October 28, 2009

Despite mounting evidence of an economic recovery, for many small businesses the future is still murky. Quarterly reports on sales reveal 41 percent of small business are experiencing declines, compared to 21 percent reporting quarterly gains, according to the October 2009 Small Business Economic Trends survey, conducted by the National Federation of Independent Businesses (NFIB). Quarterly profit trends are the weakest in survey history, with 50 percent of businesses reporting declines compared to 14 percent reporting gains. Furthermore, weak sales and earnings are bruising the credit worthiness of many potential borrowers, according to the report.

So where's the good news here? It's all about collections. If you can be a collections expert in your business, you can mitigate some of the economic risks. While there's no easy way to prove that collections problems have put more companies out of business in this recession, says NFIB Chief Economist William Dunkelberg, one thing's for sure: slow-paying customers are putting many companies at higher risk today.

Let's say that you have a recession-proof business such as selling toilet paper, explains small-business finance expert Kate Lister. If all the companies that you sell to start to pay slow, then you can’t pay your own bills, and from there it snowballs: companies that have bank loans based on their receivables will begin to disqualify for their loans or line of credit renewals if receivables fall beneath a certain limit, says Lister, a financial consultant, former venture capitalist, and author of small-business financial books, including Finding Money—The Small Business Guide to Financing.

Here are our few guidelines and considerations when managing a successful collections practice:

Choose customers carefully
It’s time-consuming, sure, but the more work you can do up front qualifying your customers, the less risk you assume. Firstly, says Lister, check the credit references of your potential customer before doing business with them - even doing personal credit checks of the business owner or CEO is not unreasonable. Naturally, you also might want to ask around on your social networks to find out if the company has a good reputation. Further, she advises, try to avoid having large concentrations of customers in a single industry - that can be risky to your cash flow if that industry begins to suffer for some unforeseen reason.

Establish credit limits
Many businesses today extend goods and services based on credit. So in essence, your business has become a bank for your customers, Lister warns, and you need to determine your limits for the amount of credit that you will extend and your timeframe for getting paid. These days, some people are even forgoing the 30-day window in favor of payment in 15 days or less, or, requiring 50% of the payment up front. Whatever your strategy, make sure you have terms regarding what happens when the customer defaults. Late fees or requiring collateral at the point of sale are just two ideas.

Be flexible and get creative
If you give your customers a lot of options for payment, you might get better results. As an example, allow customers to pay by credit card, rather than by sending a check, advises an author on AMEX Open Forum.  Of course, you want to think about incentives as well for paying early, writes Anita Campbell, blogger with Small Business Trends: "Try this technique to get paid fast: call or email the customer and ask if they can pay that day (or that week) if you give them a discount, and then get the money right away through wire transfer, PayPal or a credit card payment."

Invest in the right systems for your size business
As you grow, you need to adapt your systems accordingly. "When you start to talk about a $500 million business or more, you have grown beyond Quicken," Lister says. "You need a bigger accounting system… and if I'm a business owner, I want weekly reports of what is going out and what is coming in the door." It's especially important to have systems that monitor accounts receivable aging, so that you can be proactive with your customers about payment.

Playing hardball
Some companies have policies to delay payment as long as possible to protect their cash flow. In those cases, you'll need to become a bug in that customer’s ear, until you get paid. "Get on the phone with the CEO and with other vendors to get the story,” Lister suggests. “It's perfectly reasonable to ask the customer to show you how they will continue to pay your bills." If you’re fulfilling a big job for a new or potentially risky customer, require a letter of credit from their bank that guarantees payment. “For instance, the terms might not release widgets from your loading dock until the money is in your account,” Lister says.

Outsourcing: it works
Running a solid collections practice can be time intensive. Until you reach a certain size in which outsourcing is cost-prohibitive, Lister recommends letting someone else take care of this critical yet tedious task for you: “Most business owners may not even be qualified to interview a bookkeeper.”  If you do decide to outsource, look for an accountant or service provider that has experience in your industry, and with similar-sized businesses.

For more on this topic, visit our Resources page.

Photo Credit: Skettalee