Dealing with slow payers

If your SME has cashflow or debtor problems it’s probably your fault. Kevin Kevany gets the lowdown on sound debtor management and credit control from the experts.

The certified figures reflect it. The experts agree we’re out of the trough. It’s happening. Just when we thought all was lost, the financial world, which feeds the commercial, industrial and agricultural world our SMEs operate in, is on the move again. At last!
Just over five years ago, the Great Financial Crash spoilt September 2007 and then went on spoiling succeeding years. As recently as this time last year we were fretting about which country in Europe would fold first. Now the golden sun has started to flicker through. Even the conservative IMF boss has pitched her tent at 3.5 percent growth for the world.
“There is no doubt the latest trade credit figures tell us the country is out of the trough and business is on the up for the first time in five years,” says Veda Advantage CEO New Zealand and International, John Roberts. “One of the proofs of that statement is that when you compare the last quarter of 2012 with that of 2011, business defaults are down by nearly 16 percent.”
But he immediately cautions that before we crack open the Bollinger, it’s time to reflect on where we are at; the lessons hopefully learned in the dark days; and to ensure that we have the correct information and systems in place to protect our cashflow, manage our credit and protect our business in the hopefully positive growth years ahead.
In the interim, the game has changed, he says. Data now turns readily to information – to knowledge about the financial status of a mate you’ve played rugby with for 20 years, for example (as long as his business has been trading with yours). Good information on how that business is tracking is worth a whole lot more than his reassuring handshake just before the liquidator calls to say, despite your trusted instinct: “Yer big mate Rob is kaput.”
“We always remind clients: A sale is not a sale until the money’s in the bank,” says Roberts. “I’m horrified to find the number of Kiwi SMEs who regard writing off debt as a ‘cost of business’, and worse still, even hold a percentage of previous profits to accommodate it.
“New Zealand needs to wake up to the fact that we are losing more than $2.5 billion a year by just accepting bad debts are part of the way we do business. Half of the near 550,000 companies we monitor still had bad debts of $10,000 or more, and far too many (69 percent) had more than $100,000 locked up in that trap. And half again of those were up to $500,000! It’s a staggering waste we cannot afford.”
Roberts believes that every SME must have a Trade Credit Policy, which is written up and fully understood and implemented at all times by, at the very least, all the ‘customer-facing’ employees if not all the staff (see sidebar).

Cashflow the key to survival
John Blackmore, national sales manager for Bibby Financial Services knows his oats when it comes to SMEs – especially local ones.
“I would urge all small business owners and managers to make this the year you keep your business’s New Financial Year resolutions. Those owners and managers who resolve to successfully manage to reduce the impact of late payment on their business, by working smarter and adopting thorough credit control procedures are the ones that will ultimately survive and be stronger than ever before.
“Cashflow is still the key to SME business survival. You may be trading profitably in the sense that you are ‘making a profit’, but unless your cashflow is under control, you are operating at risk,” says Blackmore.
“The fundamental gap between when you invoice and when you get paid is the make or break of many businesses. Cashflow and working capital levels are driven by transactions, so the devil is in understanding the detail.”
He believes the vast majority of SMEs simply cannot afford to wait on money they are owed without a severe impact on their bottom line, particularly if a majority of their sales are to a few customers – or even worse, if one ‘biggie’ is about a third of the business; a situation which is far too common.
“Big companies often go into restructuring, during which paying bills is put on the back burner – and they change managers frequently. That can be the end of the relationship, there and then. Or a big supplier puts you on 30 days instead of 60. That’s when people like us can help you get through with restructuring debt, your debtor or you.”
While Blackmore believes professional advisers have improved he’s incensed at an accountant ignoring the fact that a customer faced with a situation similar to that described above, gave a major client a 15 percent discount for a seven-day payment, losing tens of thousands of dollars. “Bibbys could have financed it for a fraction of the cost, without sending warning signals to the major customer.”
Here are Blackmore’s practical Seven Simple Steps for facilitating sound and successful inter-company relations and thereby boosting cashflow and seamless credit management:

1. Always credit-check potential customers.
In an ideal world all customers would pay promptly; however, in reality this is not the case. The first step to avoiding late payment and bad debts is to always credit-check potential customers before handing over goods or delivering a service.

2. Issue accurate invoices in a timely manner.
The average invoice payment period has nearly doubled from 30 days up to 50 days post GFC and it will be slow to return to pre-2007 practice. Therefore it is important that invoices are issued accurately and punctually so they can be paid on time.

3. Improve your payment terms with invoices and linked communications.
Remind customers of your payment terms. Send out reminder notices, email and call customers when a payment is overdue. Don’t let payment terms deteriorate. Push for the most optimal payment terms.

4. Offer payment plans.
Customers whose businesses are struggling may not be able to pay all of their outstanding invoices when they come due. Offering payment plans not only increases the likelihood of collecting the total amount due, but can also generate goodwill with the customer. Move to more proactive management of customer debt.

5. Have an organised system for archiving and paperwork.
Create a system for outgoing invoices, purchase invoices and a cashbook to ensure all information is documented correctly. Growing a business is reliant on being organised.

6. Perform all the necessary checks to ensure the business is limiting its exposure to bad debts.
Develop a credit policy. Take the time to write out a clear and concise credit policy which is applied to all customers and clients.

7. Watch your stock.
Clearly identify which stock lines are selling and when they’re selling. Ensure that the right quantities of the correct stock lines are purchased. Challenge inventory parameters – e.g. safety stock levels, minimum order quantities and reorder points.

Some home truths
If, at this point, you are feeling that there might be some good pointers in this feature, but it is a little ‘over the top’, don’t look for any sympathy from Waterstone Insolvency’s principal, Damien Grant, who’s in the business of dealing with the mess of failed businesses.  
“One of the lies failed business owners tell themselves is: ‘the failure occurred because our debtors didn’t pay us’. Customers do not pay for three reasons, and the SME owner/manager wears the blame in all three cases:
“The customer cannot pay; you should not have given them credit. Your credit policy failed.
“Your business has failed in some area to deliver to their expectations, leading to a dispute.
“They have not been placed under any pressure to pay and are electing to keep the money in their account and not yours.
“‘Trust but verify’ was the famous quote from ex-US president Ronald Reagan. Making a sale is hard work; it seems churlish for the credit controller to want to know exactly who is going to be paying the bill. This tension is usually won by the sales people; after all, sales people are usually good looking, outgoing and charismatic.
“Nothing is as instructive as the debtors’ ledger of a failed firm,” says Grant. “It is a shambles. No completed credit application form. The trading and not the legal name used. No personal guarantee, no creditor address: just a name and an amount.”
Waterstone’s solutions? Remove all discretion from the sales process. You don’t have a sale until you have the following:
• Legal name of the customer.
• A clean credit-check of the company and the directors.
• Personal Guarantee.
• Completed credit application form.

“Put barriers in front of your sales process. Hard-code your software if necessary, to force the collection of this information. Give yourself, the owner/manager, sole discretion to waive any of the terms.
“This makes you responsible. It forces the risk of default onto your shoulders and prevents sales folk bullying your credit collectors,” says Grant.
He warns that short-changed customers are not going to pay and a slow moving debtor’s ledger should be a warning sign the delivery of your business is poor.
“Owners and managers are often reluctant to become involved in the messy side of collecting debt, but fronting the issue can pay big rewards. Talking to customers who are raising disputes cuts past the credit controller filter; allowing you to understand what the real problem is and if the dispute really is a quality problem or if this is an excuse,” Grant says.

Get in early and be open
What happens if you fail in the above – or worse still, are on the offending side of the crisis?
You’ll almost certainly be dealing with Baycorp, the dominant debt collector, now reinvented in a far more sympathetic profile, under the leadership of their Australasian CEO, Geoff Harper. Harper is a man who has dared to talk about caring; taking a ‘softly-softly’ approach; promoting entrepreneurship; preserving business relationships; and sounding more like an NGO leader than a baseball-bat-wielding enforcer.
“I doubt there were any baseball bats at Baycorp at any stage, but I can guarantee there aren’t any now,” he says with conviction.
Harper’s Baycorp represents a dynamic change in the industry, which he says is responding to their lead, following the debacle and consolidation which followed New Zealand’s own disastrous collapse of financial institutions across the board.
“If a debtor has no money – he has no money. You’ll never get blood out of a stone, however much you rant and rave. We’ve moved on to the use of technology, persuasion and incentives, if you like, to get businesses which have gone or are about to go off the rails, back and functioning efficiently in everyone’s interests.”
If trouble strikes, Harper says you must “get in early and be open.” The window of opportunity inevitably shuts very quickly and doesn’t reopen without much difficulty – and usually doesn’t.
“Too many SME owner/managers are happy to outsource all kinds of services from office cleaning to IT. Yet, when something is as specialist and tricky as credit management, debt collecting, ‘parking debt to survive’ and the like, so many choose to go it alone.
“Add the involvement of different legal entities and multiple parties (including guarantors and directors) to the mix and it’s clear that more complex collection strategies are needed to achieve results when recovering commercial or B2B debt collection, which often involves negotiating with a more sophisticated type of debtor too,” says Harper.
“Many SMEs are established by individuals with a passion or flair for a product or service. People like that are seldom enthused at the thought and discipline of this tough end of running a business.”
He encourages people to do a personal and a business SWOT analysis. There is no formula for this, but it requires honesty (“ask your wife or partner”), realism and a commitment to fix the weaknesses.
Finally, his and Baycorp’s passion is to educate and support the country’s entrepreneurs – “support the thinkers working ideas in their garages at night – to lift the veil and draw out the entrepreneurial culture which lurks beneath historically conservative Kiwis so the country can prosper in the global environment.”
And he wants government and the now-shaken-out financial institutions, which he says “still have some distance to go”, to help create a commercial environment which will encourage real and sustainable growth.

Kevin Kevany is an Auckland-based  freelance writer.
Email [email protected]

What to do when your debtor simply will not pay: the ‘natural solution’
“Businesses face cash issues every day,” says Damien Grant of Waterstone Insolvency. “The challenge is to find enough money to pay the wages each week, so it makes sense to focus on those the credit-controller knows will pay and ignore those who refuse to do so.”
“Beyond sending grumpy letters and endless phone calls, there is a letter a credit-controller can do when a debtor simply refuses to pay the bill. ‘They’ know it costs money to go through the courts, and if the value of the debt is lower than the cost of enforcement, a bankruptcy or liquidation, they gamble that you will be economically rational and not enforce the debt.”
Grant’s solution? Be a little crazy.
“A labrador could kill you, but it will not. A yappy terrier can do little more than rip a hole in your calf, but it will – because it is in its nature to do so.
“Yappy terriers are more of a risk than labradors because they will bite, even if to do so is self-destructive. You need to be the terrier. Your customers need to understand it is in your firm’s nature to enforce your debt, even if it costs you money because that is your nature – you cannot help it.
“Each firm must best decide how to convince the world that it is of this nature, but there are examples in nature. The harmless hover fly perfectly mimics a bee, creating the impression it will sting, even at the cost of its own life.”
Grant reckons if it is a large debt, the owner/manager should take over its collection, paying a personal visit to the debtor.
“Embarrassment is a very powerful human emotion and only the most hardened individuals are not moved by it. By fronting the debt issue, your client will understand that your business takes collecting debts seriously and that you are personally invested in getting the money,” he says.

Best practice trade credit management
Veda’s ten-point ‘personal checklist’ to ensure your SME has a best-practice Trade Credit Management Solution at hand is listed below.
Equally as important as a credit check on your new and existing customers, is having a strong credit policy in place. And everyone in the company has to abide by it.

• I have a documented credit policy which is up to date and reflects my organisation’s risk profile.
• My credit policy is known and being followed by staff.
• There are processes in place to review our credit policy regularly.
• I have considered the benefits of an automated solution in the context of my work environment.
• I have reviewed credit report options for the levels of credit I’m extending.
• I have cleansed, or am considering cleansing, my whole ledger as it currently stands to ensure it is accurate.
• I understand and comply with the Privacy Act 1993 when looking at the people behind the business.
• I am checking the correct legal entity of my customers.
• Staff know how to access the appropriate credit management products suitable for my business.
• I have considered the benefits of using ongoing monitoring of my customers to keep my ledger up to date.