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:


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.


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.


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):

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.

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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:


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.


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.


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.

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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.


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:


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 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.


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.


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, 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?

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How to collect late payments

Here’s a typical story you can hear from almost any small business owner: the business opens up a credit line to a customer and decides to accept payment in 30 days. Customer buys something, promising to pay in one month. 45 days after the invoice, small business owners find themselves wondering what they can do to make their customers pay while keeping their business relationship intact. It’s a very personal and a painful process.

If you have been feeling that your customers keep stretching the payments they owe you, you are not alone. Most businesses find it extremely difficult to get paid by their customers. In fact, according to a survey by Aite Group, Visa and CashEdge, over 50% of small businesses find collecting payments to be the most challenging aspect of their cash management activities. The issue becomes even more pronounced in industries with heavy use of trade credit, where net terms such as 30, 45, or 60 days are common during B-to-B transactions. Delinquent receivables not only impact the amount of working capital businesses have to function properly, but jeopardize the profitability of many enterprises operating with low margins.

Late payments, unreachable customers, delinquent accounts might be very common in your books. The issue, however, can have drastic consequences if you do not properly deal with it to bring down your delinquencies to a manageable level. Here are a number of tips for businesses on how they can collect more payments without damaging their business relationships:


Knowing your customer is critical. Especially if they are having financial difficulties. If you can find out about your customers’ financial condition, payment habits or legal issues, it will make it easier for you to come up with the proper credit limit you would want to extend to that customer, or approach your transactions with an added level of caution. Today, you can purchase credit reports from major credit bureaus to see the payment habits, legal filings and overall credit ratings of your customers. The reports are expensive however, so pick wisely.

It is usually good practice to purchase credit reports on your important customers on a regular basis to see if there are any updates on their credit, i.e. if they have any bankruptcy history, or any judgments or liens filed against them. This will give you a more complete picture of how risky your customer is. By knowing as much as you can about a customer, you should try to reduce the unpleasant surprises to a manageable minimum.


Keeping track of the invoices is VERY IMPORTANT for sound accounts receivable management. If you keep track of all the invoices with upcoming due dates, this makes it easier to get in touch with the customers who are supposed to pay you soon. Once you know the invoices with approaching due dates, you can start sending your customers very friendly reminder letters to remind them that they owe you money. As long as the language on the letters is friendly, this will keep your relationship intact, and even improve your customer service image with your clients.

Another reason why you should keep track of invoices is that the longer you wait to contact your customer for a delinquent invoice, the less likely it becomes for your customer to pay you back (see chart below). For example, if you wait 90 days before acting on a delinquent invoice, recovery rate goes down by 20%. It is a pure numbers game. It might sounds a little aggressive, but you gotta get that reminder out to your customer as soon as possible.

Source: Commercial Collection Agency Association


If an account is still delinquent after several collection efforts, you might need professional help. This might come in the form of an online platform or a professional collection agency that actively tries to collect your delinquent invoices. When selecting a collection agency, make sure you pay attention to these two things:

1) Recovery rate of the agency: This is the average success rate of an agency when recovering a delinquent payment. The higher it is, obviously, the better it will be for you.

2) Commission fee: This is how much the agency charges. Collection fees usually range between 30-50% for commercial accounts, depending on a number of variables such as invoice size, geography, invoice date and client profile.

Collecting delinquent accounts used to be a lot more difficult. But a series of new innovations are coming to the market to make the accounts receivable management a lot easier for small businesses. Effective tools that help companies virtually at every step of the accounts receivables process will make it easier to extend and manage trade credit between businesses.

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