Cash Flow is King

The number one mandate of any business is to survive. This mandate supersedes any other.  An organization must generate enough cash flow to meet its obligation such as payroll, taxes, and payment to trade suppliers and avoid being insolvent.

During negotiations with many debtor companies, the #1 response we typically hear is “We had tons of orders- I don’t understand why I’m in trouble”.  These “successful” business people become insolvent because they simply didn't have enough cash to meet operating expenses, including the added cash requirement that increased sales generates. Without adequate cash planning these debtor companies were not capable of meeting payroll and the purchase of raw materials to meet the sales demand.

With any business the cash cycle looks like this:

Cash is used to buy raw materials or pay for services rendered in the production of the final product or service. The sale of the goods or services produces cash and accounts receivables. When customers pay their bills, the accounts receivable goes down and the bank balance increases. Unfortunately the cash doesn't usually come in the same month as the sales generates.

If a business finds itself short of cash, the options are:

•       The owner can inject more cash into the business.
•       The business can use a pre-existing bank line of credit.
•       The business can slow its payments to trade suppliers.
•       Sale of fixed assets.
•             Sale of non-current inventory.
•             Issuance of company stock.

One of the easiest methods of raising some fast cash flow is to ensure you are collecting money from your credit customers in a timely matter. Your collection efforts should include a systematic and consistent follow-up. This is vital to the establishment in the credibility of your credit terms in the minds of your customers. Time is of the essence when credit and collections are concerned. To be effective one must follow-up diligently. An accurate, timely report of your aged trial balances is crucial to the efficient control of collections and release of new orders.

Putting a customer’s order on credit hold is an excellent way to get their attention. Prompt contact with your customer in a professional, tactful manner usually produces the desired effect. Make sure you respond quickly when your customer pays his account to make sure there are no delays with their next order.

Trust – But Verify

The Value of Validating Your Customer & Supply Chain 

     The phrase “Trust-But Verify” comes from an old Russian proverb. Ironically in the 1980’s it was a favorite mantra of Ronald Reagan.  Wikipedia defines it as: a form of advice given which recommends that, while a source of information might be considered reliable, one should perform additional research to verify that such information is accurate, or trustworthy.

     Back when I was a kid and just got into the receivable management business, I had a boss that used this phrase all the time – and it drove me nuts! Today we have staff in two countries and thousands of clients and can now tell you unequivocally that he was right. Trust your customer but don’t be naïve. Trust the information on the new credit application but complete your due diligence check list anyways.

It’s All About Risk Management

     Trusting your customer and vendors is important in business. Validating that your customer and vendors are capable of fulfilling their obligations is of equal importance – maybe even more so.

 So How Do I Trust But Verify?

     There are many ways to satisfy yourself that your client and vendors are capable of doing good consistent business with you. If possible, we recommend visiting your customer or vendors place of business where practical. Have a look around.  Is the yard busy? Does the stock on the shelves look current? What’s happening at their loading dock? Do the employees look busy? Are the phones ringing?

All these indications are good signs of the level of activity that your client or vendor is operating as a going concern.

What If You Can’t Visit?

     If the physical location of your client or vendor makes it impractical to do a premise visit, we recommend retaining the services of a credit investigation firm that maintains the ability to obtain information not readily available. They should have access to corporate records, land titles or deed information. They should have access to construction project data. Additionally they ought to maintain the capability of performing reference checks on trade suppliers and obtaining a bank check. It should be simple to use an investigation firm. Look for a vendor that provides online access and is equally easy to call on the phone.

Surprises are for Birthday Parties – Not Your Business

     In negotiations, information is power. Access to reliable current data on your customer and supply chain will help you to plan and source alternate suppliers if appropriate. Don’t get caught with no place to sit when the music stops.

About the author:  Brad Lohner is a Director of the PCR Group of Companies which owns Priority Credit Recovery, a Canadian commercial collection agency and AccountAdjustment Bureau, Inc., an American commercial agency. The PCR Group also consists of Lien-Pro – Canada’s only Construction and Builders lien filing firm, and Credit Process Advisors – a strategic credit management and accounts receivable outsourcing firm. Priority Credit Recovery and Account Adjustment Bureau are authorized agents of Lumbermen’s Credit Group, a construction and mercantile credit bureau with access to data throughout North America. 

Staying Out of The Doghouse

In the receivable management world, we see the good, bad and ugly of both business and human relations. While we have touched on this topic before. we believe it is a good time for another review. Let's review the secret to good business.

When I was a kid, my dad had a saying whenever I got into trouble. He would say “What are you in the doghouse for this time?”  As we work through our clients disputed receivables and consult with prospective clients, my dad’s question still rings in my head. Approximately 40% of the cases assigned to our firm in the last 24 months have not been a result of the customers inability to pay, but rather a dispute with delivery, quality, supply chain disruption, unfulfilled promises...and the list goes on. In these situations our firm acts more as a mediator than professional debt collector.

There is a way for creditors and their customer to stay “stay out of the doghouse” and that is to not be afraid of tough conversations. Addressing tough issues head on without your pride or ego getting in the way is difficult. For some, admitting mistakes is tough. Creating an environment where staff and customers can fess up to mistakes can be equally challenging. Trusting your boss to not crucify you for making a mistake can be tough.

So What Do You Do?

A young Jewish man was once quoted by his friend John as saying “… the truth shall make you free.” As was true over 2000 years ago – the same is true today. Phone your supplier or customer and admit you screwed up. While the recipient may not like the message initially, they will come to respect you for admitting the mistake.

Taking this approach will accomplish two things:

1)      Position yourself as a person or company of integrity, and/or;

2)      Establishing yourself as someone who can be trusted during a difficult negotiation.

Managing Expectations

The best way to position yourself as a person or company of integrity is to talk about the “tough stuff” up front. As mentioned earlier, if everyone did this, 40% less receivables would end up in third-party collections and business relations may be stronger than ever! The best way to minimize these troubles is to do your due diligence on your vendor supply chain and customers at least once each year. Check their credit rating, review their warranty claims, review their track records.

If you need assistance with the due diligence process contact our business partner Credit Process Advisors Inc. to obtain information such as credit information, bank checks, builder lien information, law suits, and receivable monitoring.