Diggers Plus is a small construction company specializing in excavating, trenching and other building site preparation construction. A typical project for the company takes one to two weeks to complete. Jim Backhoe, the owner, takes care of the invoicing and the other bookkeeping duties for the company, in addition to actually operating the equipment at many of the project sites. Needless to say, Jim would rather be out operating the equipment instead of sitting in the office preparing invoices!

Jim's cash flow has been . . .well, it stinks! Just last week he received a call from a subcontractor inquiring about the status of the subcontractor's payment for some work completed for Jim. This subcontractor was used at the building site for the Bushes' new home (that's George and Bar Bush). Jim told the subcontractor he was unable to pay him at that time. You might say Jim is digging an early grave for his own business. (This makes sense since he has the equipment for it!) Here is why:

Jim prepares invoices for all completed projects at the end of each month. Jim's credit terms require that full payment be made within 30 days of the invoice date. The work for the Bushes' new home site was completed during the first week of the month. The subcontractor's work was completed one week earlier.

Because Jim waits until the end of the month to prepare invoices, he has added three extra weeks to his cash conversion period.

The "Old" Way of Doing Business

The "New" Way of Doing Business