Showing posts with label days beyond terms. Show all posts
Showing posts with label days beyond terms. Show all posts

Tuesday, July 17, 2012

Small Business Credit (Cont'd)

In the last post we looked at days beyond terms for the five worst industries in Alabama. Now let's look at how Alabama stacks up with the other 49 states:

In the days beyond terms category of small business credit, Alabama isn't doing too badly. We're in the second best category. Georgia and Florida in the deep south are in the worst category. So we should feel pretty good about our position in that regard.


In the bankruptcies category, we're in the second to worst category, with Georgia and Florida doing better. Mississippi is in the best category for business bankruptcies. I wonder what they're doing in Mississippi that causes their businesses to fare so much better?


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Friday, July 13, 2012

Small Business Credit

Typically I write about the state of small business credit each summer based on the first quarters results. I thought I'd compare first quarter 2011 vs. 2012 days beyond terms. Days beyond terms is a measure of how slowly small businesses are paying their bills.  If a company has credit terms of 30 days, and they pay in 37 days, they are 7 days beyond terms. The top 5 worst industries in Alabama for 1Q2011 ranked in order of offense and the 1Q2012 rank are listed in the following table:



Industry
1Q 2011
1Q 2012
Δ Days
% Δ
Bankruptcy %
Construction
12.0
8.4
-3.6
-30.0
3.3
Business Services
9.2
5.8
-3.4
-37.0
2.1
Finance
8.9
7.5
-1.4
-15.7
1.5
Agriculture
8.8
5.5
-3.3
-37.5
1.9
Communications
8.1
6.5
-1.6
-19.8
1.6
List Average
9.4
6.7
-2.7
-28.0
2.1


The list of worst offenders is the same. However, the number of days beyond terms for this worst 5 list has dropped from 9.4 to 6.7. This is 2.7 days quicker payment for this group of industries, a 28.7% decrease in days. This is a significant improvement.


Does this mean that the recession is over? Well, no. Does it mean that the local Alabama economy is getting better? Maybe. What is does say is that these five industries are better able to meet their credit terms in the first quarter of 2012 than they were in first quarter 2011. Maybe this is a result of more financing availability. Maybe it's a weeding out of the worst offenders in the worst industries. On average, 2.1% of companies in these five industries go out of business in the first quarter of 2012. So it can be a little tricky assigning strict cause and effect to these figures. There are so many variables at work.


We'll look at bankruptcies by state and days beyond terms by state in the next post.



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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.