Home' Border Enterprise : Summer-Autumn 2011-2012 Contents enterprise
Vol 5. Summer/Autumn
NOTHING is more frustrating than
clients who take forever to pay
their bills and treat you like a
bank. They pressure your cash
flow, waste time and cause
stress. All too often, hardworking, honest small
business owners are the last to be paid and cash
flow complications eventually kill the venture.
It now takes an average 55.6 days to be paid
-- the slowest rate of payment in three years --
according to credit information company Dun
& Bradstreet. Average payment times for small
enterprises with up to five employees ballooned
by five days to 56.6 days in the March quarter.
I expect this to be even higher -- possibly the
worst in a decade - when June-quarter figures
are released. Small enterprises that do not
have their cash flow cycles in order could be
Consider the recent past: more signs the US
economic recovery is spluttering; Europe on
the brink of a mini-GFC if Greece can't meet
its debt; the Australian sharemarket within a
whisker of a correction (a 10 per cent fall); more
signs the local property market is weakening;
and rising mortgage stress. Watch for more
business failures to follow.
It is a long list of dangers. Several company
directors I spoke to at a recent conference
-- some on the boards of Australia's largest
enterprises -- said trading conditions had
weakened noticeably since March. That usually
means big companies taking even longer to pay
The sleepers in this cash flow conundrum are
property prices and mortgage stress. I suspect
many small business owners have used rising
equity in their home over the past five years as a
backstop. They borrowed against their home to
inject funds into their business when conditions
weakened, or used home equity for personal
cash flow. Flat or falling property prices -- and
likely interest rate rises later this year -- mean
that party is over.
Higher levels of mortgage stress will see more
small businesses pay others later, as owners
preserve their own income to meet a home-loan
payment -- usually the last thing to be cut -- and
keep their home. This is a far bigger problem for
the small business sector than is yet realised.
Despite the gloom, I still believe this period
of economic weakness is transitory. The
commodities boom, rebuilding from natural
disasters, and improvement in the global
economy will lift trading activity late this year.
But I would not bet the house on it: Australia
has not had a synchronised sharemarket
and property downturn for years. Rarely has
consumer confidence been this fragile.
The message for small business owners is
clear: buckle up, and re-examine your cash
flow. How will your enterprise cope if it takes
more than two months to get paid? Here are 10
ideas to consider:
1. Confirm your banking relationship
Weak trading conditions will see banks
tighten the screws further on credit. Ensure your
line of credit is secure and talk to your financier
about their cash flow expectations.
2. Analyse your cash flow
Do some basic scenario analysis: what does
your cash flow look like if revenue drops 10-20
per cent in 2011-12 and it takes up to 60 days
to be paid? What is your margin of safety?
3. Bill earlier
Do not wait until the end of the month to
send your invoice; do it as soon as the work is
done or products provided. Consider changing
payment terms to speed up cash recovery.
4. Pay later
Only pay bills earlier than due if there is a clear
benefit, such as maintaining strong relationships
with key suppliers. Reconsider your accounts
5. Identify problem payers
Rank debtors by the time taken to pay bills,
and devote extra resources to billing and
collecting payment from the bottom 20 per
cent. Talk to them about the problem and
ask what can be done to work together to
6. Streamline billing processes
Ensure your bills go to the right person, in the
right form. Do not make the mistake of emailing
an invoice and having it stuck in someone's
inbox for six weeks while they are on holiday.
Know the accounts person who pays the bills
and ensure they contains the right information
for smooth payment.
7. Debt collection -- part I
Chasing outstanding invoices can be tricky
for small enterprises that have low power with
big clients. Wait too long and your cash flow
suffers. Be too aggressive and you risk losing
key business. Have a clear policy and process
on steps to be taken to recover outstanding
8. Debt collection -- part II
If possible, devote more resources to
accounts receivable. For example, an effective
part-time employee who chases up outstanding
bills will pay their wage several times over.
9. Debt collection -- part III
Consider selling your accounts receivable to
a credit-recovery agency if many debts look
unrecoverable, and the recovery process takes
too long. Yes, you have to sell those debts at
a discount, but they could be worth a lot more
than if they languish on your books. And it may
be cheaper than legal action.
10. Stand firm
Too many small businesses are soft when
it comes to debt collection. Understandably,
they don't want to confront a key client and risk
losing business. But payment terms must mean
something: what is the point of "payment due
within 28 days" if you never enforce it and no
one pays any attention?
Do not wait until strained cash flow threatens
your business survival -- and your sanity - before
getting tougher on late payers, who are, in
effect, reducing their bill by keeping funds in
their account longer and using your cash flow
cycle to help fund their venture.
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