In recent times it has become very clear, especially with the effects of the Global Financial Crisis, that many businesses are now getting caught with their sloppy business practices.

What do you mean Paul?

Well, what I mean is that in good times, businesses can afford to be more casual about their terms of trade and credit policies but when times are tough it becomes crucial that businesses are on top of their game in this regard.

For those who are wondering why, lets explore it further:

In the current economic climate, if you offer credit/account facilities you may find or be experiencing the following:

• Your customers are taking longer and longer to pay – 30-day accounts can easily run to 60 - 90 days and beyond if one is not careful. And, of course, the longer the debt is outstanding the greater the chance that you will not recover the money at all.
• You experience severe cash flow issues yourself … that impacts on your ability to fund working capital and stock requirements … which in turn effects your ability to supply product to your customers or (in worst case scenarios) pay wages of staff or sub-contractors … which means jobs aren’t finished on time … which means progress payments are delayed even further …
and the cycle continues.

Clearly this is a very slippery slope and it affects all players in your marketplace and the associated supply chain.

Some say, what you have said Paul is true, but what can we do about it?

If we don’t do the business on those terms we may not write the business at all.

And to a certain extent there is some truth in that.

However, you do want to make sure that you manage your risk so your exposure to bad debt is minimised as much as possible.

This may mean reviewing/reducing/capping the credit limits that some of your customers have with you. In some cases this may mean putting a “Stop Trade” instruction on their account – until some or all of the arrears are brought up to date.

Some business owners fear taking such steps, thinking they just might go somewhere else; and that’s true, they might.

However, if they are honourable people they will work with you – since the “big picture” is they know that you both need each other in the longer term and especially once the economic climate turns for the better.

Of course, there will always be those who are short-sighted and focus only on the now, and in so doing they burn the commercial relationships they have established.

If they choose to do that then you need to decide do you want to play that game and perhaps risk losing more money to those unscrupulous operators since the ones that play hardball like that either have no intention of paying at all (they will do a runner) or, lamentably, you find yourself in a marketplace dominated by a few players who are throwing their weight around, bullying all and sundry to get their way. Typical examples are supermarket chains, fast food franchises, petrol companies and the like, where competition is well, you know, the
story …

Only last Friday I was talking with a business owner (no names to protect the innocent) and he shared the story of how he had supplied a certain widget with a $10,000 value to a customer as a matter of priority to get the customer out of a “sticky situation” and on the strength of an order number, and yet five and a half months plus later (that’s 165 + days) the account has an outstanding balance of more than half.

Numerous attempts by this business owner to secure his money have fallen on deaf ears. Recently the accounts people of the customer were even so brazen as to say to the supplier, ”We’ve been instructed not to pay that account just yet!”

What! JUST YET!!! – It’s been over 165 days.

Needless to say, all the chasing up has cost this business owner dearly and chewed into his profit margin.

Sound familiar to you? Hmmm

The Good News:

There are things you can do, such as:

1. Review your existing credit polices and terms of trade and make adjustments as needed.
2. Educate your sales team, point of sale staff to be more circumspect as to who they offer an account to.
3. Identify the slow payers and increase your prices (yeah, I know, some of you will baulk at this) to cover the default financing you are providing to the slow payers. Remember you are in business to make a PROFIT and PAY a RETURN on YOUR INVESTMENT, not provide cheap financing to all and sundry.
4. Sack some customers. They are too resource intensive, buy too little and, to top it off, are slow at paying.
5. Consider introducing minimum and maximum monthly trading caps for different customers – this will vary from industry to industry.
6. Make all sales below $X cash or credit purchases at point of sale (not on account).
7. Ensure that your terms of trade retain title in good and service with you until full payment has been made.
8. Establish a relationship with a reputable credit control company. (If you need an introduction to one email me  with your details and I will arrange.
9. Negotiate harder with suppliers to have them provide more for your money. Many suppliers have a marketing budget and if you come up with a campaign that will result in you selling more of their goods (you may be able to have them pay for or at very least contribute towards the cost of that promotion).
10.    If you are having challenges with some current customers or       suppliers then ensure you maintain open communication with them and let them know in civil terms that they are in endangering the ongoing commercial relationship.
11.   If you are not comfortable reviewing your business and perhaps renegotiating with your suppliers and customers then don’t be shy, engage outside expert help so that it can be managed properly with the minimum amount of disruption to your business.

Reminder

Last week I mentioned that we are seeking expressions of interest from motivated business people to become charter members of our “Maximising Profitability In Challenging Times Roundtable”

To find out more go to registering your Expression of Interest