Howe's Bayou Brad Howe's monthly guide to navigating the swamps of small business financial management October 2009 Good morning! The recession has shifted the buyer-seller negotiation in favor of the buyer. Competing for the order seems to involve ever-more concessions by the seller. Even closing the sale doesn't mean that the race is over. The baton gets relayed from sales to finance, and until payment clears there are a lot of potholes in the road to the bank. Best regards, Bradlee T. Howe Financial Managers Trust Potholes in the Road to the Bank My sisters always told me that I'd get hurt chasing women.Sure enough, it happened this summer. See, my granddaughter Abby was running away, resisting (?!) my charms. So I set off in hot pursuit. Between us was this well-concealed hole in the lawn. In went my foot. In a flash, my femur went left, my tibia went right, and my knee went kaput. Abby chortled (ah, women). I gamely continued the chase and caught up to her at the sandbox. A couple of weeks later, I caught up with the surgeon after the MRI. "What have you been doing?" he asked, routinely. "Chasing women," I confessed. "That sometimes hurts," he acknowledged, with barely detectable irony. "I know," said I. "That's what my sisters always said." So I'm two weeks into a four-week regime of crutches in hopes that the swelling will go down and the cartilage will "reseat" itself. My clients these days are all in the chase as well. Their quarry is their customers, and their pain stems from extended accounts receivable. Several of them have put themselves in a hole by not being in hot pursuit right from the invoice date, and they're discovering that their banks are now less willing to provide a crutch in the form of an extended line of credit based on their receivables. End of the metaphor. On with the lesson. Whether you're selling products or services, big ticket or small ticket, standard or custom, all sales are negotiable in the current economic environment. Even if you have advantages on all three sides of the Competitive Triangle (price, quality, on-time delivery), you'll be asked for concessions on terms. "Net 30" isn't automatic: apparently the word is out in procurement circles that if you're not asking for 60 days to pay, you can't call yourself a purchasing manager. And we've begun to hear of "1%/30, net 60" terms being requested. That is, "I'll pay you in 30 days if you'll give me 1% off the top; otherwise, it will be [at least] 60 days." (Emphasis added.) So what's a lean and hungry company sales rep thinking? "It's been a long time since the last fat commission check, and now my finance department wants to hold up the deal over a measly 1%?" "Absolutely!" replies Finance. "We'll be lucky to bring 5% to the bottom line this year. Giving back 1% of that reduces our profits by 20%. The alternative — waiting for an extra 30 days — means straining the bank line to borrow more. And you know that net-60 gets stretched to 70 or 75 days to pay, just like net-30 invoices don't get paid for 40 or 45 days." There are no great secrets in the credit and collection game. It really boils down to execution. And these are five of smaller companies' biggest failings in that arena:
Alligator Bites "In an example of corporate Darwinism at work, the recent round of quarterly earnings results showed companies with annual revenue of more than $5 billion sped up their collection of cash from customers while slowing their own payments to suppliers…"Firms with less than $500 in annual sales, on the other hand, generally took longer to collect cash and paid their bills faster than in the same period a year ago… "So far, the biggest and fittest companies are often flexing their financial muscle, benefiting at the expense of smaller and weaker ones… "If corporations can manage their inventory well, collect on their bills faster and take a longer time to pay their trade creditors, they can rely less on borrowings and free up cash for other purposes… "But in practice that often involves bare-knuckle negotiations between companies and their customers and suppliers. There is also a balancing act involved. If companies force untenable terms on their suppliers, they risk putting vendors out of business, which could end up disrupting their own operations…. "There's a 'relative power play that's going on,' says Steven Ehrenhalt, a principal at Deloitte… Consumer-products companies, for example, are often able to negotiate more aggressively with customers and suppliers than industrial-products manufacturers, for whom the supply chain is more carefully tailored and rigid." — The Wall Street Journal, August 31, 2009 Draining the Swamp Bill collection:Companies with sales over $5 billion —
Companies with sales over $5 billion —
Source: Wall Street Journal, 8/31/09 About Us Financial Managers helps the managers of smaller companies and non-profit organizations develop reliable financial information for operational decisions.On an affordable retainer basis, FM serves as the part-time controller and senior financial manager for multiple clients, leading them to profitability and positive cash flow. The goal is for the organization to outgrow Financial Managers' services, at which time FM will take the lead in identifying and hiring the right full-time financial person for the firm, and effect a smooth transition to his or her management. Financial Managers Trust 781-799-5737 | FAX 781-788-9794 PO Box 2 Lexington MA 02420 PO Box 1527 Fort Myers FL 33902 www.finman.com Newsletter developed by Blue Penguin Development |