Message to KS CEO regarding - cash flow. Posted: Sep 21st, 2016 - 7:20 am
I hope you'll take this in the helpful spirit it's intended. It comes from a position of experience that I hope will be useful.
The time period between incurring direct production-related expenses (such as labor) and receiving the income that's correlated with those expenses is notorious for creating cash flow problems.
Unfortunately, many businesses (especially smaller ones) make the problem worse by not proactively managing the elements of billing and collection that shape the relationship between expenses and income. There are things you can do to assert a measure of control over these elements, and together they can improve your cash position significantly.
It's not uncommon for customers to pay their bills just as late as they can - even (or should I say, especially) large customers. From their perspective, this is not bad financial management; it's good management because they are, in effect, receiving interest-free loans from their suppliers for every day that they delay paying their bills. When you're talking about a big company with lots of payables, those little 3-day, 5-day, 10-day "free loans" add up to significant "float" dollars for them. At the same time, of course, they're reducing their own lag between payables and receivables, because they won't tolerate late payment from their own customers!
Note that I say "as late as they can" and this is where you can take some actions that shape the situation.
1. SQUEAKY WHEEL METHOD: You need to be on the phone to delinquent clients on the very first day that the payment is overdue. This means you know exactly who - by name - handles payables, and their contact information. DO NOT CALL THE TRANSCRIPTION ACCOUNT MANAGER with whom you normally deal regarding production. This isn't about production.
If the payables person says the check was mailed yesterday, explain very carefully that those are NOT your billing terms. The terms of an invoice state (or should) the date on or before which the payment must be RECEIVED, not SENT. Then ask them to please move your invoices up in the payable calendar (companies have them) by at least 4 days so that this never happens again - and put it just that way.
If they say the bill has not been sent, immediately ask to speak to their superior, who will likely be the accounting department manager. To this person, explain the situation and provide a means by which the payment can be made immediately electronically, not sent in the mail. Or, if the client is local to you, ask for a time THAT DAY that you can drop by and pick up "my check" (and put it that way, not "a check." It drives the point home. During this conversation, you can also explain that if this happens again, you'll have to impose a daily penalty equal to the interest that you pay for short-term money from your bank or receivables factor (see below) that late payments force you to do. "I imagine my interest rate won't be as good as what you'd pay if you needed to borrow to pay my bill." And, again, say it just that way. Sometimes you have to remind these people about the relationship between revenue and expenses which is just the same on your side of the fence as it is on theirs.
I'm not talking about speaking in a rude way or an angry voice, but being sufficiently direct that there is absolutely no ambiguity about your message: Your bill must be paid on time, every time. You are not a bank funding the "credit float" for your clients.
Will they get pissed off? Not usually, as long as you don't call them a son-of-a-whatnot or the offspring of unmarried parents. For all you know, they just got off the phone demanding payment from one of their own delinquent clients! If you're businesslike about it, the chances are better that they'll have more respect for you rather than less - and no one is disrespected in the payables department than a vendor who's afraid to say boo to a goose. They get paid last.
2. TERMS ADJUSTMENT METHOD: In the best-run accounting departments, discounted invoices get paid first because they represent savings to the company, and/or (if the discount isn't taken) they represent a very high interest rate loan that the company is "taking" just in order to hold onto their cash for a few extra days.
A discounted bill looks like this: TERMS: 2/10 NET 30.
This means if paid within 10 days the client can deduct 2% of the bill, otherwise the full amount is due within 30 days. In other words, the client is literally paying 2% interest for a 20-day "loan". Without doing the math, in simple interest terms, 2/10 net 30 means they're paying an annual rate of 36%!! Are they making 36% on their cash? Of course not. Even if it's rolling through short-term instruments, they're earning a pittance on it. This is why no responsible accounting manager or CFO ignores discounts.
(A retired CFO of a large company taught me this.)
Now - doesn't this cost you? Well, not like you might think. There are numerous advantages to realizing very short turnaround on your receivables (their payables are your receivables), especially if you would have to factor your receivables or hit a line of credit at your bank to meet your current expenses, especially labor. Your cost is also reduced if, having the cash on hand, you might be able to take advantage of discounts in your own payables. The secondary benefits of NEVER HAVING TO DELAY PAYMENT TO YOUR ENGINES OF PRODUCTION should be obvious without further commentary except to note that some of them do translate to dollars - as in the cost of losing people, lost production, the cost of hiring replacements, etc. These costs are not inconsiderable, but I never met anyone at a transcription company who could tell me what their actual costs were in these areas.
3. FACTORING/LINE OF CREDIT METHOD: A "factor" is a company that buys receivables for instant cash. Of course, they don't buy a $10,000 invoice for $10,000 but for something less, and the difference can be viewed as the functional equivalent of interest that you'd pay for the other financing option - a bank line of credit.
Things being what they are, I recommend that you set up a relationship with a factor before you might need to use them to meet a cash short-fall, and do the same with respect to a bank line of credit. These are tools that every small business should have available for contingencies.
4. THE PENALTY METHOD: The opposite of discounting, attaching a penalty for late payment works somewhat the same way. In fact, you can set the terms of an invoice to include both a discount and a penalty. The penalty should be prorated to the daily rate of the discount in such a case just for the sake of rationality. For instance, if your discount is 2/10, the penalty would be 0.2% per day for each day the payment is late.
There are other approaches to managing your receivables and your fiscal relationship with your clients. Whether you use any of the methods above or choose others, the point is that you don't have to be at the mercy of the "whims" of your clients when it comes to paying your bill. You did the work. You met your obligation. You delivered. THEY MUST DO THE SAME.
Should you run into a client who, despite every measure you take, remains delinquent, you need to go a step further and pull a Dunn & Bradstreet because you have a decision to make, which is whether you will continue doing business with them. I can't offer any blanket advice on that, but I do know that one critical factor in your decision that you must consider is whether or not this client is experiencing serious financial difficulties and becoming un-creditworthy even on 30-day terms.
Other signs would be visible to you if you are properly aging your receivables, meaning a process that keeps an eye on how timely or untimely payments are being made to you. If the aging report shows that a client has been trending in the wrong direction...once on time, now becoming more and more delinquent...they are putting your business in peril and as much as you might hate to do so, you need to kindly wish them godspeed (and recommend that they would be very happy with your biggest competitor!) There are other ways to keep your ear to the ground with respect to a troublesome client. I've gone so far as to watch to see what suppliers trucks come to the facility and visited the supplier's accounting department to see if they were experiencing payment problems with the client. They were glad to talk to me.
GET PROACTIVE! NICE GUYS FINISH LAST AND GET PAID LAST - and your people don't deserve to be on the short end of that stick.
Post A Reply Reply By Email Options
Complete Discussion Below: (  marks the location of current message within thread)
|
