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Small Business Survival: What To Do When the Big Banks Won’t Lend

Are big banks lending enough to small businesses? Anyone involved in the small business sector has heard this question as of late. Numbers prove that lending from large institutions has gone down due to the recent financial crisis (as the FDIC data reports, in June 2007, all big banks held just over $400 billion of small business loans, where in June 2011, they held just under $309 billion).  But the real question is, are these banks morally obligated to be giving more?

The truth is it’s hard to say. Both sides of the issue have valid arguments. Small businesses are the backbone of America, and even more so, their ability to be job creators (one of the things we as a country need most at the moment) is unparalleled. In order to have this power, these companies need cash; cash to begin and cash to grow. In the past, the big guys have helped these little guys out. However, due to the effect that lending had on our economy in the recent years, banks have had to become more hesitant in their lending. But who can blame them? Given what happened last time, shouldn’t we be thanking them for being more cautious?

As seen, it can be tough to pick a side. What can be done? Capitalize on what can be controlled. For the moment, small businesses will have to be patient while the big banks become re-acclimated to lending. However, sitting and whining isn’t going to make it happen faster. Therefore, work with what you’ve got.

We’ve discussed before ways to access capital by really “thinking outside the box”. As mentioned, budgeting is an excellent maneuver to really shave off excess cost. Even a little goes a long way. Also, be ingenious in accessing different avenues. There are many interesting lending options out there.

However, in the midst of all this debate, there is a positive angle. With small businesses having trouble accessing cash from other sources, it will force them to look within. The easiest way to get cash is to get it from the people that already owe it to you.

OVER 50% OF SMALL BUSINESSES, according to a survey done by Aite Group, Visa and Cash Edge, find collecting to be the most difficult part of managing their cash. In fact, at least 5 to 10% of their accounts are delinquent. If small businesses were able to better collect that “lost” cash, even just 50% of it, think of the kind of cash they’d have available.

If a small business is doing $10 million in sales a year, their delinquent accounts range from $500,000 to $1,000,000. Imagine, if they focused on better managing these accounts, the amount of interest-free cash they’d have flowing in.

Small businesses need to learn how to better manage their accounts receivable. Creating these habits now will have a lasting effect in the future. These businesses will have perfected the practice of collecting their capital, which will create healthy financial habits and put them in an excellent position when banks are able to lend freely again.

In times like this where there are obstacles that create friction, being proactive, working with what is available instead of working against what isn’t, is always more productive.

So, WHAT IF THE BIG BANKS WON’T LEND? Realize it’s a good thing. It forces small business to look within, bettering their business from the inside out.

Credit Bureaus: Friend or Foe?

Extending credit to customers is an intelligent business process that can be immeasurably valuable in gaining customer loyalty. However, if not done both carefully and thoughtfully, it can become one of the most damaging practices in business. Previously, we worked through the process of wisely determining credit extensions. As discussed, when defining this limit, small businesses often times pull credit reports from agencies such as Dun & Bradstreet, Experian, and Equifax. The problem is that these reports are very expensive. A basic report typically includes court filings (such as bankruptcies, liens, judgments, and UCC filings). Fancier reports include credit scores and financial stress scores that attempt to give an “accurate” picture of a business’ probability of re-paying its vendors. For example, Dun & Bradstreet has established a “Paydex” score (similar to the FICO score for consumers, but in this case, for businesses). The Paydex score measures how well a business pays its vendors, and it is on a scale of 0-100, with 80 signifying a customer that pays promptly. The below chart explains the Paydex scale:

Source: Merchant Account Guide, 2009

Credit bureaus charge a lot of money for these credit reports:

• To conduct a simple bankruptcy – tax lien – judgment search on a business using Experian’s database, it costs $10/search. For a report that includes a full credit score and financial stress analysis, you have to pay $99/month for ONE report .
  

  Source: Equifax.com

• With Equifax, a small business credit report costs you $99.95!

• Lastly, Dun & Bradstreet’s cheapest report (that only includes court filings and NO credit scores) costs $25/report.

What is really frightening is to put these numbers into perspective. Imagine the amount that can be spent on credit reports in one year. Using Dun & Bradstreet as an example, if a company has 1,000 customers and wanted to screen and monitor all of them, at $25 for the cheapest, most bare-boned report, that is $25,000 a year! $25,000, the equivalent of a brand-new car, or even the price to bring on a new employee.

It’s sometimes hard to believe that small businesses are actually willing to pay these prices, because the reality is: payment performance data of small businesses is almost impossible to get. Less than 2% of businesses report their customer’s payment data to credit bureaus. These 2% typically represent the large Fortune 500 companies that get perks, benefits, and discounts if they report payments of thousands of customers to credit bureaus. Relationships with their customers are more distant.

Small businesses, however, usually carry accounts receivable (A/R) on known and local customers that they see in church every Sunday.  Business owners have little desire to report poor paying customers to the credit bureaus; it’s bad for business and for cocktails at the club. Moreover, small businesses are even less likely to report their own financials to the bureaus. Why would they? It does not provide them with any benefits.

Often times credit bureaus “claim” that their credit score and financial stress algorithms paint a very accurate picture of a small business’ payment habits. But, to determine the financial health of, say, a particular pizza restaurant in Manhattan, do you think that dividing the total pizza sales in Manhattan by the total number of pizza restaurants in Manhattan, and using that number, gives an accurate picture?

So why are these reports so expensive? Well, the big credit bureaus have been around for hundreds of years. They have been acting like an oligopoly and what they sell is their “premium brand”. For example, to register with the federal government for contracts or grants, every business is required to get a DUNS number, which is an identifier issued by Dun & Bradstreet. If you don’t get a DUNS number, you can basically forget doing business with the government.

These expensive prices make small businesses hesitant to pull credit reports because they know if they pull a credit report on a customer, and there is nothing wrong, than they will have wasted anywhere from $25 to $100 PER REPORT. Small businesses have therefore been gathering information and data on their customer’s risk profile from other sources:

• They call their friends and other suppliers that have been doing business with the customer.
• Because hard payment data is so hard to get, other services have emerged that try to gather “soft” facts about a small business’ credit profile, such as Cortera. They have a community based scoring system, where businesses can “rate” other businesses (similar to Yelp, but for business credit).
• Some industries have developed their own credit scores, such as Seafax, which provides commercial business information for the food industry in North America.

At the end of the day, this is your business and you will always be the most informed source on your customers, but doing high quality, results-driven research will only make your decisions more precise.

It’s crucial for you to check the credit profiles of your customers when extending them credit. The information is not perfect, but you need to work with the information that is available. Nonetheless, make sure you fully understand the information at hand, the accuracy of it, and how much you’re paying for it.

Win Over Your Customers with Online Payments

Nearly 50% of U.S. small businesses send at least five invoices a day and still, somehow, unpaid receivables remain a chronic disease for small businesses.

            A survey by Aite Group revealed that over 50% of small businesses (or 1 in every 2 businesses) struggle with unpaid receivables. That survey was taken in 2006. Just imagine what those numbers look like today given the recent financial crisis and the current unemployment rate of 9.1% in the US.

Source: Aite Group’s Small-Business Survey, April 2006

Why?

            Businesses are cash strapped and must accomplish more with fewer resources. Businesses extending credit are in need of better ways to manage their accounts receivable so they can get paid faster and therefore, increase their cash flow to start generating more jobs.

As explained in our previous blog, there are considerable reasons why customers don’t pay. If you’re extending credit to customers you should explore every avenue that will help them pay you back. Put yourself in their shoes and do what it takes to win over their heart. More simply put: make your customers love paying you back. Where does this courtship begin? Try focusing on one particular aspect of accounts receivable management: how different payment methods can affect the likeliness of getting paid by your customer. As shown in the figure below, checks remain the dominant payment method for U.S. small businesses:

Source: Aite Group’s Small-Business Survey, April 2006

What is particularly interesting is that U.S. businesses face an expanding range of payments choices as they migrate from paper to electronic payments. The check itself is experiencing a revolutionary decline in favor of electronic payments, primarily ACH and card payments, as shown in the following graph. Paper checks are being “electronified,” either through check imaging or conversion to ACH debits.

Source: Aberdeen Group, June 2008

What are the main reasons for such a trend? The chart below shows the key reasons why the usage of checks is declining:

Source: Aberdeen Group, June 2008

COST

Businesses are focused on cost. It’s that simple. A long-standing advantage of automation, the elimination of manual and paper-based processes consistently delivers more dollars to the bottom line due to increased visibility and the speed of transaction. The removal of paper from the accounts payable department is also one of the more alluring benefits. The costs to cut and send live checks as a form of payment are generally higher than that of electronic payments. Small businesses achieve higher per transaction savings by using electronic payment methods over paper-based checks. As shown below, small businesses can save 30-40% when using electronic payments vs. paper-checks.

Sour: Aberdeen Group, June 2008

Also, by using electronic payment methods, small businesses are able to accelerate their payment processing, which in turn allows them to take any early payment discounts.

SECURITY

What about fraud? Integration of payments with accounting systems is the correct action to reduce costs and mitigate the risk of payment fraud. Risk reduction and the spotlight on reducing costs go hand-in-hand. As the graph shows below, over 40% of small businesses experience fraud when using paper-based checks. On the other hand, ACH and wire transfers are the most secure form of payment methods.

Source: Aberdeen Group, June 2008

Long story short: there are various ways in which you can manage your accounts receivable. You don’t need to always chase down your customers – there are nicer ways of increasing the likeliness of getting paid. However, given that over 70% of small businesses prefer to pay online, you should consider changing the way you’re getting paid by your customers:

Source: CashEdge Small Business Survey, 2006

Ask your customers whether they would prefer to use electronic payment methods (such as ACH) because based on the available data it appears to be exactly what they want.

Why are Collection Agencies so Sketchy?

Every small business extending net terms will have to deal with a collection agency at some point during its operations lifecycle. Engaging a collection agency is almost always considered as the last option, a necessary evil that should only be initiated after all other organic collection attempts fail. The reason for the chronic lag between the time an account becomes delinquent and the time the same account gets transferred to a collection agency can be explained in two ways:

DAMAGED CUSTOMER RELATIONSHIP

When a third party agency starts to deal with your customer, you risk losing that customer for good. However, if that third party did everything it could to preserve that relationship, the story could be different. But that is often times not the case, which brings us to the next point:

NEGATIVE INDUSTRY REPUTATION

Most of the time, the collection agencies are extremely opaque; their fee structure is not easily accessible. Moreover, these agencies use very unpleasant methods to collect outstanding payments, which at times, could be intolerable. Most of the time, they end up permanently damaging your relationship with your customer.

The natural question to ask is: how do collection agencies stay in business? After all, according to the Commercial Collection Agency Association (CCAA), commercial accounts placed for collections rose to close to $15 billion. And that was in 2008; that number should now be closer to $2o billion. Another metric: the trade credit space in the US is a $2.1 trillion industry, and close to 20% of it is delinquent.

Let’s take a look at the industry trends. Back in the mid-90’s the largest collection agency accounted for less than 5% of the industry-wide contingency-fee revenue of $5.5 billion in 1996 (according to a report by Dun & Bradstreet). As a group, the top 10 agencies accounted for just under 20% of the contingency-fee total. Today, when fees from outsourcing, telemarketing, and other non-traditional lines of business are considered, the top-10’s total market share is certainly larger, but based on the traditional contingency-fee measure, 80% of the business remains in the hands of the other 5,000 – 10,000 commercial and consumer agencies. In short, it is a massive industry, but yet so fragmented, opaque and as some would like to put it, sketchy.

It’s not that there are no laws prohibiting bad behavior of collection agencies. It’s that those laws are simply not enforced. As a result, a high number of agencies just ignore these laws. In fact, there are well over 6,000 collection agencies in the United States and only about 5% of those are properly licensed.

The Fair Debt Collection Practices Act has been around for a long time, but given the stratospheric collection fees these agencies charge (which range from 30-50%), the market has been attractive enough to take the risks associated with unprofessional behavior.

Why are the collection fees so high? Let’s just look at what small business owners currently do to manage their accounts receivable. Every small business owner has a percentage of their customer base that is always delinquent (the national average for 90+ days delinquencies is approximately 5%). They first pull expensive credit reports from the credit bureaus, they then try to get their customers to pay by calling them up (good luck, your customer is probably out to lunch), they then send them one reminder letter after another (definitely not an efficient use of their time), they then engage their lawyers to find a solution (costing hundreds of dollars in legal fees), and the list goes on. What’s worse, they waste precious time during this process and the probability of getting paid gets dramatically reduced as the account becomes more delinquent (this was already outlined in our first blog post).

In today’s world, small businesses lack the technology and effective tools to manage their accounts receivable seamlessly and without hassles. Receivables management is not their core business expertise. So to avoid dealing with late customers, businesses send these accounts to a collections agency. The industry is still dominated by old-fashioned mom and pop agencies operating with little-to-no-innovation over the last decade. The cost of collecting delinquent accounts is therefore still high, allowing collection agencies to justify the ridiculously high fees they charge, while getting away with violating the laws imposed by the Fair Debt Collection Practices Act.

Smaller collection agencies feel the competitive pressure more than the larger shops, which results in less transparency, both at the customer as well as at the debtor level. An increase in technology investment is critical to create more transparency in the receivables management industry.

Just as outlined in our previous blogs, start investing in technology to streamline your accounts receivable management processes. You will find that you actually may not need a collections agency to reduce your Days Sales Outstanding and keep your delinquency rates in check. Believe it or not, most processes can be automated, and through investment in technology you can save significant amounts of time and money, increase your cash flow and stay in control of your customer relationships.

Perfect Terms – Ultimate Guide to Extending Credit without Breaking the Bank

If you are giving net terms (i.e. selling on credit) to your customers, you know they are treating you like a bank. They buy goods or services from you, and they end up paying you months later. You are paying others to run your business (suppliers, utilities, lease) and you are letting your customers use your goods and services without paying anything upfront. You are basically giving your customers free working capital.

Extending credit is probably helping your sales, but what about your net earnings? Are you making any profit (and we are not talking about income statement profit here; we are talking about hard cash)? If your customers are treating you like a bank, you’d better be prepared to act like one. If you want to stay profitable while extending credit, you definitely need to use some of the effective tools that banks and other lenders use to extend credit.

We know it is difficult to deal with receivables and act like a lender. It is not your core business. If you really hate and do not want to deal with receivables management at all, you can outsource your entire receivables process to companies like Blue Tarp or trade credit insurance companies such as Euler Hermes. But they are very expensive solutions for many small businesses.

In this article, we compiled some of the best techniques used by other creditors and made them available to you. Below you will find tips on 5 crucial areas of receivables management that will help you extend net terms in a more professional, less risky way.

1. TREAT NEW CUSTOMERS WITH CAUTION

Unless the customer is established, always start with Collect-on-Delivery (COD). If you are dealing with a new customer who never had a business relationship with you, it is important to start with caution. Showing your generous side might end up hurting you a lot. And don’t worry about seeming too anal: if they ever did business with others, they will know that you are just trying to run your business without giving away free cash. It makes sense to establish a track-record with a new customer before offering any credit terms. If they try to push you to extend credit, tell them you will give plenty of credit after they establish a business relationship.

Starting with COD or a very low credit limit will keep your risk exposure in check while allowing you to get to know your customer more.

2. COLLECT YOUR CUSTOMERS’ DATA WITH A STANDARD CREDIT APPLICATION

No matter what happens, have your customers fill out a trade credit application form. Getting as much information as possible will tremendously help you if that account starts going sour. Make your new customers fill out the application the first time they ask for net terms. Tell your existing customers you are updating your credit files and ask them to send you their trade credit information. If you don’t want to send them the same application form, send them an “existing customer info update sheet”.

Putting together a credit application is very easy. You can do a simple Google search to get a sample trade credit application. See sample trade credit applications in manufacturing, construction, wholesale and retail here.

Recently, many companies (like Dell) began automating their entire trade credit process. If you receive a high number of applications every week, you also may want to set up a similar system.

3. DECIDING ON THE CREDIT LIMIT

Before you decide on how much credit to give your customer, make sure you do an initial due diligence check on that customer. Check the trade references. Find out the range of trade terms your customer gets from other suppliers. The credit limit should be based on:
A) Your customer’s overall credit standing (You can check reports from Dun & Bradstreet, Experian or Equifax)
B) Your overall risk exposure (always track your open positions and aged trial balances. If you have an accounting system (such as Quickbooks, Sage or Peachtree) you probably can download it with a single click.
C) Your customer’s historical payment performance (how well they have been paying you)

Resist the urge to extend existing customers more just because they have been in business longer. Statistically, existing customers are just as likely to stop paying as new customers.

If you do not have enough information on a particular person or business, you might be better off doing an investigative research by using services such as Kroll. Especially for big ticket sales that may have an impact on your risk exposure, it might be worth the extra cost.

4. PERIODIC  MONITORING

There are several red flags you can pick up before you realize your customer is in delinquency. Especially for customers that constitute a majority of your overall sales, monitoring their financial risk will help you make better credit decisions. Finding out about liens, judgments, suits or UCC filings of your customers, you can save a lot of time and money during your receivables management process. It may be difficult to monitor all your customer portfolio, but you should at least check your major accounts every once in a while. (Check out Cortera Pulse).

5. QUICK FOLLOW-UP AND A SOLID CREDIT POLICY

It’s a lot easier to set the expectations with new customers than with the old ones. So, the earlier you put up a credit policy in place, the easier it will be to manage receivables. Your policy does not need to be complicated or harsh, but it needs to be clearly defined. For example, let your customers know what your net terms are, what kind of late penalty you charge, when you will contact them about late accounts. Then stick to your word. Whenever someone is late, resist the urge to give them a rain check for this time. Follow your standard procedure.

Clear communication is a critical component of receivables management. Make sure you quickly follow-up on your late accounts. Your customers should know that you monitor your books very closely. If your customers think they are flying under the radar, they will gladly keep stretching their payments.

Always remember, by extending credit you are acting like a lender. If you can get paid in a shorter period of time, you can extend more credit, thus sell more. Unless you put those practices in place, it will always be difficult to increase your ability to extend more credit without increasing your risk.

5 reasons why customers pay late and what to do in each case

Next time you call a customer to follow-up on an invoice, it is important you know how to sift through the excuses they usually give over the phone or in an email. Unless you know the precise reason why they are not paying on time, you may not be able to convince your customers to pay their invoices before their due date. As Jay Goltz puts it, collecting payments is “one of the most surprising, upsetting and dangerous challenges” small businesses face on a daily basis. So, you need a first class game plan.

Most of the time, your late-paying customers fall into one of the five categories we describe below. Your delinquent accounts will usually have customers from ALL of these categories. You should therefore know how to identify each customer’s category, know the reasons and figure out how to act accordingly. Here’s a basic guide that might help:

1. INDUSTRY-WIDE PAYMENT PRACTICES

Reasons: Some businesses pay late because of their sales, receivables and inventory cycles, or operational practices that are customary in their industry.  Some industries are infamous for the notorious delinquency rates (such as construction and building supplies, manufacturing, wholesale distribution. For real-time past-due debt statistics, see Cortera’s Market Trends here).

What you can do: Having a corporate credit policy usually helps. Signal your customers that your practice does not allow for average industry cycles. The fact that many businesses are not able to collect from customers does not necessarily mean you should give up on your receivables. Your customers need to know that you have robust credit policies in place. You need to follow-up regularly on late invoices. You need to help them with their payments (giving them the option to pay in installments, for example). The point is, if you do what everyone else is doing in your industry, your delinquency rates will be just like everyone else’s. If you improve your credit practices, however, your customers will respond to your calls & payment requests.

2. CUSTOMERS WITH OTHER, CRITICAL SUPPLIERS

Reasons: You may not be ranked at the top of your customer’s payment priority list. Your product may not be critical to your customers’ business cycle, or your product may be easily replaced by products from other suppliers. Another important reason may be that your customer has other suppliers that have more stringent credit criteria. So, your customer pays them before paying you.

What you can do: The fact that they have other suppliers cannot be an excuse for them not to pay you. You need to have a firmer stand from the beginning. Have a clearly defined process for your accounts (here are some tips on effective in-house receivables management processes). There are many ways you can ask for the payment you deserve while still being cordial. Your customers need to know that it is as important for your business to get paid as it is for your customers’ business. But we live in a distracted world, and getting your customers’ attention like all the other suppliers is critical in the race to get paid. Always remember: the squeaky wheel gets the grease.

3. CUSTOMERS WHO ARE IN FINANCIAL DIFFICULTY

Reasons: The reasons for this can be anything. Your customer’s business may be going through tough times and they really are unable to pay you back. This category carries by far the highest risk for your receivables. Today, overall business bankruptcy rates are lower than 2009 levels, however the failure rate is still quite high in several industries.

What you can do: To avoid facing such a challenging situation, you need to constantly monitor your customer portfolio to see if there are any changes on your customers’ credit profiles. You can have an idea who is not doing well by simply looking at your customers’ court records such as judgments, liens, suits, UCC filings and bankruptcies. As soon as you know one of your customers is in financial difficulty, you should take action. Adjust the credit limits based on the information you have. If you sold something and waiting to get paid, hurry up and get in front of the line. Because if you don’t act quickly, you may never see that customer again.

4. CUSTOMERS WHO CAN’T TRACK THEIR PAYABLES

Reasons: Your customer’s internal accounting practices may be a mess. A disorganized accounting department or a lack of headcount that knows how to track and process payables may cause delayed payments, not only to you but to everyone dealing with that business. This is a typical scenario for new companies and startups that don’t have the systems in place.

What you can do: This customer requires more attention than others. You may need to follow-up regularly and remind your customer that they have an upcoming payment. Systematic reminders before and after the due date should become part of a standard operating procedure for this type of client. Depending on your relationship, if e-mails, faxes and letters are not powerful enough to get paid, you may have to try more severe methods and capture the attention of anyone in the company who is in a position to pay you.

5. CUSTOMERS WHO KNOW THEY CAN GET AWAY WITH IT

If a substantial part of your accounts falls into this category, you’d better do something to change that.

Reasons: It is the way you deal with your customers. If you have traditionally been tolerant towards the late-payers, your customers already know that there are very little repercussions to paying you late. In that case, it is obviously in their best interest to stretch the payments as much as possible. After all, it is basically free cash. The later they pay, the more working capital they will keep for their business.

What you can do: Standardize your credit policies. Set up clearly defined credit procedures for all your customers. Be firm on your deadlines and your follow-up practices. Collect more information, always monitor your customers, let the world know that you will follow-up on late accounts, precisely because it is your money. “Being predictable” is very important in credit. All your customers should know when they will be getting a call or a letter from you if they don’t pay you. Predictability will lead to credibility. Credibility will help you get paid earlier than you otherwise would.

As Michelle Dunn, founder and CEO of the American Credit and Collections Associations and author of “The Guide to Getting Paid” (Wiley, 2011) puts it, it is not always right to think that it is somebody else’s fault if you are not getting paid (here are some of her other tips).

Always remember that a few basic changes in your receivables management practices can create wonders for your business.

Stop Asking the Government to Find You Capital. Here is a Better Guide.

Let’s suppose that we have arranged a 15-minute interview between just you (a small business owner) and President Obama (and maybe a couple of secret service agents…). Assume that the first 5 minutes of the interview revolves around EVERYTHING non-business related: your family, your town, kids, etc. But then, in the remaining 10 minutes, Obama wants to hear from you about how he can help you to be more successful in your business. What would you tell him?

The answers we might give in this question are an extremely good indicator of the top challenges facing small business owners today. But even more importantly, these insights can help you determine which challenges you should try to solve first as a competitive business owner. After all, America became a superpower as a result of the ingenuity of private enterprise, not reliance on government intervention, right?

So, let’s take a look at the challenges facing small businesses. Obviously there is not much you can do immediately about healthcare costs or tax rates: they are what they are. Nevertheless, many challenges that business owners encounter can be transformed into competitive advantages through information, innovation, and persistence at the business level. For example, if, as with most small businesses, access to capital is one of the first issues that come to your mind, then re-evaluating your business practices will give you an advantage in the market while others await government intervention. Even if Obama manages to get the banks to increase their lending activities and stimulate the economy with more money, you really don’t want to operate your business on the edge, vulnerable to political whims. Yet, by carefully examining your daily operations, you will find many ways to innovate your practices that will improve your cash flow. Here’s a guide on what to do when no-one seems to want to give you the capital to grow your business:

START BY LOOKING AT YOUR OPERATIONS

The capital that you can generate through your own business operations is the cheapest form of capital there is. So, before you go to any lender for financing, you need to make sure that not a single penny is wasted in your operations. Here’s a list of common capital leaks and how you can plug them before they will cost you your business. They may be as simple as renegotiating some of your utilities, looking at the type of rent you are paying every month or making a few changes in your hiring and employment policies. No business operates with perfect efficiency. We all waste a lot of money. In fact, operational inefficiency is such a common problem that there are hundreds of thousands of consulting companies helping businesses to improve their financial operations. Yet, you will be surprised to see how many easy-fixes you can find on your own by simply reviewing your operations carefully.

MAKE SURE YOU GET PAID FOR WHAT YOU SELL

After plugging the leaks, the next line of attack is your receivables. If your customers don’t pay you for your products and services, you will go out of business. And, if you can’t make them pay you on time, you will suffer on the margins as long as you are in business. Just like anything else, this problem can be overcome with a couple of quick, but crucial fixes. Here’s a useful guide by Janet Attard on Amex OPEN platform about how to get paid faster. The recommendations don’t require significant business resources or time investments from your end, yet they will yield sound, effective results.

CAN’T GET A BANK LOAN? LOOK AT DIFFERENT FINANCING OPTIONS

Banks are convenient, but there are other financing options out there. They may be more expensive, but if you minimize your exposure and use them only for a short period of time, you can minimize the cost you have to pay them in order to capitalize your business. Just because banks stopped lending does not mean all capital sources have vanished. They might not be as visible as your local bank, but they are around and may be more attractive options than a traditional lender. In fact, some won’t even ask you for any money until you put their capital to work! Depending on the kind of business you operate, some of these options will fit your business better than others. Scroll through the list below (in alphabetical order):

• Business credit cards (See a list of common business credit cards here)
• Friends & Family
• Leasing & Factoring
• Merchant cash advance and pawn stores (While these lenders have been stigmatized, more and more people are strategically taking advantage of their services. See this week’s Newsweek article)
• Online lending platforms (iBank or On Deck Capital)
• Peer-to-peer lending (www.prosper.com or www.lendingclub.com)
• Receivables financing (The Receivables Exchange)
• SBA Programs (Here’s an overview of SBA Loan Programs)

Depending on your business profile, you will almost always qualify for one or more of these capital sources. Be mindful, however, that some of these sources are VERY expensive and running your business entirely based on the capital coming from these sources might be a fatal mistake. You should always think about what kinds of returns you will receive when you put their capital to work, and then compare it to the cost of the capital you are getting from them. You should carefully review their terms and make sure you can pay them back with your cash flow from operations. But always remember, the cheapest cash is the one that your customers owe you!

Of course it wouldn’t hurt if the government would solve our problems for us, but there is still a lot we can do ourselves, and a competitive advantage to be gained by doing it right.

Beat Your Competition In 30 days. Here is How:

What metric should you use to compare your business to your competition? There may be hundreds, maybe thousands of companies going after the same customers. Your product offerings, however, may be vastly different. You may not need as much marketing as they do. Your #1 competitor may be 10 times your size. Your cost structure may not even resemble that of your next door competitor. So, what can you measure as your competitive advantage?

Surprisingly, there is one factor that all small businesses have in common when chasing the same customers. This one factor may be your strongest weapon. Taking this one factor seriously will allow you to beat your competition even if your competitors DOUBLED their sales. This one factor can be put into a simple question every small business owner should ask him/herself: “how fast do I get paid by my customers?”. Your answer to this question also determines where your customers rank you among their “priority” list of suppliers.

Your receivables are what your customers owe you. Your ability to turn your receivables into cash directly impacts your profits and will allow you to operate with healthy margins. What is amazing about your receivables is that even if your sales stay the same, you can substantially increase your margins by reducing the number of delinquent invoices you have on your books.

To help you understand where you are in your industry’s receivables management rankings, we prepared a quick guide for you:

1. WHAT PERCENT OF YOUR CUSTOMERS FAIL?

Take a look at the failure index chart below. The data is from Dun & Bradstreet’s 2011 US Business Trends Report. The failure index is calculated as a failure rate for an industry divided by average failure rate for the US overall in the same year (You can check out the full report here).

Source: Dun & Bradstreet 2011 US Business Trends

The major industries in the US are included in this chart. If your industry’s failure index is above the index average of 1.0 (displayed as a yellow horizontal line on the chart above), then you need to be extra careful when selling goods/services to your customers on credit, and when purchasing goods/services from your suppliers. Make sure you closely monitor your customer’s financial standing and credit status before extending large amounts of credit, and avoid an over-dependence on a single supplier for a critical component in your business process.

Protecting your business from potential customer (and supplier) failures protects your profits, and gives you an upper hand against your competition. Thus, make sure you do your due diligence before extending credit to your customers or decide to purchase from your suppliers.

2. WHAT PERCENT OF YOUR CUSTOMER BASE IS DELINQUENT?

This is the second trick for your business to stay ahead of your competition. The number of past due accounts on your books directly impacts how much cash you get from your customers. The following chart shows you the percentage of accounts that are 90+ days overdue in each industry (yellow line displaying the aggregate average, 14.2%). Compare your books with the averages from your industry.

Source: Dun & Bradstreet 2011 US Business Trends

Obviously, the winner is ultimately determined by the ability to manage his/her customers and the ability to promptly collect overdue accounts. If your business operates within the manufacturing industry, for example, and you manage to reduce the percentage of 90+ days overdue accounts to half of the manufacturing industry averages, your delinquency rates may be close to the US average but much better than those of your next-door competitor who operates on par with other manufacturers. It requires a delicate balance of refined collection practices (which we will go through in our articles) coupled with the right customer relationship management. It is well worth the effort. Especially in sectors with high delinquency rates, you need very strong credit policies to make sure you always stay in control of your cash cycle.

3. WHERE IS YOUR BUSINESS GEOGRAPHICALLY LOCATED?

You may have already taken a deep breath after comparing your business to the charts above. But unfortunately, it is not over yet. If you are happy that your delinquency rates are on par with the industry in which your business operates, you may be awfully wrong.

The US is the third largest country in the world according to land mass. Due to regional trade dynamics, it is normal for customers in different geographic locations to have different delinquency rates. You can get a better perspective by looking at the business failure and delinquency rates within your geographic area of operation.

According to the same Dun & Bradstreet report, continued residential housing instability and the steep drop-off in the tourism, travel and hospitality sectors made Nevada and California failure rates among the highest in the country (see the chart below for a list of 15 states with the highest failure rates. The yellow line displays the index average of 1.0). The next cluster is formed by New Hampshire, Colorado, Tennessee and Washington. North Dakota, Wyoming and Louisiana have some of the lowest failure rates in the nation.

Source: Dun & Bradstreet 2011 US Business Trends

But when it comes to delinquency rates, we see a different pattern across different states. This time, Arizona, Nevada and Utah top the list of states with the highest delinquency rates (the yellow line displays the national average of 14.2%).

Source: Dun & Bradstreet 2011 US Business Trends

We reviewed some of the methods that will be helpful when you are triangulating where your business ranks in terms of effective receivables management vs. your competitors. If you are one of the millions of small business owners and managers who go to bed every night thinking about ways to improve your company’s profits and stay ahead of your competition…start with better managing your receivables.

Intro to Working Capital Management

It seems like everyone is constantly talking about how important “working capital” is for your small business these days. The topic is everywhere: national TV commercials, morning radio shows, daily newspapers, your local bank branch and White House briefings. Even your kids may be giving you advice at this point.

Working capital is undoubtedly crucial for any small business, but for those of us who are not financial experts, figuring out a sound strategy for managing our working capital can be a daunting task, especially when we are getting bombarded with a constant stream of advice from literally hundreds of random sources. As a result, figuring out the most affordable and the most effective methods to manage working capital may sometimes be more difficult than actually running our business.

In a new series of articles beginning with this post, we will compile, refine and simplify all the crucial things you need to know to better manage — and to quickly improve — your working capital, so that you can go back to growing your business. With practical tips, real-life examples, and step-by-step instructions, we will share the best practices around working capital management in an easy and understandable format.

WORKING CAPITAL & ITS MAIN ACCOUNTS

According to the Small Business Administration, insufficient capital is one of the major reasons why small businesses fail. Very broadly defined, net working capital equals current assets minus current liabilities.

Net Working Capital = Current Assets – Current Liabilities

Current assets and current liabilities include four accounts that are crucial for working capital management:

– Cash
– Inventory
– Accounts Receivable
– Accounts Payable

It is important for businesses to understand how best to optimize the relative sizes and turnover rates of these accounts. Depending on the industry, business size, location, and other individual factors, there can be great variation in methods and suggested approaches to optimization. Nevertheless, the basic strategies for managing these accounts are quite comparable. So let’s take a brief look at each one of them:

CASH

Your cash balance is what pays your bills every day; therefore, making sure you have enough cash to get through your sales cycle is critical. The inability to pay bills, loans, or other expenses can really put a lot of pressure on a business. By focusing on cash generation without increasing your liabilities, you can significantly improve your working capital. Advances, bank loans, and other forms of debt will increase your liabilities. Though you may increase your cash today, you will strain your working capital down the road. That’s why most of the time the cheapest way to access cash is through sales. Therefore, businesses extending net terms to customers find accounts receivable become the major source of their cash balance.

INVENTORY

Inventory is really nothing more than “tied up cash”. You need continuous production with minimal investment in raw materials and minimal reordering expenses. This is mostly an operational balance that every business needs to strike on a case-by-case basis.

Balanced inventories are important because many businesses rely on their stocks of items to make a profit. Stockpiles that never move from the shelves, however, do little good for the company. A proper balance is crucial for the health of your business.

ACCOUNTS PAYABLE

This is what you owe to your suppliers but have not yet paid. You will inevitably have to pay them one day, sooner or later. Your ability to pay suppliers depends entirely on your ability to manage your working capital. Businesses rarely have much real flexibility when it comes to accounts payable: you can stretch your payments, but they always show up on your ledger.

The type of financing option you decide to go with usually determines the terms of your accounts payable (e.g. short term vs. long term, structure of the debt instrument, price, etc). Financing your operations is a critical component of your business and the financial choices you make will determine most of the stress on your working capital. Yet, there is only so much you can do after getting a loan or receiving an invoice from your supplier.

ACCOUNTS RECEIVABLE – YOUR MONEY

This is money customers owe you. You have already earned it and, unless you find a way to effectively collect it before it is too late, it might cost you your business. According to the premier business blog allbusiness.com, effective accounts receivable management tools to reduce those delinquent accounts are especially vital in this tough economy. If you don’t get paid by your customers, you will most likely be in deep trouble. There is a reason why “insufficient capital”, which is to say, money, is one of the main reasons why over half of all small businesses don’t make it past the first five years (see article here).

Unlike the other critical accounts we included in our definition of working capital above, accounts receivable is the one area that is most likely to give you a significant boost if you follow a number of practical actions. Most small businesses do not have effective accounts receivable management policies. They are neither aware of the solutions that will help them convert receivables into cash, or of methods that will help them simply to collect their payments from customers. In our future articles, we will explore in detail the best solutions businesses can use to better manage their receivables, including:

– How to reduce days sales outstanding.
– When to outsource receivables.
– How to determine if it is the right time to sell receivables.
– How to minimize risk and better manage delinquent customers.

We leave you with a simple illustration of the crucial role of accounts receivable for any business:

Assume you are a small business making $2 million in sales with a 10% profit margin. If 5% of your accounts are delinquent ($100,000), then you will need to make an additional $1 million ($100,000 = $1 million in sales x 10% profit margin) in sales (50% more over the current $2 million in sales) to make up for the lost profit!

Which one do you think will be easier for you and your business: increasing your sales by 50% or learning to better manage your delinquent accounts?