Todd Marks | Crain's Philadelphia

In this ongoing series, we ask executives, entrepreneurs and business leaders about mistakes that have shaped their business philosophy.

Todd Marks

Background:  

Mindgrub customizes mobile, social and internal applications for companies, individuals and educational organizations. The tech firm was founded in 2002 in Baltimore.

The Mistake:

Don't finance your clients.

In 2008-09, during the recession, we faced a chock-full of issues. We've always turned a profit, but during the cash-flow crunch of the recession, there were two payrolls where we just couldn't get enough money through the door. We were doing enough work, but we couldn't collect on our accounts receivable.

The two times I slipped on payroll, I paid it out on a Monday instead of a Friday. That weekend I had to go and just knock on clients’ doors. Had I known it would come to that, I would have fought even harder, because I know how much of an issue it is when employees are worried about getting paid.

We were doing more than enough work for clients, but we couldn't get paid fast enough. In 2009, we had Geico as a client, but we still had another slip in payroll. I thought my employees would all start looking for jobs, and I couldn't afford that.

I was on the porch dialing for dollars, trying to do whatever I could to get just enough money. I first started calling all clients, trying everything I could do. Earlier that year, I had taken a small loan from my dad for $5,000, and I tried to hit him up again. I had already maxed out on everything I could. What I never did was refinance my house. That's the one where I draw the line, that's the sacred value.

So I’m on the porch, dialing for dollars, knowing I couldn't slip another payroll. I turned to my web architect, who was super loyal and one of my better paid guys. I texted him and asked for a loan to cover payroll. It was a couple thousand dollars.

He loaned me the money, and I rode my bike to the bank and put in the deposit. Then I returned to the office and was able to hand out paychecks.

It was a slip, but everybody got paid. That was the last time and we've never looked back. We've been a really strong company ever since.

I was on the porch dialing for dollars, trying to do whatever I could to get just enough money.

The Lesson:

I learned early on that employees, at the end of the day, are working with an expectation to get paid. And as soon as you slip that paycheck, a bit of a bond is broken.

There’s something to be said for bootstrapping and being nimble, but you ultimately have to pay your obligations to your staff.

One of the biggest lessons was recognizing that we were working with a lot of startups so we had to factor in timeliness of payment.

You have to be very mindful, because you can see a really good opportunity with a startup but you have to be careful if you don’t have credit. If I were to go back now, I would have made all my small companies I worked with put 100 percent in some sort of escrow camp.  

We basically worked for a month, then billed, then got paid weeks later. We also charged a fixed price, so I was basically financing their operations.

We ultimately shifted to a different invoicing system with more upfront payments so the only thing we waited on was our profit. Depending on the size of the contractor, it would be 25 percent upfront, 25 percent a quarter way through, 25 percent three-quarters of the way through, and 25 percent at the end. Still, revenue didn’t always come in just like that because clients aren't as particular about invoice terms.

We learned the hard way that we needed to shift our billing considerably, requiring prepayment and penalties for late pay.  It helped our cash flow so we would never get ourselves back into that crunch.

Our bookkeeper once told me, "Unless you're a bank, you're not a bank.” That stuck with me.

It doesn't make sense to finance your clients. You have your business and they have theirs, so they should pay you to conduct your business. You shouldn't be financing their business, because then what you're doing is deluding the focus on your own business.

Follow Mindgrub on Twitter at @mindgrub.

Photo courtesy Todd Marks.

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