Showing posts with label credit and collections. Show all posts
Showing posts with label credit and collections. Show all posts

Thursday, September 1, 2011

Days Beyond Terms


Business Days Beyond Terms reported by Experian Business Information Services for the second quarter of 2011 show some interesting results.  Like the bankruptcy rates discussed in the last post, the most interesting being that the largest companies had the worst payment rates.


While the publicly released data doesn't give the actual numbers for company size, the full report does disclose figures for industry groups.  For company size, Days Beyond Terms is represented by categories of colors from tan (least bad) to dark red (worst).  I'll represent them with numbers from least bad (1) to worst (5).  For the period ending June 2011, the figures are as follows:

Company Size DBT
1 - 4 1
5 - 9 1
10 - 19 2
20 - 49 3
50 - 99 3
100 - 249 2
250 - 499 2
500 - 999 3
1,000+ 4

Frankly, I'm at a loss to explain this.  Like the discussion about bankruptcy rates, I'm not surprised that the larger companies are having difficulties, but what's different about them versus the small companies?  Anyone have an explanation for this?

Now let's look at industries.  I'll just summarize the top worst offending industries.  These may surprise some of you.

Industry Avg. DBT % $ Delinquent % $ 91+

Construction 12.1 22.8 17.4
Business Services   9.2 12.7   9.0
Finance   8.9 11.2   7.8
Agriculture   8.8 10.5   8.0
Communications   8.1 19.3  11.7



Tuesday, December 28, 2010

Not getting paid? It's probably your own fault!


Extending credit, that is allowing your customers to buy your products and services with the promise of payment later, can dramatically increase your sales in certain industries.  Customers tend to buy more product per order and order more frequently from your business if they can pay for those goods and services at a more convenient time.  Package deals, case quantities and even a full truck-load of merchandise are more palatable when payment doesn’t have to happen on the spot.  And while extending credit can help you sell more product, it can also help your customers better manage their inventory, reduce costs by buying in quantity and better utilize cash during the normal cash flow cycles of their businesses.  Extending credit to customers can really be a win-win situation, and in some industries, is necessity if you want to compete in the marketplace.
  
And for every positive reason for extending credit, I’ll be we can come up with a corresponding negative reason why not to do so.  The fact is, if you mismanage your accounts receivable, you’re going to get burned—and in most cases, it’ll be your own fault.
  
Let’s face it, sometimes people don’t pay.  It may be that they intended to pay, but mismanaged their own business to the point that they ran out of cash or are about to fold.  Every once in a while, and in my experience this is VERY seldom, people request credit with the intention of not paying.  There’s really very little you can do to prevent the occasional bad debt loss.  It’s a cost of doing business and should be included in your yearly budget.
  
However, systemic bad debt loss can be prevented if you properly manage your credit policies.  And the first place to start is by actually having a credit policy.  Determine under what circumstances you will offer credit and the kind of information needed to establish a credit account.  This really isn’t that difficult.  Look around at other businesses in your industry or related industries and see what kind of credit policies they have in place.  At a minimum, require a credit application with detailed information about the business and owner.  If you don’t typically use purchase orders in your business, you should also include a promise to pay.  This section should include any and all purchases and require the signature of an officer of the customer company.  If you utilize purchase orders, you can skip this step.  Some companies try to sneak a personal guaranty statement into their promise to pay.  I find that this generally prevents getting a signature on the application needlessly and doesn’t really grant you much protection in the form you are seeking anyway.  If you need a personal guaranty to sell the account, create a separate legal document for that purpose.  And remember, in most states, getting the signature of only one spouse is practically worthless.
  
After you collect the information from the customer, look at it.  It sounds simple enough, but many companies and credit personnel think that the process is about getting the application signed and a file created.  And while that’s a great start, it’s just a start.  Check the references from their other trade vendors and analyze the information.  If the prospective customer pays their other trade vendors in a timely fashion, they’ll probably pay you on time.  Don’t think that they will treat you differently though.
  
Based on the information contained in the application and from credit references, establish a credit limit that reasonably meets the needs of your customer.  My approach has always been to try to meet the needs of your customer.  If they are requesting a $10,000 credit line, analyze the information in terms of justifying that amount.  If you are comfortable with that request based on their information, then grant the request.  Send the customer, in written or electronic form, a summary of their credit line and your requirements for payment.
Before ever selling the first item on credit, make sure the customers understands your payment terms.  You’re selling valuable products and services at a fair price.  They should expect to pay you on time.  Don’t be afraid to tell them that you expect timely payment.  Start doing business with the expectation that they will pay on time and that they should not expect to get additional products and services if their account is over limit or late.
  
After the first sale, call the customer and confirm that the order was received and copies of all paperwork are in order.  You should reiterate that you appreciate their business and that you’ll call again right before payment is expected to make sure everything is on track for timely payment on their account.  Then, right before payment is expected, call the customer again and actually confirm that everything is on track for payment.  Create the expectation that you will be paid on time.  Follow-up with the first few orders to insure that a new customer is happy with your service, receiving their paperwork and that payment will be timely.
Training your customers to pay you on time is half the battle in accounts receivable collections.  Helping them keep their account in order and payment on time is actually a valuable service to them and helps you generate more sales.  If you have to put their account on hold for late payment, they can’t buy additional products and services and tends to create hostility.  You can prevent this by properly managing the account and keeping it in order from the start.  At the first signs of problems, talk with the customer and help them through their issues.  Letting their account get into bad shape only creates a bigger problem in the future.

Wednesday, March 3, 2010

Weathering the Economic Storm - Part 4 - Cash


In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I spoke about managing your business to improve profitability.  While you should be doing these things all the time, you should pay even more attention to them during a period of economic distress.  Part three discussed reviewing your costs.  Now, in part four we’ll talk about the king of all concerns for small businesses: Cash.

It’s the Cash, Stupid!

In the verbeage of the 90s and the lesson painfully learned by President Bush (41), “it’s the economy, stupid!”  Times have changed and for the worse, but the theme for small business stays the same.  It’s not the economy, it’s the cash.  It’s always been the cash.  It’ll always be the cash.  For small business success, CASH IS KING.  A small business can survive a period of less-than-optimal profitability.  But as soon as a small business runs out of cash, it’s out of business.  If you can’t make payroll on Friday, how many of those employees will show up on Monday and keep working?  If you can’t pay for that last load of raw materials, do you think you’ll get another?  What if you don’t make your loan payment to the bank?  I’ll tell you what, you’re done!

Cash is important for small business success in all times, but especially so during times of economic turmoil.  Look for ways to collect your cash faster and conserve it once in your possession.   A few options to consider might include:
  • Collect your accounts receivable faster
  • Review your credit policies
  • Consider shortening your payment terms or offering a larger cash discount for quick payment
  • Postpone expansion plans until the market is stronger
  • Don’t build new buildings or add more office space
  • Postpone any risky projects
  • Delay hiring new employees unless they will directly improve cash flow
  • Reconsider expanding into new sales territories

In some cases, your business will need to do new things and expand in some ways.  The key is to postpone any risky ventures until times are better.  Those ventures that you consider worthwile need a rock-solid and fast ROI to prevent excessive cash drains.  When you do dicide to try new things, make sure you have ample cash reserves in case your time-frames lengthen and cash doesn’t flow as you anticipated.  Remember, iIt’s difficult enough to profitably expand and conserve cash during good times, much less during bad times.

NEXT AND FINAL INSTALLMENT:  Relationships

Tuesday, February 23, 2010

Weathering the Economic Storm - Part 1 - Corporate Dashboard


The economy is slow and jobs are disappearing by the day.  The outlook for most businesses is not so rose-colored these days.   How’s a small business owner to survive this economic storm?

Over the next five entries, we'll look at strategies that small business owners can employ to re-evaluate their business model and operating efficiencies.  This is no time for halfhearted management.  Times of economic distress call for decisive action and clear plans.  You need your whole team working to forward your plan in the most efficient and productive manner possible.

Corporate Dashboard

Start by re-evaluating your corporate dashboard.  What’s a corporate dashboard, you say?  It’s like your car’s dashboard in that you have a few gauges that tell you the important aspects of your cars performance.  For instance you have a speedometer, tachometer, fuel gauge, temperature gauge and voltmeter.  Perhaps your car has more, perhaps less.  In any event, these few gauges measure and tell you in a visual way, how the most important functions of your car are performing.  In the same way, you and your management should evaluate and determine the most important functions of your business and then keep your eyes on them every day.  By creating a ‘dashboard’, you have a single sheet of paper or even better, a single computer screen displaying the vital characteristics of your business.  If one of the gauges is off, you should investigate.

On a regular basis, you and your team should determine if your dashboard is still serving as the most important measures of your business.  If not, make the necessary changes.  Once you've determined what to look at, then actually look at it.  Having a nice dashboard set up in your corporate intranet and then not using it to better manage your business is like buying a new car and not filling it with fuel.  It might look nice sitting there, but it doesn't provide you any transportation and it costs a lot of money.

When your dashboard tells you that something is amiss in your operations, investigate further and get to the bottom of the problem.  Determine the best course of action to fix the problem and then measure your results.  Continue tweaking the problem and measuring your results until the problem is solved or the process is improved.  The key is to take action and measure results. 

NEXT:  Reviewing Profitability