In these difficult times the “hard nose” approach has merit

 

As funding issues continue to bite more and more Customers are actively employing various tactics to delay payment to Suppliers. Credit control and the monitoring of payments is an increasingly critical element for every business.

 

When a Customer exceeds the agreed payment terms, they are in reality using the Supplier as an alternate (unsecured overdraft).

 

This situation if left unchecked can spiral out of control. In a worst case scenario the Supplier is in reality forced to keep “trading” with the errant Customer for fear of realising a bad debt. It is a slippery path.

Slack policing of accounts receivable will have serious consequences. At best tardy payments damage cash-flow and at worst can often be the precursor of a company failing with the end result of a total write off.

 

Take a long hard look at your accounts receivable –are you really comfortable with allowing 30 day terms drifting into 60 and beyond?

 

Consider the damage that is being done to your company’s financial position and then ask yourself “who is taking advantage of us?”

 

 

Financial crises are like buses in that they come along frequently

 
The ongoing fallout from the latest financial crisis has parallels with previous financial upheavals such as the 18th century South Sea Bubble, the Victorian Banking crisis of Overend & Gurney, the Great Depression which followed the 1929 Wall St Crash, and the Dot Com Crash.

 

In all of these episodes the common denominators were reckless pursuit of profit whilst fundamentals were ignored, the so called “get rich quick” school of business.


Following each of these debacles there was a collective reigning in and return to the principles of sound business.


However memories are short and it is not long before the blurring starts again and risky practices again become more and more the norm.


Complacency has resulted in the demise of numerous organisations.
As George Santayana commented “those who cannot remember the past are condemned to repeat it”.

Zeroing in on your target

All businesses operating in today’s climate need to have constant and rigorous focus to their commercial exposure.


Against the current competitive background it is very difficult to contemplate turning away business especially from a customer of long standing.


However, there are times when subsequent events show that on occasion the best business decision was to leave it to your competitors.


When stricter controls are in place over such elements as payment terms and credit limits the result is likely to be a reduction in turnover.


The upside of such fiscal discipline carries its own rewards.

 

Avoiding defaults by customers is the surest way to protect the company’s bottom line at a time when profits are hard won and losses easy to establish.

 

Spot the fault line

 

The overriding lesson from the calamities in the global financial mess was that the monitoring systems were inherently flawed.

Last week in what is largely viewed as a symbolic process Fabrice Tourre the former Goldman Sachs Banker went on civil trial in New York  on charges of defrauding investors .

There is no dispute that, in exchange for a $15m fee to Goldman, Mr Tourre helped Paulson & Co, a hedge fund, create a complex security named Abacus out of mortgage-backed bonds in order for the fund to profit from an anticipated collapse in the housing market. For Paulson it was a spectacular success; for those on the other side of the trade, not so much

 An email written by Tourre has become a metaphor for the whole financial mess which engulfed global markets and institutions. In January 2007 as the subprime meltdown was beginning Tourre wrote “The whole building is about to collapse anytime now. Only potential survivor, the fabulous Fab...standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstrosities!!!” 

Exotic trading products and programmes were created which like the Frankenstein monster quickly became uncontrollable. Risks were taken on an unprecedented scale and those supposedly monitoring risk were “asleep at the wheel”. 

Recklessness was encouraged and became the default position. There were no checks and balances – it became for the participants in the so-called casino bankers a safe bet.

What’s the worst that could happen following a spectacular flame out?

Maybe you lost your job and had to move to another bank or institution. Get it “right” and the rewards were sky high.

Whenever there is a bonus culture unless the supervisory systems are rigorous there will be potential for abuse. 

Whether through greed or stupidity there will always be people willing to take potentially catastrophic chances.

The danger of pushing it too far

 

The most important component in any business relationship is the question of trust.

 

The ultimate demonstration of trust and good faith is when a Supplier delivers goods to a Customer on Credit terms.

 

It therefore is incumbent on the Buyer that they acknowledge this act of trust and observe the agreed payment terms.

 

With the current pressures it is easy to understand the temptation of “pinching” a few days extra credit but this type of behaviour soon begins to pall. Once a Supplier feels that their Buyer is taking undue advantage the relationship is damaged sometimes irreparably.

 

For any relationship to be sustained there has to be mutual benefit. When a Buyer gains a reputation for persistently crossing the line the merit in maintaining the account is called into question.

 

 

Make service your USP

 

We are operating in times when everyone expects ultimate value for their cash be it the corporate customer or the man in the street.

 

It is a paradox that as times become tougher and business harder to win the level of service offered by many Suppliers is falling very short of acceptable standards.

 

From the frustrations of automated answering (devised surely to test anyone’s patience to the ultimate degree) to the failure to meet agreed delivery schedules Customers are left feeling that their business is not valued.

 

Little wonder that they choose to vote with their feet. Customer service is not a difficult act to pull off – in reality all that is required is to give the Customer the feeling that their business is important and they are valued not just “one of a number” or even worse a nuisance.

 

Those businesses that master the art of Customer service will emerge from this current difficult period all the stronger.

 

Whenever it rains the banks want their umbrellas back

 

Despite previous rhetoric it is now apparent that some banks are still trying to increase their reserves, rather than lend more money out.

 

New figures from the banks themselves confirm that lending to businesses is continuing to fall.

 

Lending from the UK Government Enterprise Finance Guarantee scheme has dropped to record £66 million low in the first quarter of 2013. The EFG scheme was introduced in 2009 to assist SMEs to obtain loans.

 

As the Banks continue to labour under the weight of their previous errors the knock on effects are percolating down through the economy.

 

Prior to the credit crunch it was not uncommon for companies to use loans or overdrafts to settle VAT and tax bills but these companies are finding it hard to do so in the present climate.

 

With both new and additional funding hard to access – now is the time to take a long hard look at your Company’s financial situation.

 

Any approach to your Bankers could be very uncomfortable in the current climate so it is necessary to demonstrate you have full control of your exposure. Make sure that the Debtors book makes for healthy reading and that inventory control and stock turn are being monitored very closely.

 

Ironically it is the activities of Banks themselves who precipitated the ongoing crisis but that will not prevent them from playing hard ball with anyone trying to seek support for additional funding in the current climate.