Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How a Payment Gateway Saved a Bakery Chain's Cash Flow
Transcript
- Lucas: So we've talked about this bakery chain a few times — the one that runs seven locations across the Pacific Northwest. In Episode 45 we covered their rolling forecast, and in Episode 48 we talked about how that forecast actually helped them avoid a crisis when their flour supplier raised prices by 18 percent. Luna: Right, the one where the owner, Michelle, started forecasting weekly instead of monthly. That saved them about thirty thousand dollars in unnecessary debt. Lucas: Same business. But there's a sequel to that story that I think is even more instructive. After they got the forecast under control, Michelle realized that the forecast was telling her something uncomfortable — that her biggest problem wasn't cost, it was timing. Luna: Meaning cash flow timing, right? The gap between when they bought ingredients and when customers actually paid. Lucas: Exactly. The forecast showed that on paper the bakery was profitable — gross margins around 62 percent, healthy for a bakery — but they still had weeks where they couldn't cover payroll without dipping into a line of credit. And the root cause was that they were sending invoices with net-30 terms to their wholesale clients: coffee shops, hotels, a few corporate cafeterias. Luna: Net 30 plus the time it takes to actually get paid. So really more like net 40 or net 45. Lucas: Exactly. Their average receivable was running 42 days. Meanwhile they were paying their own suppliers — flour, butter, eggs — on net 7. So they were financing their customers for over a month, and the forecast made that gap visible in a way that the P&L never did. Luna: Because the P&L shows profit, not cash. You can be profitable and broke. Lucas: That's the classic small business trap. So Michelle decided to attack the timing problem directly. She didn't renegotiate terms — we covered that in Episode 37. Instead, she changed the payment method entirely. Luna: What did she switch to? Lucas: She moved all her wholesale customers from invoicing to a payment gateway — essentially a platform where customers could pay immediately by credit card or ACH, and the funds would settle in her account within one to two business days. She used a gateway that integrated with her accounting software, so the moment an order was placed, the customer got a payment link. Luna: So no more printing invoices, no more mailing, no more waiting for checks to clear. Lucas: Right. And the results were pretty dramatic. In the first quarter after the switch, her average receivable dropped from 42 days to 3.5 days. That's not a typo — 42 days down to 3.5. Luna: Wait, 3.5 days? That's basically instant for B2B. Lucas: It is. And it freed up about $47,000 in cash that had been sitting in receivables. That's money she could use to buy ingredients in bulk, take advantage of supplier discounts, or just keep in the bank as a buffer. Luna: And I assume the customers didn't complain? Paying by credit card is easier than cutting a check. Lucas: Most of them actually preferred it. The coffee shops especially — they could pay right when the delivery arrived, match it to their own sales for the day, and not have to track a paper invoice. Michelle said only two customers pushed back, and both were older businesses that had been paying by check for decades. She offered them a small discount to switch, and they came around. Luna: What about the gateway fees? Credit card processing usually runs 2.5 to 3.5 percent. That's real money on a wholesale bakery's margins. Lucas: Great question. Michelle calculated that the fees cost her about 2.8 percent of revenue from those wholesale accounts. But she also realized that she'd been effectively subsidizing her customers' cash flow — the cost of carrying those receivables was higher than she thought. She figured the implied interest cost of waiting 42 days for payment, plus the administrative cost of chasing invoices, was roughly equivalent to 4 percent of revenue. So switching to the gateway actually saved her about 1.2 percent net. Luna: That's a really useful framework. You have to compare the fee against the cost of doing nothing. Lucas: Exactly. And there's another benefit that's harder to quantify but maybe more important: certainty. Before the switch, every month Michelle had to guess when payments would arrive. Some customers paid on day 30, some on day 45, some on day 60. Now she knows that every order placed on Monday will settle by Wednesday. That predictability is worth a lot when you're managing payroll and supplier payments. Luna: It also reduces the mental overhead. You're not spending half your week wondering who's going to pay and when. Lucas: Right. And speaking of overhead — the admin time savings were substantial too. Michelle's office manager had been spending about four hours a week just on invoicing and follow-ups. After the switch, that dropped to about 30 minutes. That's 18 hours a month that could be redirected to more valuable work. Luna: That's like getting an extra half a week of labor back each month. Lucas: And again, that's not on the P&L as a line item, but it's real capacity. So the question becomes: why don't more small businesses do this? The technology is not new. Payment gateways have been around for years. Luna: I think a lot of owners just assume their customers won't accept it. Or they think the fees are too high. Or they're worried it'll feel impersonal. Lucas: The fear is real. But Michelle's experience suggests that the barrier is lower than owners think. She started with just her top ten wholesale clients — the ones that represented 60 percent of her receivables volume. That let her test the system without rolling it out to everyone at once. Once those clients were onboard and she saw the cash flow improvement, she expanded to all wholesale accounts. Luna: So a phased rollout. That makes sense — you prove the concept with the biggest impact first. Lucas: And you also build a track record to show the hesitant customers. 'Look, ten of your peers are already doing it and they love it.' That's a lot more persuasive than just sending an email saying 'we're changing our payment process.' Luna: One thing I want to ask about: does this work for every type of small business? A bakery selling to coffee shops seems like a strong fit, but what about a consultant who invoices for large projects? Or a manufacturer with net-60 terms? Lucas: It depends on the customer relationship and the typical invoice size. For a consultant billing $10,000 per project, a 3 percent fee is $300. If the client insists on net-60, you have to decide whether that $300 is worth getting paid in two days versus two months. Often it is, especially if you're growing and need cash to hire. Luna: But for very large invoices, the fee can be a real bite. If you're billing $100,000, that's $3,000. Lucas: Right. At that level, you might be better off negotiating a discount for early payment, or using ACH which typically costs a flat fee of maybe 25 to 50 cents instead of a percentage. Most gateways offer both options. Michelle used ACH for her largest wholesale accounts — the ones that ordered more than $2,000 per week — and credit card for the smaller ones. That kept her effective fee rate around 1.8 percent overall. Luna: So the key is to tailor the payment method to the transaction size. That's smart. Lucas: Exactly. And it's worth noting that the gateway she used also automated reconciliation. Every payment was matched to the corresponding invoice in her accounting software automatically. That alone saved her from the dreaded end of month spreadsheet dance where you're trying to figure out which check covers which invoice. Luna: That's the kind of administrative drag that you don't realize is costing you until it's gone. It's like a weight you've been carrying. Lucas: If these conversations have moved your work forward in some small way — helped you think differently about a cash flow problem, or gave you a framework to try with your own business — that's exactly why we do this. We deliberately don't run ads on these shows. It keeps the advice clean and focused on what actually helps. Luna: Yeah, and it means we can talk about things like specific fees and real numbers without worrying about a sponsor's product getting in the way. Lucas: If you want to support that choice — and help keep these episodes free for everyone — the link is buy me a coffee dot com slash fexingo. No pressure, just an option for people who find value here. Luna: So back to Michelle — she told me that one of the biggest surprises was how much easier it became to onboard new wholesale clients. Because the payment process was automated, she could sign a new coffee shop and have them paying within the same week, instead of waiting for them to set up their own invoicing systems. Lucas: That's a competitive advantage. If you're a bakery and you can start delivering to a new client and get paid immediately, while your competitor is still sending net-30 invoices that won't get paid for six weeks, you have a real cash flow edge. Luna: And that edge compounds. Faster payments mean more cash on hand, which means you can negotiate better terms with your own suppliers, which improves margins further. Lucas: That's the flywheel effect. Michelle said that within six months, her cash conversion cycle — that's the time from paying for ingredients to collecting from customers — went from about 49 days down to about 10 days. That's a 39-day improvement. For a business doing about $1.2 million in annual revenue, that's the equivalent of unlocking roughly $128,000 in working capital. Luna: That's real money. It's almost like finding a new revenue stream without selling a single extra croissant. Lucas: Exactly. And it's all from changing how you get paid, not what you charge. So if you're a small business owner listening and you're still mailing paper invoices, I'd encourage you to just run the numbers. Take your average receivable, multiply it by your daily revenue, and ask yourself what you could do with that cash if it were in your account tomorrow instead of in 45 days. Luna: And even if you're not ready to switch entirely, you can start with your biggest customers — like Michelle did — and see the impact before committing fully. Lucas: Right. Small steps, but with big cumulative effects. That's the theme we keep coming back to on this show: cash flow is about the details. The little friction points that add up to weeks of waiting. Smooth those out, and the business runs differently. Luna: It's a good reminder that sometimes the biggest gains come from the simplest changes.