Accounts Receivable v Accounts Payable

In the operations of a company, you make money and you pay money. The general intent is to make more than you pay. But sometimes the timing is more important than the amount.

TripleLift gets paid by two types of entities: agencies and DSPs. Agencies pay us based on the terms in the insertion orders (IOs) that they sign with us. DSPs pay us the amount at which each impression clears in the exchange, with reconciliations for discrepancies. In either event, at the end of the month, we send them an invoice saying how much they owe us. Eventually they pay us - somewhere between 45 and 90 days later.

a_r_management.gif

 

TripleLift has a few significant non-employee costs: vendors and publishers. Vendors include our technology costs, marketing expenses etc. The publishers on our platform have contracts that say we will pay them somewhere between 45 and 90 days after the end of the month.

Our business is very cyclical, with Q4 accounting for roughly 40% of annual revenue. Our plan shows us being rather profitable - on paper - in that quarter. But there's a difference between paper profits (transacting the impressions, running the IOs, less the costs of our expenses) and actual cash flow. Cash flow is money received and paid, as compared to the realization of contracts that say people owe you money (this is revenue). So if we have a quickly growing Q4, but in a world where our agencies and DSPs don't pay us until well after we need to pay the publishers, we could get into a bit of a pickle - despite running what is ostensibly a very strong business from a revenue perspective.

Receivables financing serves this exact need. Specifically, if you're going to get paid at some point in the future, you've already done the thing you need to get paid (e.g. deliver the impressions), you have a contract showing it, and you've sent an invoice out, then the bank will lend you that money for that invoice until you get paid, then use the proceeds to pay back the debt - meanwhile you're paying interest on the money the bank lent. The money that the bank lends is "secured." This means that if the company goes bankrupt, we've pledged that the bank has the right to be paid from the outstanding invoices, and can collect them for itself. So the bank has assurance that the money it lent can somehow be retrieved.

The terms with the bank will include an interest rate on the money they've lent, as well as restrictions on the amount that can be lent at any given time. For example, they will lend up to 80% of "receivables" (the total amount of invoices yet to be paid) that are still within 90 days of the invoice having been sent out. Each month, you true up with the bank what your receivables look like and adjust the maximum amount. This means that every month both the maximum amount you can borrow - and the actual amount you're borrowing change. When we collect accounts receivable that we've financed, we pay back the debt - so our total amount of debt decreases.

In the example above, at the end of Q4, we would have a significant amount of accounts receivable from agencies and DSPs, and a large accounts payable due to our publishers. We would draw from our receivables financing as the publisher payments came due (before we were actually paid by the agencies and DSPs), and then we would pay back the debt from the amount paid by the DSPs and agencies as it came in. In this case, the shorter a publisher's payable terms means the earlier we have to pay them - so the longer we pay interest on the account receivables debt. Similarly, the longer it takes for an advertiser to pay us, the longer we pay interest. Both thus have direct costs to the business, though