Riding the Economic Roller Coaster

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Collect those receivables!

Have you gotten a tad sloppy when it comes to your billing and collection procedures? Here's a quick blueprint for success:

1. Bill promptly. If you wait until the end of the month, your cash flow has already taken a hit regardless of how quickly your customer then pays.

2. Follow up, follow up, follow up. You can't do this enough. If you've got the staffing to handle it, the most effective procedure starts with a phone call to your customer as soon as the bill is mailed. (Be friendly here. You want to notify the customer that the bill has been sent, make certain he or she is satisfied, and give a gentle reminder that you expect payment within 30 days.) If the payment is late, you want to then schedule weekly telephone calls.

3. Track results. Make sure that all key executives receive a weekly update on outstanding receivables. Then set collection priorities based on the size of problem bills.

4. Involve top management. It's amazing how much more effective a collection call from a company's owner, rather than an accounting clerk, can be. So try it whenever receivables age past the 45-day stage.

5. Cut off the juice. If a customer develops a pattern of delinquency, there's only one way to handle it: stop fulfilling new orders.

Managing your accounts payable

In an ideal corporate situation, you'd collect all your receivables quickly while paying your own outstanding bills at the latest stage possible. Here's how:

1. Time your payments according to their due dates, rather than following some artificial schedule within your organization. If your financial staffers don't want to write checks daily--and most won't--then set up a weekly payment schedule.

2. Plan for your cash-flow realities. To avoid big cash outflows, some companies schedule payroll biweekly and then pay their outstanding bills during the other two weeks of the month. Talk to your accountant about whether that makes sense for your business.

3. Avoid interest charges. If temporary cash-flow problems require you to stretch out your own payables, make certain that you aren't late with those bills that incur additional interest charges.

4. Communicate with your suppliers. Often, if you've built up a good relationship with a supplier and have been reliable in the past, you can avoid late charges by contacting the owner in advance, explaining your short-term problem, and requesting a payment extension. It's worth a phone call.

5. Circulate weekly payables reports to all key executives. Sometimes the first warning sign of a cash-flow problem comes when you realize your payments are falling behind. Don't leave it to your financial clerks to sound the alert.

A self-warning system

Are you convinced that global economic problems can't hurt your company? We hope you're right. But here are some danger signs to watch out for:

Aging receivables. Slight fluctuations, of course, do not matter. But what you want to avoid is either a pattern of average increases (a steady addition of, say, two days more each month will add up quickly and damage cash flow) or significant slowdowns in collections from your biggest customers.

Debt problems. Are you suddenly having trouble keeping up with your principal as well as interest payments? Or are business-related credit-card charges building up? Something is wrong within your cash-flow system if the problem persists for more than a month or two.

Late financial reports. When business conditions worsen, entrepreneurial companies sometimes get sloppy with key reports--perhaps because they don't want to face the bad news. Crack down on such situations immediately.

Late-interest charges. Are you paying your own bills so late that you're getting penalized financially? That's a sure indicator of bad news.

Coping with international problems

Even the savviest financial managers can find themselves with unexpected problems on the international front. Just listen to Mendy Kwestel, a partner and director of entrepreneurial services at the accounting firm Grant Thornton in New York City. "We did quite a bit of work for a Brazilian firm," he explains. "That client doesn't dispute the work we did or the amount that we billed it. But they've been telling us that it's very difficult for them right now to pay us by check in dollars. They may be using it as a stalling technique. It never dawned on me that we could be vulnerable, until this happened."

Fortunately, international collection problems can be avoided fairly simply if your company institutes some inflexible rules. First, conduct the same kind of due-diligence investigation about prospective foreign customers (including taking a credit history and doing reference checks with other suppliers and bankers) that you would with U.S. customers.

Then make it a matter of course to require all foreign customers to obtain a letter of credit from a U.S. (or well-established foreign) bank; that guarantees that no matter what happens to your customer's business operations down the road, you'll be paid. Given that currency swings also present a risk--they can wipe out your profit margins if they move against you--it's also a good idea to require all payments in U.S. dollars. If foreign customers can't, or won't, comply with those requirements, then the safest course is simply to turn down their orders. "You may sacrifice some sales, but that way you won't wind up with foreign bills that you just can't collect," Kwestel says.

Even if you set strict procedures in place, you unfortunately won't be able to insulate your company against future problems that may result from having had loose procedures in the past. "Don't wait for overseas problems to present themselves," advises John Evans of Arthur Andersen. "The trick is to identify at-risk foreign receivables at the earliest stage possible and then move quickly to collect them. If they're large enough, that may even warrant a trip overseas yourself."

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