AFR Weekend Edition 9th & 10th November

AFR November 2013

Take control of business cash flow

Good cash flow is the backbone of any small business so when the bills aren’t being paid on time, quick action is needed.

Dun & Bradstreet’s latest Trade Payments Analysis shows 60 per cent of invoices are settled beyond the standard 30-day payment period, with many stretching beyond 120 days.
While the average payment of 53 days during the third quarter of 2013 is slightly better than the previous quarter, it is a day slower than the same period last year and more than three weeks beyond standard terms.

The longer a business leaves it to claim a debt the harder it becomes, says Prushka Fast Debt Recovery chief executive Roger Mendelson. “People can get sick or go bankrupt or become insolvent and the money can be lost forever,” he adds.

Picking up on the challenges of Australia’s current trading environment, Dun & Bradstreet’s latest Business Expectations Surveyfound 41 per cent of companies had a customer or supplier that became insolvent or was otherwise unable to pay them during 2013.

In addition, one in two companies expect cash flow will be an issue for their operations in the final quarter of 2013.

Size matters

Dun & Bradstreet chief executive Gareth Jones says it is not uncommon to see a profitable business fail because of poor cash flow.

“Cash flow issues can affect businesses that are both small and large. The key issue for small businesses is their customer base and, regardless of size, whether or not they pay on time,” says Jones.

Jones adds that while traditionally larger companies are slower at paying bills than smaller ones, it’s the processes in small businesses that let them down.

“Often small businesses may not have the systems and processes in place to chase accounts receivable, as they may go into business doing something they are passionate about, rather than having a business management background,” he says. “Very simple things can often delay invoices being paid, including incorrect contact and address details, failure to include a relevant purchase order number or simply not following a bill up immediately after it becomes overdue.”

Larger firms tend to have efficient and experienced accounts receivable departments and are better able to stay on top of these items. Larger companies are also in a better position to use their market power to manage their own cash flow requirements. Deferring payments can mean millions of extra dollars in the bank earning interest.

Invoice on time to get paid on time

Mendelson says successful small businesses send out one invoice and, if necessary, one statement. “It sends a message that you are serious about collecting the money. If your trading terms are 30 days and you are sending out statements at 60 and 90 days then people will continue to delay payment. It is perceived as a weakness and people under pressure will always look for a weak point.”

Mendelson says it is important to call the customer close to when the debt is due. “Making a polite call as to why an account is unpaid can clear up any issues about the service they provided. They can fix it and get paid. Making the call distinguishes it from being an unpaid account,” he says.

Often there will be people in the business who are better at, and don’t mind, making the chase-up calls. Mendelson says good businesses also send in a debt collection agency at a defined point in time. The earlier the engagement, the greater the chance of recovery.

Prushka works on the basis of “no recovery, no charge”, with any debt over $50 worth chasing. The commission charged depends on the debt. The collection of $1000 will cost $250, with the rate declining the higher the debt.

“In a small business you feel the loss of every dollar that doesn’t come in, so sending out invoices and chasing them up is the most effective tool. Invariably, chasing them is not as unpleasant as you think. People know when they haven’t paid,” says Mendelson.
While chasing unpaid invoices is one way of getting cash in the door, so is being realistic about the business and its processes.

Keep looking to the future

Aide de MD director Charlotte Rimmer says that when times are tough, sales forecasting needs to be as accurate as possible and the break-even point reviewed more regularly.

“With small business there can be a high degree of focus on what the company is doing, but if times have changed you have to be aware of the impact and know what the break-even point is,” says Rimmer.
Accurately forecasting the business outgoings is also important, as well as identifying areas where costs can be cut or redeployed. “If money is owed but the business owner finds it challenging to contact clients to chase unpaid accounts due to personal connections, then look at outsourcing the chasing,” she suggests.

On the flip side, if a business knows it is going to have trouble paying its bills, then it is important to let suppliers know early and negotiate payments. “If you know what is happening, then try to be upfront with suppliers. Nobody likes surprises,” she says.

Jones says businesses can also take action before they get to the accounts receivable process by ensuring they conduct the appropriate checks up front.

For example, do they have a credit agreement that outlines the terms of trade and is signed by the customer?

Did they conduct a credit check on the customer before offering a credit account? Did they consider whether they should offer credit or if cash up front is more appropriate for the customer? Another option is half up front and half upon delivery.

“The biggest challenge for many small businesses is they are often reliant on a small number of customers. As such, they find it difficult to enforce a penalty such as a late payment fee for fear of losing a customer,” Jones says. “That said, if a customer is a continual drain on cash flow through late payments, businesses need to make tough decisions to decide whether they want to continue a customer relationship.”

BINA BROWN