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:

  1. Failure to communicate internally – Everyone who sells, from the President on down, has to agree: these are the pricing metrics, these are our terms of sale; we deviate only with the approval of the Management Team.
  1. Failure to communicate externally – Getting your customer’s purchasing department to agree to your Terms and Conditions (“T’s and C’s”) is a fairly obvious prerequisite to the sale. Making sure that their controller has signed on is less obvious, but more critical in terms of timely payment. Follow up your first invoice within a week by calling the Controller, reviewing the invoice, and getting a payment commitment.
  1. Failure to keep selling – Everyone, including Sales, Operations/Quality, and Finance, has an interest in the results of the sale, so the best follow-up is broad-based. The collection process benefits from multiple contacts with the customer’s key people, any one of whom may be in a position to help move the payment along.
  1. Failure to incentivize your collection person – No one enjoys pursuing the traditional collection process of endless voicemails, trite excuses, and broken promises. An occasional reward, from compliments to cash, may inspire creative problem-solving by the receivables accountant – such as actually getting to know the payables person on the other end of the phone line.
  1. Failure to demand better credit and collection management – For every large customer who tries to push you around, there are 5-10 others whose de facto 60-day terms result primarily from your staff’s inattention. When the commitment and follow-through come from the top – including a willingness to invoke credit limits – receivables are seldom a major problem.

Plugging these holes in your credit and collection process will help to smooth the road to the bank with your net sales. I’ve discovered, however, that it probably won’t help your pursuit of the opposite sex. Especially if they’re only 18 months old.

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 –

  • In 2008 collected in 41.9 days
  • In 2009 collected in 41.0 days

Companies with sales less than $500 million –

  • In 2008 collected in 54.4 days
  • In 2009 collected in 58.9 days

Bill payment:

Companies with sales over $5 billion –

  • In 2008 paid in 53.2 days
  • In 2009 paid in 55.8 days

Companies with sales less than $500 million –

  • In 2008 paid in 42.9 days
  • In 2009 paid in 40.1 days

(Figures compared through second quarter each year)

Source: Wall Street Journal, 8/31/09