The cheque’s in the mail!

Today’s challenging business environment is forcing many business owners to toughen up their debt and credit management procedures.
Old ways are giving way to new ones…  as Patricia Moore reports.
You’ve probably heard the expression: ‘A sale is not a sale until the money’s in the bank’. It’s the latter part of that statement which is often the challenge, says John Roberts, managing director of credit bureau Veda. And it’s an issue that’s becoming more challenging – according to a Dun & Bradstreet report released in January, New Zealand firms took longer to pay their bills in 2011 than in the previous year.
It also seems the bigger the business, the more cavalier the attitude, with public companies trading on the stock exchange taking an average of 51 days to pay – up 5.8 days on a year ago. The good news is that if you’re dealing with a South Island-based outfit the cheque will be in the mail faster than in the north – 43.5 days as opposed to 44.9.
Small and medium sized enterprises are more likely to be afflicted by slow payers rather than bad debtors, says Roberts, so the report probably wasn’t a surprise to many business owners and managers. “Slow payers have been getting worse for many of them and many of these are large corporates and government departments. This creates cashflow problems.”
But does it have to be that way? It’s indicative of the business environment we’re in, but by having strict terms and conditions in place and sticking to them, businesses can help themselves, says Baycorp NZ business manager, Kelvin Hill. “They have to put credit management disciplines in place and move quickly if payment is in default – he who shouts the loudest gets the money! If that doesn’t work, refer it to a third party for collection rather than hanging on to the debt.”
Hill agrees that’s akin to the ambulance at the bottom of the cliff, but suggests most SMEs have a better feel for their clients than larger corporates, and resorting to the use of a third party may not always be necessary. When it is, do it sooner rather than later he says. Don’t let debts drag on for months and still expect results. “One of the limiting factors for debt collection is the age of the debt. Have a predetermined point and when it’s reached say ‘that’s it; we’ll have a very good chance of collecting.”

Greater awareness
Catriona Knapp of Future Focused Accountants believes the great financial crisis has made a lot of businesses more conscious of getting good debt management processes in place. “It’s been a tough few years but for a lot of clients it’s actually seen them sharpen up in a number of areas, one of which is debt/credit management.”
For some that’s meant starting from scratch – actually putting terms of trade in place. Because they want to make it easy to do business with them, they’ve been reluctant to hand over a lengthy document to be signed. “Now people are realising that even though it may be an uncomfortable thing to push out there at the beginning of a relationship, it’s really important to find out any issues up front rather than after you’ve supplied a whole lot of goods and services and you’re not getting paid.”
Credit policies need to apply across the board, adds Hill. “Make no exceptions. Know your customers by way of their credit application; ensure terms of trade include collection costs and interest, take time to check the Companies Register and use the Personal Property Securities Register. Find out who you’re actually dealing with and complete trade references. Ring them up, ask what sort of payer they are – and don’t be afraid to stop credit.”  Get all that right and you won’t need Baycorp’s services, he says.
Take advantage of the WOW factor and get those invoices out smartly – that’s one of the steps Knapp advises. “If you receive something and really like it and you’ve had a great customer experience, that WOW factor is always going to be highest immediately after the event. Capitalise on the goodwill you’ve built up before it’s replaced by other WOW experiences.”
And, she says, be just as quick off the mark when an invoice isn’t paid. “Don’t be afraid to ring and ask for payment. Don’t wait until next week. Don’t think maybe it will be in the post tonight. You’re not a charity asking for a donation; you’ve actually provided goods or services and you’re asking to be paid for doing that.”
Implementing ‘stop credit’ procedures earlier and placing slow payers on a repayment plan or setting up a direct debit are also keys to better debt management.  
How your business is perceived is about your approach on a wide range of fronts says Knapp. “Not just customer service but follow-up with regard to your own processes. If you want to be seen as a professional business you need to be professional not just at the front end as a supplier, but at the back end, chasing up that closure to the deal.”
One of the problems for SMEs is that they have to deal with bigger businesses because that’s where they get the volume of sales, says John Blackmore, national sales manager for Bibby Financial Services. “And bigger businesses are demanding improved terms themselves. This places an extra emphasis on getting your invoicing right.” He points out that corporates tend to have one payment day a month; the time involved in correcting an invoice will mean waiting until the following month for payment. “Time is critical for SMEs and the longer you have to spend on producing and collecting a sale the more time it takes away from dealing with somebody that might be a better client.”
Getting the invoice right and getting it out early – possibly invoicing every week rather than once a month – are both important says Blackmore. “And being strict with terms. Make sure the invoice states when payment is due and follow it up if it’s not. Don’t be afraid to do this.” He also advises sending regular monthly statements early each month. “If you’re sending multiple invoices during the month then they’ve got one statement that says ‘this amount is outstanding’. That way you have a common document to refer to as opposed to several invoices. These are all things a financial services agency offers; it’s just something that happens, whereas in an SME it has to be done.”

The outsourcing option
For many small enterprises outsourcing debt management is a practical and cost-effective solution. Professional agencies have staff trained to do it well and can provide add-on benefits such as cashflow support. It’s a cost but then so is hiring someone to come into the business, even just a few hours a week. Blackmore believes the cost of the sort of debt management they offer, along with their financial services, will easily outweigh employing somebody to do it.
“The overarching thing with engaging anyone, whether it’s hiring someone to come in to your business or outsourcing is the cost,” says Knapp. She hasn’t done the numbers to determine which option is most favourable but points out that it always comes down to training and approach. “At the end of the day you’re dealing with your customer.”
The use of software systems to handle credit management can be a mixed blessing. Lack of training too often means companies are not getting value from their investment in them. As Blackmore points out, “you have to be an adequate user. A number of the systems are very good at producing invoices but we often find when we go into a business and we’re looking to provide finance, getting information out of these businesses is really, really tricky. They don’t know how to access reports; they don’t know how to access balance sheets.”
Indeed, says Catriona Knapp, you can do invoices on Word and have better credit management than somebody who’s got the flashest system in the world. “Often not getting training on a system is only one of a number of issues that are going on. Systems help but it has to come from the process. Somebody’s got to drive it.
“Successful business people, whether they’re running a small business or a large one, are those that understand what they have time to do and get experienced support to cover in the other areas.”

Creative thinking
Veda is acutely aware of the conflict that SMEs encounter doing business, says Roberts. “They want a sale; they want to provide a good service so they often make a sale on the spot, frequently relying on industry intelligence. This is the way generations of New Zealanders have successfully conducted their businesses.”
But financial turmoil across the globe has meant the old ways have to change and Roberts says they’re seeing SMEs using a variety of additional approaches to ensure payment, such as structuring payments, using formal documents and self-researching.
Knapp has also noted people are becoming more creative in the ways they encourage payment. “Coming up with ways that mean your bill is close to the top of the pile rather than the last to be paid. Pay early and get a $50 discount, or 10 percent, or whatever the case may be. It’s an area that many of the small businesses which are succeeding have looked at, and are doing well.”
Patricia Moore is an Auckland-based freelance writer. Email [email protected]