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The Slow-Pay Blues: Cash Management Strategies for Slow-Payers

With political rhetoric heating up as we head into the heart of 2012 campaign season, the economy is shaping up as a central issue of the campaign.

Statistically speaking, the economy has been out of recession for nearly three years, but growth remains tepid – especially in the small business sector. This is atypical of most economic recoveries, in which small businesses tend to lead the way back to growth.

A Culprit: Cash Flow Strains
Various pundits have different ideas about why this is happening, but one theory proposed by Jeffrey Leonard, the CEO of the Global Environment Fund, is worth a close look. In an article published in Washington Monthly last year, Leonard stated that strains on small business cash flow are one of the main hindrances to hiring and economic growth.

And these strains are due largely to extended payment terms by some large companies to their small vendors, which Leonard observes are squeezing cash flow cycles ever-tighter. He notes that several large, well-known corporations have announced within the past year that they are now extending their vendor terms to 90 and even 120 days or longer.

“Many large companies today have simply announced that as a matter of policy, they will be paying their bills late – sometimes as much as four months late,” Leonard noted in the article. “This in effect forces small businesses to make free loans to big businesses instead of being able to use their working capital.”

Of course, dealing with slow-paying customers is “par for the course” for many small business owners. But given the ongoing sluggishness of the economy and the growing trend toward longer payment terms, it’s wise to refocus your attention on smart cash management strategies that can help boost your company’s cash flow now.

Manage Your Cash Flow Cycle
The goal should be to shorten your cash flow cycle by accelerating the flow of money into your business (or your accounts receivable) while decelerating the outflow of funds (or your accounts payable). Here are a few strategies for accelerating receivables:

• Create an accounts receivable aging report. This report will track accounts by time period (e.g., 0-30 days, 30-60 days, etc.) and the amounts due, giving you an accurate picture of each customer’s current payment status. Knowing which customers’ accounts are past due and how late their payments are will help you focus collection efforts where they will do the most good.

• Collect a percentage of payment upfront. Depending on your industry, you may be able to require that up to half of your customers’ payments be made upfront, before services are rendered or products are shipped. This will not only boost cash flow, but it will reduce collection uncertainty in the future.

• Use technology to your advantage. Some customer relationship management (CRM) software platforms can be programmed to send automated updates to clients at certain intervals reminding them of payment due dates. Also consider allowing customers to use PayPal and other electronic payment options to make it easier for them to remit funds.

• Be proactive instead of reactive. For example, learn each client’s specific procedures for formatting and submitting invoices and issuing checks, and make sure you follow them to a “T.” Also, it might not hurt to call and speak with someone in the accounting department a few days before payment is due just to make sure your invoice is scheduled to be paid, especially with large invoices.

• Act quickly on past-due accounts. The likelihood of collecting past-due receivables drops drastically over time: from over 90 percent after 30 days to just 50 percent after six months. Therefore, you should begin actively pursuing collection of all receivables the first day they become past due – starting with a gentle reminder letter or e-mail, followed by more sternly worded communications and phone calls, if necessary.

• Know when to call for help. You may reach the point with some past-due accounts where it becomes clear that they either cannot or will not pay the outstanding invoice (e.g., after 90 or 120 days). In this case, consider sending a final collection notice giving the customer one more week to pay before their account is turned over to a collection agency.

Before taking this serious step, though, carefully weigh the amount of the outstanding invoice against the value of the ongoing relationship with the customer, which may be severely damaged after such a notice is sent.

Scheduling Your Own Payments
On the accounts payable side, the goal should be to take full advantage of any payment terms offered by your suppliers by making payment as close to the due date as possible. For example, if payment is due in net-30 days, use online bill pay to schedule the payment on the exact due date – not a day before or a day after.

One possible exception to this is if your supplier offers a discount for paying invoices early. For example, some businesses offer vendors what is known as a “2-10, net-30” discount, in which a 2% discount is given if the invoice is paid in 10 days instead of 30. Depending on the amount of the invoice, it may be beneficial to take such a discount if your cash flow allows it. You could also offer prompt-pay discounts to encourage your customers to pay invoices faster, and thus accelerate receivables collections.

Financing Extended Terms
Despite your best efforts to manage the cash flow cycle, some customers may simply tell you to take their payment terms or leave them. If so, you must determine whether or not you can finance the extended terms – either internally by streamlining your cash flow cycle or externally through
a bank line of credit.

The revenue boost provided by a large new client may very well be worth the cost of carrying the receivables. But if your cash flow isn’t strong enough, such a client could just as easily lead down the road to bankruptcy. So be sure to perform your financial due diligence before saying “yes” to new clients with extended payment terms.

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