abnormal figure.

I will withhold the client's name, so let's call them Company A.

Company A's accounts receivable balance was 2.3 million yen.

The number of months elapsed since the transaction—the oldest one was eight months.

"I've been worried about this for a long time," he said.

Mr. Murase lowered his voice and said.

"Every month, Section Chief Harada records sales for Company A. But there have been months where no payment has been received."

"Even though there are sales every month, there is no payment?"

"Yes. We send the invoices. But the payments don't keep up. The old balance remains, and new sales are added on top. That's why the balance is ballooning."

I looked at the list again.

The accounts receivable from eight months ago were still there.

On top of that, new accounts receivable were piling up: seven months ago, six months ago, five months ago...

The payments received were not zero.

However, the amount received was clearly less than the monthly sales. The difference was directly causing the balance to increase.

"Murase-san, have you told Section Chief Harada about this?"

"I've mentioned it several times. But—"

Murase-san looked a bit hesitant.

"He says, 'I know. I'm chasing them up. It'll be fine.'"

"What about the President?"

"Since it's Section Chief Harada's account, it's hard for me to bring it up..."

Seeing the look on Murase-san's face, I began to see the outline of the situation.

The following week, during my monthly report meeting with the President, I brought up the issue of the accounts receivable.

"President, regarding the accounts receivable for Company A, the balance has ballooned to 2.3 million yen. The oldest items are from eight months ago."

The President looked a little surprised.

"Has it really reached that point?"

"Yes. Sales are being recorded every month. But the payments are not keeping up."

"What does Harada say?"

"I've heard he is chasing them up. However, as a result, the balance has not decreased."

The President crossed his arms.

"Harada is our ace, you know. Company A is a fairly large client. If we push too hard, the relationship might break."

At that point, I pushed a little further.

President, may I show you just the numbers?

Yes.

Sales to Company A over the last six months have been approximately two million yen. Assuming the cost of goods sold is 80 percent of that, it's 1.6 million yen. This 1.6 million yen has already been paid to the suppliers.

Yes, that's right.

Against two million yen in sales, the cash received is almost zero. In other words, this transaction has caused 1.6 million yen in cash to leave the company. The two million yen that should be coming in hasn't arrived yet.

The president remained silent.

On the P/L—the profit and loss statement—the transaction with Company A is profitable. If you subtract the cost from the sales, there is a profit.

Yes.

But looking at the cash flow, it's a negative 1.6 million yen. Even though there is a profit, the company's cash is decreasing.

The president's expression changed.

Wait a minute. You're saying that even though there's a profit, the money is decreasing?

Yes. Even if you record a sale, if you can't collect it, that cash doesn't enter the company. Meanwhile, the purchases have already been paid for. This time lag eats away at the company's funds.

...

When this piles up, you end up with a situation where you have profits, but your account balance just keeps shrinking. This is the gateway to what's known as bankruptcy while profitable.

The president's face stiffened.

That afternoon, the president called for Section Manager Harada.

I was also present.

Harada, the accounts receivable for Company A have reached 2.3 million yen. What's going on?

Section Manager Harada replied with a calm expression.

Yes, I am aware. It seems the other party is also having a tough time with their cash flow, so payments are a bit delayed. However, the business relationship itself is continuing, and they do have the intention to pay.

Are you following up on it?

Of course. I contact them every month.

I interjected.

Section Manager Harada, you contact them every month, so what is the result?

...Well, they say it's difficult to pay right away.

The accounts receivable from eight months ago are still outstanding. You've been following up every month for eight months, and the situation hasn't improved.

Section Manager Harada's expression stiffened slightly.

Sir, the reality of sales isn't that simple. If we push too hard, they'll cut off business with us. If they cut us off, our sales will drop. Is that what you want?

Section Manager Harada, may I ask you one thing?

What is it?

Does the job of sales end at receiving an order, or does it end at collecting payment?

Section Manager Harada was momentarily at a loss for words.

...It ends at collection, I suppose.

Yes. Your job is not done until the payment is collected. Sales without cash inflow are sales on paper, but they don't help the company's cash flow. It's no different from lending them money.

Section Manager Harada fell silent.

The president was also silent.

After a while, Section Manager Harada spoke.

Then I'll just make up for it with other sales. I'll fill the hole left by Company A with other clients.

I couldn't help but speak up.

That is not the point.

Section Manager Harada looked at me.

"Even if we generate sales elsewhere, the 2.3 million yen from Company A will not be recovered. The 1.6 million yen paid to suppliers will not come back either. Filling the hole with new sales means incurring new procurement costs. If we can't collect on those either, the hole will only get bigger."

Section Manager Harada said nothing.

I made a proposal to the president.

"President, regarding how we handle Company A, this is what I think."

"Let's hear it."

"First, I will go to meet Company A directly. Not with Section Manager Harada, but you yourself, President. Or I will accompany you."

"You want the president to go all of a sudden?"

"Yes. This is not a sales problem; it is a management problem. An uncollected 2.3 million yen is not a small amount for a company of this size."

The president nodded.

"On top of that, we will have them pay at least 1 million yen immediately. As for the remainder, we will draw up a written agreement on whether to pay in installments or restructure the terms."

"Is 1 million yen enough?"

"The biggest danger is losing everything by insisting on full recovery. First, let's secure the cash that can move today. The rest depends on negotiations, but the important thing is not to pile up any more ambiguous accounts receivable."

"..."

"And for future transactions, it should be cash on delivery or payment in advance. If that's difficult, at least we should set a credit limit and stop shipments if it's exceeded."

The president was deep in thought.

"There is one more thing that is difficult to say."

"What is it?"

"Is there any prospect that continuing business with Company A will bring significant sales or profit to this company? Is this a client we would be in trouble without?"

The president paused for a moment before answering.

...Honestly, we can function without them.

If that's the case, you should also have the option to stop doing business with them if they don't agree to cash transactions. The effort of invoicing, the effort of chasing payments, and the management man-hours for Mr. Murase—these are costs, too.

The president nodded.

Understood. I'll consult with Harada and go to Company A next week.

Three months have passed since then.

At the monthly meeting, I opened the accounts receivable balance sheet.

I looked at the column for Company A.

The balance had not decreased.

On the contrary, it had slightly increased.

2.5 million yen.

I asked the president.

Did you go to Company A?

The president looked away for a moment.

...I went. I did go, but their president bowed his head and said, 'If you stop us now, the site will shut down. We have a large payment coming in next month. Mr. Harada has been helping us for a long time...'

And then?

Harada also said, 'Let's wait and see a little longer. If we cut them off here, the relationship will be ruined,' and as long as they are bowing their heads like that, we can't really come on too strong, can we?

I remained silent.

The president continued.

Harada is our ace. If he gets upset, it will affect our other clients. I can't afford to make him lose face, can I?

I was thinking of Mr. Murase's face.

Every month, she continues to record accounts receivable with no incoming payments in the books. She issues invoices, checks for payments, and if no payment arrives, she carries it over to the next month. She does this repeatedly, in silence.

To the president, Ace's sales figures are reliable numbers.

But to the accounting department, sales without incoming payments were numbers that provided no power to keep the company running.

Even if they are sales on the books, if the cash doesn't come in, you cannot support purchases, labor costs, or future investments.

It was close to a loan using the company's money with little prospect of recovery.

Three more months passed.

The accounts receivable for Company A had reached 2.8 million yen.

It had increased by 500,000 yen over the past six months.

During that time, the company's cash flow had become visibly strained. Every time the end of the month approached, Ms. Murase would repeatedly check the payment schedules and rearrange the order of bank transfers. Payments to suppliers, which used to be made with ease, were increasingly being pushed to the very last minute of the month.

Company A was not the only cause. However, 2.8 million yen in uncollected funds was not a small hole for a company of this size.

Every month, Section Chief Harada continues to sell to Company A.

Every month, Harada's name appears at the top of the sales ranking.

Every month, the president says at the morning assembly, 'Learn from Harada.'

And every month, purchase costs flow out of the company's account, while the sales revenue that should be coming in never arrives.

On the P/L, the transactions with Company A appear to be generating profit.

But in terms of cash flow, the transactions with Company A are slowly draining the company's funds.

Ms. Murase stopped saying anything.

Before, she used to call out to me, 'Sir, about those accounts receivable...' But lately, she just hands over the reports and says nothing.

She must have realized that saying anything wouldn't change a thing.

I think to myself while looking at the trial balance.

The hero of this company might, without even realizing it, be the one leaving the company's funds out in the cold for the longest time.

But no one can say that.

Because they are the top salesperson.

Because they have the president's deep trust.

Because they are number one in the sales rankings.

The figure of 'sales' covers everything up.

Murase-san from accounting said to me the other day, almost to herself:

"Sensei, the books I'm looking at and the view the president is seeing are completely different."

I couldn't say anything back.

What the president sees is sales.

What Murase-san sees is cash inflow.

Even though they are looking at the same company, the same transaction, and the same numbers, the scenery they see is completely different.

A company does not live on sales.

It lives on cash inflow.

No matter how many sales you make, if the cash doesn't come in, the company will dry up.

On the books, there is a profit.

But in the bank account, the cash needed to run the company was quietly dwindling.

Section Manager Harada was number one in the sales rankings again this month.

End of 'Management Lessons No One Taught You', Episode 2

K's Mutterings

When you praise your sales team, what criteria do you use?
Is it sales volume? Or is it the figures that include collection?
Sales that cannot be collected do not provide the power to run a company.
Behind the sales rankings, the screams of the cash flow statement are sometimes hidden.
Salespeople who see the process through to payment are the ones who truly support the company.