You are currently browsing the monthly archive for October 2010.
Consider this:
Surviving in today’s economy is dependent upon one thing: getting paid. Many small to mid-sized B2B companies are failing not because of a decline in sales, but because they do not have the cash-on-hand to survive if their customers fail to pay. In this economic climate, business owners have to plan for the worst in terms of their own finances, as well as take their customers’ financial situation into consideration.
It generally takes a small business 56 days to get paid by its customers. For a company selling $20,000/week, that’s eight weeks of sales outstanding, which equals $160,000 in untouchable assets. What would the difference be for a company of this size if, instead of risking that amount, it could have guaranteed access to 90% of that capital within 3-4 days rather than 7-8 weeks?
The economic crisis has affected almost every sector of the US economy but there are a few steps B2B companies can take to protect their businesses from losing money this year. Business owners should take into consideration the credit worthiness of their customers before making sales and have a backup plan in place to prevent a loss in revenue from buyer bankruptcy. In today’s market, it’s important to understand the consequences of the business relationships keeping a company afloat and although it’s possible for companies to grow under these circumstances, having an added layer of protection certainly helps.
One increasingly popular way for SMBs to protect themselves from being subject to a customer’s failure to pay is by AR Outsourcing. Here’s some background on how AR outsourcing works and the implications it could have on the health of a company:
Know Who Your Customers Are
Business that use AR outsourcing should implement an underwriting and credit verification process before verifying invoices so that businesses immediately have a transparent look into the creditworthiness of their customers. As a business owner, having this insight helps you avoid selling to someone who might not pay on time – or at all.
A business’ credit management provider should also maintain an ongoing credit monitoring system with its customers to help establish a credit policy that includes trade credit limits and payment terms. Having an understanding with customers about the extent to which you will lend helps ensure a healthy business relationship and protects against unpaid invoices.
Put the Burden on Someone Else
Similar to a B2C company accepting a credit card for payment, AR outstourcing puts the invoicing burden on the credit provider. By working with financial institutions, the credit management vendor borrows against your AR, takes on the debt and provides you with the capital upfront. In some instances, businesses get paid in as few as four business days, which eliminates the hassle of slow paying customers while also increasing a business’ cash-on-hand.
Businesses Have More “Insurance”
By outsourcing AR, businesses are often guaranteed a certain percentage of each sale, thus providing “insurance” for their invoices. In addition, in the event that a customer does go bankrupt, the business is protected and will still get paid. For certain credits, credit insurance backs each sale for up to 90-100% of the amount of the sale made.
By: As founder of FTRANS, John B. Hayes brings over 30 years of experience in developing technology-based companies that help businesses manage their finances. John was also co-founder and president of the company that built Peachtree Software products, the first microcomputer accounting software. He recently published a book entitled, “Use the Credit Crisis to Grow Your B2B Business: A Proven Strategy for Enduring Competitive Advantage and Business Growth, Especially in Times of Crisis or Recession.”
Ftrans combines fast and affordable access to funding professional with receivables services – providing small and medium businesses the business line of credit they need to grow and take advantage of market opportunities. Liberating you from funding challenges and receivables hassles.
I spent some time at the large payroll processor ADP. A very successful company and a very successful public company. They had a significant focus on ‘earnings quality.’ Wikipedia defines Earnings quality as an assessment criterion for how “repeatable, controllable and bankable”[2] a firm’s earnings are.
Since I’ve been involved in the Commercial Finance business, I think of Accounts Receivable in much the same way – how reapeatable, controllable, and bankable is your AR? Every business owner or manager is justifyablely proud of his or her customers – they are the lifeblood of the business. But others, with less pride of ownership, take a more jaundiced view of business practices and their impact.
I’ve quoted in other articles this combination of two Norm Brodskyism’s: It’s only a sale if you get paid for it. That is the essence of quality Accounts Receivable: are you really going to get paid for the sale?
The current state of the state in best practices in Accounts Receivable says: bill correctly and accurately, set the terms to the actual due date, then enforce it …
These practices are key to ensure 1) that credit risk is minimized, 2) that time to payment is as predicted and 3) that dilution is minimized.
AR Dilution is how much you don’t get of what you thought your sales were. This AR dilution stuff includes short pays, discounts, returns, disputed deliveries, or damaged goods. It doesn’t really matter who is at fault in any of this, it just matters that you have AR dilution and didn’t get as much in actual cash for the sale as you originally hoped.
Often this shortfall is based on the quality of the Receivable.
We lend on Receivables. This requires us to develop an opinion of their quality and typically AR dilution. So, let’s take a tour of the Account Receivables in various industries to give you an idea of what I’m talking about.
Hopefully, this view of your business will enable you to better forecast cash and ultimately better run your business. Think about your business in terms of how you sell, contract, and bill; then, how you collect. And think about this key measure: be sure you know how much cash you really are going to get.
Dan Drechsel is CEO of Ftrans. Prior to joining Ftrans, Dan was General Manager of SAP’s Banking business in the Americas. Dan has alos served as President of Global Energy Decisions and was President and COO of S1 Corporation (Nasdaq: SONE), a leading provider of technology solutions for financial institutions and one of the key leaders in distribution channel innovation surrounding the growth of internet banking. Previous to that, Dan served in key executive roles with CheckFree, ADP and D&B.
Ftrans combines fast and affordable access to funding professional with receivables services – providing small and medium businesses the business line of credit they need to grow and take advantage of market opportunities. Liberating you from funding challenges and receivables hassles.
