ABSTRACT

This project summary outlines how

I used the skills and knowledge
gained in the Organization
Management program to help an
established business improve its
cash flows and sustainability.

Capstone Project
Improving Cash Flows in a Down Economy

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Jose A. Mirabal
MAN 4900

Capstone Project | Jose A. Mirabal

All Electrical Solutions, Inc. - An Introduction

For my Capstone Project, I had the opportunity to work with All Electrical Solutions Inc.,
herein referred to as AES. AES is a residential and commercial electrical contracting company
which was founded in 2004. The company was founded by Tom and Mariana Sanchez. Mr.
Sanchez is a Master Electrician with 25 years of industry experience. Mrs. Sanchez has 25 years
of sales and service experience with companies such as Greyhound, SunTrust and Wells Fargo.
The company is based in Homestead, FL and is licensed to do business in both Miami-Dade and
Monroe County.
Nearly all of AESs business comes from residents of Monroe County, better known as the
Florida Keys. Moreover, ninety percent of the companys work comes from residents of the
exclusive Ocean Reef Club. The Ocean Reef Club is a private island off of Key Largo Florida and
is a winter home to some of our countrys wealthiest families. Residents include heirs to the Ford
and Farmer (Cintas, Inc.) fortunes. Tom has provided electrical services to the residents of The
Ocean Reef Club for 25 years. How is this possible, you may ask, considering that the company
was founded in 2004? It comes down to opportunity and drive.
Before founding AES, Tom worked for an electrical company called Reef Custom Electric.
Owner Bob Walsh gave Tom his start in the industry and ultimately changed his life. During his
10 years with Reef Custom Electric, Tom gained a wealth of experience and proved to be an
invaluable employee. He developed a great rapport with his list of high worth clients; and, in a
great sense, became the face of the company. In his final year with Reef Custom Electric, Tom
saw an opportunity to move beyond his role of employee. He approached Mr. Walsh and offered
to buy the book of business from him. Mr. Walsh turned down Toms offer. In a great sense, Tom

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felt as though Mr. Walsh saw nothing more than an employee in him even though hed successfully
run Reef Custom for several years. This was the catalyst. Tom quit his job with the company and
founded AES. Much to Mr. Walshs surprise, not only was AES successful, all of Toms former
clients started to do business with him as soon as they found out hed started his own company. It
was him they trusted to get the job done. Hed successfully positioned his new company as a direct
competitor to his former employer.
Business Overview

AES is currently a small business with a total of 5 employees. Tom is the CEO and COO and
is responsible for bringing in the business and also assigning daily responsibilities, supervising
jobs and ensuring their successful completion. Mariana is the Office and Accounting Manager.
She is responsible for taking service calls and relaying information to the field. She is also
responsible for all of the companies purchasing, billing and payroll. There are three technicians:
Gabriel Gonzalez, Fernando Garriga and Jorge Perez all of whom work at Toms direction.

Its interesting to note that in its 11 years in business, AES has never done any direct
advertising, has not owned a website or proprietary email account and has only accepted cash or
check payments from customers. In essence, AES continues to do business the old fashioned way:
they write estimates by hand, use a manual time punch system for employees, keep all records in
a paper format and mail out paper invoices to customers. As result of its business model, all
incoming business is secured in one of three ways: first time customers referred by word of mouth,
repeat customers calling for new services, and jobs won through a proposal and bidding process.
Whats amazing is that in spite of the fact that AES has not modernized its business, it has been

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profitable to date. In fact, AES grossed approximately $300,000 last year and it saw a $1,000,000
in sales in 2006 and 2007. At that point, AES employed 15 full-time employees.

STRENGTHS

WEAKNESSES

Excellent quality of work and reputation

Poor invoicing, record management and

payment systems resulting in poor cash flows

Affluent customer base

Centralized power with little authority given to

lower level employees

Owned business assets such as vehicles and

equipment

Poor communication between members

resulting in a duplication of efforts, increased
costs and missed opportunities

Low monthly overhead

OPPORTUNITIES

THREATS

Expansion into other service areas such as

electronics installations and Smart Home
applications- the future

Competitive business environment leading to

lower profit margins
Lower levels of new construction

Increasing company size and capacity in order

to capture additional business / bigger, more
profitable jobs

Increased expenses related to increased cost of

materials i.e. copper wiring, aluminum, lumber
etc.
Increasingly specialized field requiring a
specialized workforce

Assessing the Competition

As referenced above, most of AESs business comes from residents of The Ocean Reef Club.
As such, these residents are at liberty to choose who they have work on their home. This puts AES
in direct competition with 45 electrical contractors based in Monroe County and around 1,500
electrical contractors based in neighboring Miami-Dade County (Department, 2013). AESs top
two competitors are: Tri-Systems Group, Inc. and Lomar Electric Designs, Inc.

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Business Problem Defined

How can I reduce and track the average collection period in an effort to positively affect
cash flows and reduce reliance on personal funds?

As part of this project, I interviewed Tom and Mariana in an effort to obtain the fine details
on the companys processes and pressing issues. During my interview, they both advised that the
single most pressing issue the company was facing was collecting from customers. They stated
that while this had not been an issue in the past, they have seen a considerable increase in days
outstanding year over year since the 2008 crash. Currently, AESs accounts receivables are
averaging 65 days outstanding. They advised that this average held true even for relatively minor
service calls which range in between $150-$200. In our discussion, they advised that this delay
was having a negative impact on their business as it forced them to use personal funds to pay for
costs such as materials, salaries and insurances until they could recoup the money and pay
themselves back. Clearly, this issue can threaten AESs existence as poor cash flows can
potentially affect the companys ability to service existing clients and obtain new ones.
Frankly, this was not the issue I was expecting them to have. As mentioned above, they
have been profitable every year; and, considering that the majority of the customer base represents
that top 1%, why would it take them 65 days to pay such a nominal fee? I also questioned the
reliability of AESs data. How could they be certain that the average days outstanding was 65 if
everything is kept on a paper log? My mission was defined.
Viable Solutions
After studying the issue, I came up with four possible solutions that could improve AESs cash
flows. They are as follows:

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1. Pre-paid Service Contracts:

I thought of this option as a viable solution because a large percentage of AESs sales comes
in the form of services calls. In many instances, these calls are from customers experiencing
technical difficulties with their A/C system, a fan, a house alarm or other appliance. Offering
a pre-paid service contract can benefit both parties. Customers can benefit by knowing they
have a guarantee from the vendor that they will perform the services outlined in the contract.
This can give customers the peace of mind of knowing they are prepared in the case of any
emergency; and, it can potentially save the customer money as the cost of emergency services
is in many cases double the normal rate. AES stands to benefit by increasing its cash flow as
a result of the up- front payment from customers. In my study of Business Law I learned that
contracts play an integral part of business. Contracts keep things orderly and help define the
terms or agreement and obligations of each party. They also help to resolve any disputes that
may arise as a result of a failure to perform from either party. A contract call for the
construction of a building, the installation of expensive machinery should be in writing to
protect the parties involved to and to prevent a later disagreement over the terms (Liuzzo,
2013).
For example, a service contract between the customer and AES can read: This service
contract is between AES and (John Smith). In exchange for the agreed upon sum, AES will
perform up to 12 service calls in a 12 month period. Service calls may consist of scheduled or
emergencies services. The contract price includes up to $50 dollars in materials per call. Any
additional materials that may be required will be charged at the respective time. Any service
call performed beyond the yearly allowance will be billed at the regular hourly rate of $100
per hour.

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While pre-paid service contracts can positively affect cash flows for AES in the short term,
they would have some limitations. This option can reduce the customer pool as not many
individuals would consider electrical services to be an essential service they should pre-pay
such as home or auto insurance thus limiting its long term effect. Additionally, this option does
not address the underlying need to accurately track and record receivables.
2. Securing a Business Equity Line
Another option I considered could assist with the companys cash flow problems was an
external revolving credit line. This option could provide working capital and provide
immediate relief by freeing up personal assets currently being used to fund the business.
Additionally, a business credit line could potentially finance additional projects as needed.
Considering that the Flash Crash of 2008 has brought the prime lending rate to near 0%,
finance costs would be relatively low. And, because credit lines are an open credit option,
having a credit line versus taking on a loan would afford AES the ability to draw as much as
they need when they need it. Furthermore, credit lines typically do not have pre-payment
penalties; as such, AES could technically pay off their balance at the end of each month and
pay 0%.
Its important to note that most banks will require customers who wish to open a credit line
to carry a compensating balance. Lines of credit usually require that the borrower maintain a
minimum balance throughout the loan period. This required balance which can be stated be
stated as a percentage of the line of credit or the loan amount increases the effective cost of the
loan to the customer unless a deposit balance equal to or greater than this balance requirement
is maintained in the bank (Keown, Martin, Petty, 2011). Additionally, the flexibility of the
credit lines comes with a variable interest rate which could significantly increase the cost of

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borrowing should interests rates go up. Payments are also affected what type of balances AES
carries on the line of credit and how long it takes them to pay it off. Lastly, while a credit line
can improve cash flows in the short term, repayment of this obligation, would still be
contingent on collecting payments from customers. As a result, while this option can offer
immediate relief, it can prove to be a challenge to the companys solvency and long term future
3. Establishing a Clear Collection Policy with Enforceable Rules
As it stands, when AES invoices customers it sends out a Word document which outlines what
services were performed at what rate, what the total balance is and it provided a telephone number
to call with any questions as well as the payment mailing address. The ambiguity of this invoice
and its terms, could certainly lead to AES extending customer credit in the form of delayed
payments. The final determinants of the level of investment in accounts receivable are the credit
and collection policies- more specifically, the terms of sale, the quality of the customer and the
collection efforts. These policies are under the control of the financial manager. The terms of sale
specify both the time period during which the customer must pay and the terms, such as penalties
for late payments or discounts for early payments (Keown, Martin, Petty, 2011). As outlined
above, setting clear terms of sale provided both an incentive for early payments and a deterrent for
late payments. By employing this method AES could potentially increase its cash flows.
There are some considerations, however, when deciding whether or not to employ this system.
Because many of AESs customers have worked with Tom throughout his 25 year career at The
Ocean Reef Club, they are not accustomed to this system- at least not from him anyway. My fear
is that they may perceive this added pressure as sign of insolvency. Additionally, while setting
payment terms a standard business practice for most, the formality could result in a loss of personal
connection and relationship with the customer.

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The Best Solution- Providing Additional Payment Methods

While the above referenced solutions can positively affect cash flows in the short term,
they can present added risks for the company. For that reason, it is my opinion that the most
effective solution would be to provide additional payment avenues for customers other than just
cash or check. This solution can help AES reduce its days outstanding and help increase cash flows
for several reasons. The services can also help improve customer satisfaction and help AES expand
its customer base to individuals who would only pay by debit or credit card.
We all know that the days of paying bills by check or cash, using snail mail and doing
book keeping by hand are gone. Technology is an integral part of our society and as a result many
tasks which were once manual have moved online. More and more individuals are relying on web
based systems to run their households, pay their bills and keep track of their money. Furthermore,
the widespread availability and use of mobile technology has not only helped individuals move
these tasks online it has also allowed them to complete them anywhere they are. Checking your
bank statement on the subway or pay a credit card bill while you have a coffee at Starbucks are a
part of everyday life. New technologies have also helped improve communication between
customers and companies. For example, you no longer have to mark your calendar to remind
yourself when your light bill is do. By choosing to receive email notifications you can have the
company send you a friendly reminder of its due date or a past due invoice. These options can help
customers reduce the time and effort it takes to pay bills and also helps them to be on time with
their payment.
Whats more, we constantly here about how we are moving into a paperless society and
this also includes cash. National data suggests that approximately 60% of payments are made
using a form of plastic payment such as a credit or debit card (New, 2012). This data would

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indicate that 60% of AESs customers are not being provided their preferred payment option.
Naturally, this could result in delayed payments. Not taking credit cards could also be costing AES
customers that would rather pay by credit card in order earn a benefit such as airline miles or
rewards payments. Moreover continuing its accounting and invoicing by hand method will
continue to cost AES time money and effort to reconcile accounts and follow up on past due
payments. In a great sense affording the customer the option to pay by credit card can improve
both cash flows and customer satisfaction.

Payment Methods

Credit Card

Debit Card

Cash

This option also makes the most sense because it is the most cost effective for AES. The
processing fees associated with taking credit cards may only marginally increase the operational
cost. Credit and debit card payment processing companies are just like every other company they
need to attract customers. As a result of their competition, many offer competitive pricing. Many
companies such as Intuit, Foursquare and others offer plans that have no monthly fee and only
charge a percentage of the sale- typically 3-4%. This can mean that a failure on my part to identify
the best solution could cost them nothing.

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Projected Operational Costs

Using Intuits pricing I was able provide Tom and Mariana a glimpse of costs associated
with processing credits versus the financial cost of delayed payments. For this example, 1 period
is 9 weeks or the average days outstanding.
The operational costs are as follows:

Labor costs, not including management, over 9 weeks (60-65 days outstanding) = $14,400

Gabriel [$10 hr. * 360 hrs. per week * 9 weeks = $5,400]

Fernando [$15 hr. * * 360 hrs. per week * 9 weeks = $5400]
Jorge [$15 hr. * * 360 hrs. per week * 9 weeks = $5400]

Operational Costs over 9 weeks = $9,090

Gas [2 work trucks fueling up 3 times a week at $60 per fill-up * 9 weeks = $3240]
Materials (lighting, wiring, etc.) [ $650 per week * 9 weeks= $5850]

Total Costs: $23,490

Sales are as follows:

AES performs an average of 4 service calls per day @ $150 per call. For the sake of
simplicity, I did not include any larger projects such as new constructions, remodels etc.

Total Sales: $27,000

Now lets assume that each one of these customers chooses to pay by credit card, AES can expect
the following costs Using Intuit Payments pricing:

$27, 000 * 3.4% = $918

20 transactions per week * 9 weeks = 180 * .25 = $45

Total Processing Costs = $963

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Projected Savings
Now, lets perform a time value of money calculation. Lets assume that AES could stand to gain
a return of 2% per month on its money through investments or interest earned from a savings
account. This would mean that in 9 weeks, 2 months for the sake of simplicity, AES could lose
4% interest. The initial cash outlay is, as outlined above, is $23,490.

Inserting an interest rate of 4%, a cash flow of $27,000 an initial cash outlay of $23,490 and solving
for one period using the above referenced formula, we can see that the Net Present Value of
$27,000 to be received in 60 days is: $25,961.24.
Income Loss: $27,000 - $25,961.24 = $2, 471. 54
A quick analysis shows that AES stands to save $ 1508.04. As this calculation shows, the cost of
forgoing a payment by debit / credit card option can far exceed the increased operational cost.

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PROPOSAL FOR PROVIDING CUSTOMERS THE

OPTION TO PAY BY DEBIT OR CREDIT CARD

PREPARED BY: JOSE A. MIRABAL

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PREPARED BY: JOSE A. MIRABAL

Capstone Project | Jose A. Mirabal

Collection Plan Overview

Objective
To develop and deploy a pay by credit / debit card option in order to reduce the
average collection period while limiting the increase in operational costs.

Target Market
Existing customer base and new acquisitions.

Call to Action
Over 60 % of payments are made by debit or credit card. Additionally, credit card
receivables average under 30 days.

Implementation Plan
1.
2.
3.
4.
5.
6.

Find a suitable and affordable payment processing company

Enroll for service
Develop e-mail invoice template
Develop a website that informs customers of service and offers a Pay Now option
Develop a mobile application to allow for doorstep collections
Notify existing customers of added feature through conversation, phone calls and
revising pending paper invoices
7. Revise business card to include new web address

Projected Transaction Costs

Approximately $1,300 per financial quarter.
This amount was calculated using an estimate of 20 services calls a week at $150
per service call. It also assumes all customers wish to pay by credit or debit card.
It is also based on intuits $0 monthly fee option which charges 3.4% + .25 per transaction
Web development is free and web hosting can cost as little as $10 per month.

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Metrics and Expectations

Naturally, the key metric would be how many credit card payments AES averages per
month. The expectation is that 60-70% of customers will pay by credit card. The added
payment avenue should reduce the collection period by around 30 days.

Message Summary
The 21st Century is one of instant access and response. Todays customer makes payments on the
go using their phones, tablets and computers; as such, the key to getting paid on time and improving
cash flows is making it easier for customers to pay you. Low start-up costs and readily available
technology can provide additional avenues to collect payments such as debit and credit cards from
customers. These additional payment avenues can result in lower collection periods, increased
customer satisfaction and a reduction in loss of income.

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Conclusion
Based on my evaluation of AESs business problem and research on the available solutions,
I concluded that giving customers the option to pay by debit or credit card can effectively address
the stated concern and also provides additional opportunities. The added payment methods can
effectively reduce AESs collection period and improve its cash flow without placing an
unnecessary financial burden on the company. Whats more, I feel that this options addresses Tom
and Marinnas deepest concern of how funding the business with their own cash could jeopardize
their retirement. Tom and Mariana stand to benefit by reducing the amount of unearned interest
lost by using their cash to fund the business. Lastly, modernizing AES to include this service and
accompanying it with mobile payment options and a use friendly website can position AES to
remain competitive and in touch with their customers for years to come.
Im happy to say that Tom and Mariana have decided to move forward with this project.
The true selling point was the fact that even as a complete failure that generated 0 payments by
way of debit or credit card, the cost for this project could potentially by $0.
Furthermore, Tom and Mariana have also requested that I develop a company website which they
can use in combination with a Pay Now system. Theyve understood the need to update the
business to meet modern customer needs and to position it for future success. The mobile
application seems promising but Tom and Mariana are not quite ready to embrace this option until
they have a better idea of where their customers stand with regard to paying by credit card.
We have discussed the option of conducting a short customer survey to understand if this
is something thats important to them, how important it is and what features they would like to

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see. These survey results could be used to validate (or disprove) my theory and also gain valuable
insight into sentiments of the greater customer base.

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References
Commerce Department, U. S. (2013). 2013 County Business Patterns. Washington D.C.: United
States Government. Retrieved 2015, from http://censtats.census.gov/
Keown, A. J., Martin, J. D., & Petty, W. J. (2011). Foundations of Finance, 7th Ed. Boston:
Prentice Hall.
Liuzzo, A. L. (2013). Essentials of Business Law, 8th Ed. New York: McGraw Hill.
New, C. (2012, June 7). Cash Dying As Credit Card Payments Predicted To Grow In Volume:
Report. Retrieved 2015, from Huffington Post:
http://www.huffingtonpost.com/2012/06/07/credit-card-paymentsgrowth_n_1575417.html

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