Getting Paid in Tough Economic Times

In economically challenging times, making sure that you get paid can make all the difference in your survival … or your demise. For businesses that are in the startup mode (i.e., in business less than 2 yrs), proper management of cash flow is essential. Since the key component of a Cash Flow Statement/Report is the incoming cash metric, it is important that adequate attention be given to all aspects of this key metric.

Early in my career, I became a franchisee in a retail-oriented franchise. Although I had a background in accounting and fully understood the importance of managing cash flow, I got distracted by the excitement of building the business.

To my credit, I correctly focused on sales, realizing that an aggressive sales and marketing posture was critical to success. I hired several sales people, something that had not been done in this business previously, since it was primarily a retail business. I was able to create a great amount of sales momentum. I was almost too successful in building top line sales.

Although I had a credit checking process established, it was not very sophisticated. I also had a procedure to track receivables in aggregate, but I did not have a procedure in place to monitor the rapid growth in receivables of my larger clients. I was just too focused on sales, which were exponentially growing, to take the necessary time to analyze the numbers closely. This is a classic entrepreneurial rookie mistake!

Someone can intellectually understand the importance of cash flow, and in my case as an accountant, understand and promote cash flow management, having designed cash flow reporting systems for others. However, until I had actually been swept up in the excitement of building a business, watched sales skyrocket, and spent a majority of my time focusing on expansion and all of the elements associated with the growth phenomenon, it was difficult to appreciate the importance of the cash flow metric. Clarity did not arrive until I got to the point when I was technically bankrupt - THEN the cash flow metric hit home! Turning on a dime, my new focus became fixing this problem.

Based on this experience, I have developed 5 essential tasks for more effective cash flow management, in an expansionary mode or during uncertain economic times:

1. Chose your customers carefully. It is better to not associate with companies that have a poor payment history or are unwilling to readily provide credit information and references. Under the best of circumstances, it is hard to find out if a company is hiding something, and if you are having a difficult time verifying information or something just does not seem right – walk away from these companies. You are better off without them. If they don’t have money or if they are having other difficulties, no matter how much they like you personally, they will not be able to pay their bills.

2. Find an excuse to call – any excuse. Being the “squeaky wheel” will keep you front and center. In uncertain economic times, he who is the squeakiest (in a nice way), is the first to get the grease.

3. Consider credit insurance. Credit insurance allows you to increase credit lines and protect yourself against unforeseen future events, by protecting your receivables against commercial risks which could result in non-payment of your invoices due to buyer insolvencies (e.g., bankruptcy) or protracted defaults (slow payment). Non-payment problems can be caused by fluctuations in demand, natural disasters, or general economic conditions in your customer's business. To find out more about credit insurance, go to Google and do a search for “Credit Insurance Policies”.

4. Turn your sales people into collection agents. Tie commissions and bonuses to on time accounts receivable payments vs. commission being paid at the time the sale closes.

5. If there is a problem, be the first on the scene to work with the client. Be creative on structuring a payment schedule. Bend over backwards to be proactive and to maintain a good working relationship. If you are a facilitator in working with your clients, you will be the first in line vs. being at the end of the line. Being proactive also cements the future relationship. This will keep competitors out when things turn around, even if the competitor offers lower pricing. The relationship is more important than saving a few bucks.