Saturday, June 28, 2008

Show me the money!

So you've hired a superstar salesperson, or you are a superstar salesperson, and your sales volume has picked up tremendously. This is a good problem to have in most instances.

However, what if you've sold on credit to your clients? Can they be trusted to pay you back in a timely manner? Did the salesperson merely sell a lot during a contest that you were having so that they could win? Was due diligence used when making a credit determination?

These are the questions that keep business owners up at night.

Not everyone is going to pay you on time. It's the nature of who we are. So how do we handle this delicate situation with our customer?

The answers are many, and the first question that needs to be asked is this: How long have you had a relationship with the client?

If you've known the client for a million years, gone to his or her daughter's wedding, etc. it's probably best to simply give your client a phone call as a gentle reminder. Provide them an "out" before threatening them. Maybe something like this:

"Hey Bill, just wanted to let you know that we were having some printing problems last month with our invoices and I wanted to confirm that you received yours. Going through my paperwork, it appears that we never received a payment - and it's most likely something on our end."

This provides Bill with the perfect alibi, while at the same time, making him aware that he hasn't paid you yet. It may have been an oversight, it may have been deliberate or it may have gotten lost - or the dog may have eaten it. Regardless, Bill now has an opportunity to deliver the payment on time immediately, or utilize your excuse and make it his own.

Because of your sensitivity to the issue, though, you've not damaged a great relationship.

Let's look at a different scenario. Assume Bill fumbles the ball and tells you "I did receive the invoice, and frankly, we're having a tough run at things right now. I'm hoping you might be able to give me a little latitude this month."

What do you do? Who is your obligation to?

If you're the AP Clerk, your obligation is to your company. You want that money NOW! However, it's probably wise to talk to your boss.

If you're the boss and your reading this, I have bad news for you. You are going to have to go with some creativity to solve this problem.

A.) Is this something that has become a habit? If so, draw a line in the sand and stick with it.
B.) If it's a one time occurence, throw Bill a bone and extend him 15 days for free.
C.) Is this a cue for you to ask what's the "tough run" he's talking about? Odds are good that this is what is really happening. You owe your client a good conversation about business and the business climate you find yourself in. Ask what he suggests you do to solve this dilemma, or how he's handled this situation in the past with his clients. If the relationship is a good one, an amicable solution will follow without jeopardizing a personal relationship.

Now, what if the client is brand new and has no track record? How do you handle a late-payment without killing the contact your salesperson worked so hard to get?

DO NOT COME OUT WITH GUNS BLAZING! Why play hardball with them when you've never collected a dime from them? They owe you nothing anyway, so if you fly out of the gates like Al Pacino in Scarface, you'll only end up with a dead customer and no money in the bank. Focus on the money in the bank.

Instead, place a call to the purchasing agent first and do a little discovery. Make small talk, get around to why you called and find out when you can expect payment? After all, your rep will be over that way in two days, can he pick up the check and bring it back if it's more convenient to them?

Again, place them in the apparent drivers' seat. Allow them to choose their own fate, while simulateneously making them aware that you are all over the account to ensure timely repayment.

One solution to this dilemma is to utilize a factoring company for your billing, invoices, collections, etc.

A factor is a company that will purchase all some, or all, of your receivables at a discount. Based upon the timeliness of their repayments, the factor will often pay $.95 on the dollar or as little as $.80 on the dollar.

Regardless, you should take a good long look at your costs of conducting credit-driven business. You probably have an AR Clerk making a decent wage, maybe some benefits, etc. And you also send out bills, either electronically or through the mail, both attached to your letterhead, using your postage meter and then your time spent going to the bank to deposit checks. Once the payments go 30 days or later, you are owed money, so you send out another round of bills, make some calls, etc. It can be extremely costly.

Sometimes, outsourcing those costs at a 5% discount is worth it considering you get your cash from the factoring company in as little as 5 days upon review of the receivables. Additionally, once a relationship is established with your factoring company, you can often negotiate more advantageous terms.

This cash flow increase can have a dramatic impact on your business model, thus allowing you to go after new clients, hire new sales staff or even make much needed capital improvements to yoru facilities. There are times that using a factor makes you a better risk to a bank when you look for a loan to grow, as cashflows are stronger than if you handled billing on your own.

While it's not the only answer, factoring is a viable option in many instances. Industries that make use of factors quite frequently include trucking firms, large manufacturers, outplacement firms, supply firms or any company that secures government contracts.

Another possibility is to sell your credit card receivables on a monthly basis. Called "merchant lending," this option can be somewhat expensive, but again, selling your credit card receivables frees up time, energy and effort to sell more, expand and continue to focus on the bottom line.

Write me with your comments, concerns or ideas, and please visit our sponsoring links!

Sunday, June 22, 2008

Focus, Focus, Focus

Thank you to the many responses so far and the visits to the advertisers that move me up in the blogging lists! (I have no idea what that means, but it sounds pretty techie...)

Let's get back to business, though.

Many responses via email and comments (always welcome) suggesting that we might just be onto something here with regard to cashflow and watching our receivables - particularly if we are a small business with a few large customers.

How do we handle our receivables, though? After all, as business people, we are probably type "A" and need control. Additionally, we like to count all of the money before, during, and after business hours, right?

The answer is one word - focus.

FOCUS can be broken down as follows:

F - Be FISCALLY responsible to yourself, and your business, first. If you have a client that you wouldn't lend a pencil to, you probably don't want to extend credit to them - even if it means losing the sale. Better to have not lost production costs, shipping costs, paying your salesperson and your staff and then not get paid than to never make the sale at all.

O - Be OPPORTUNISTIC when you do extend credit to your client. Create a competitive advantage if you open a receivable line to a new client by suggesting minimum orders or requiring a larger down-payment amount. This allows you to relax standards for the client once they've established a timely history with your company.

C - Be COST CONSCIENTIOUS. If you have a vendor that requires payment in 30 days or less, be aware of that fact as well as when your receivables are due. It makes absolutely NO SENSE to make your billing date due the first of the month if your suppliers require payment within 30 days from time of receiving their shipment. If you received supplies on the 15th of May, for instance, payment would be due June 15th. Likewise, if you make a credit sale on June 1st, your client has until July 1st to pay you in full. That's a 15 day difference between funds coming in and funds going out.

U - Avoid being UTOPIAN in your approach to lending. While we like to think that everyone pays their bills ahead of time like we do, that's not the case, folks. In fact, many larger companies take advantage of smaller companies and deliberately push payments back 45, 60 or 75 days! Not everyone in business is a nice guy. Don't fall into the trap of assuming we all want a "touchy feely" approach to collecting bills.

S - Finally, be STERN when dealing with deadbeat accounts. This is YOUR business, not theirs. They can lay anything out there as a possible reason for the delay in payment, but stick to your guns and demand payment. Accept cashier checks or money orders if a client has a "spotty" record of repayment history, and develop strong relationships with that AP Clerk at your clients' offices. Sales are an important element in any business, but collecting money is probably more important. Without money coming in, there is no sense selling anything. In fact, if you keep selling and NOT get paid, yours is a losing business my friend!

To be sure, there are plenty of good clients that will pay on time. Obviously, it's a win-win situation that grows out of respect and integrity toward each others' business. However, what do you do when someone DOES NOT pay you on time? How do you handle it?

The answers are as many as the days of summer are long. We will explore them next week, but I urge you to begin thinking about how you handle your existing relationships with clients, and vendors. I'm certain there are things that can become uncomfortable from time to time and as a result, your operating system could likely be modified to accomodate these changes.

In the mean time, I urge you to comment, write and phone me with any of your questions, and I hope you're enjoying this weekly update as much as I enjoy posting it!

Here's to a profitable week ahead.

Saturday, June 14, 2008

Cover your Assets

Sorry about the adult-themed title, but again, grabbing your attention early is important.

First, thank you to the many who have written and/or commented! We even have some non-business type among us. Welcome from the rest of us capitalistic idealists.

Now, onto your assets.

With a show of hands, who has heard the phrase "our greatest assets are our employees?" EVERYONE! Good!

It's a lie, of course.

At the risk of sounding cynical, your company's greatest assets are not the people that work with you, or even the people you bring in (consultants like me.)

Rather, the greatest assets your business possesses are those that are most easily converted into cash! Even my four year old daughter knows that "cash is king, baby." (That was one of her first sentences. I'm so proud.)

Sure, the people are important, and the technology, and the ideas, and the thinking, etc. But at the end of the day, are you in the people business or the profit business? I choose the latter, and you do to if you're still reading this post. If the people really are the focus of your business, I hope that you are self-employed as a counselor, psychologist, hypnotist or palm-reader. After all, people really are your business. Even outplacement firms are more concerned about cash than the employees they place at the end of the day!

For the rest of us, it needs to be about assets and the accumulation of assets. By doing so, every decision we make will ultimately be decided by answering two questions. 1) Is it legal? If the answer is "yes," continue onto question #2 which is: Is it profitable?

A "yes" answer here and all systems go!

A third question, "is it ethical?" needs to be answered, but I need to assume that all of you are acting ethically. Otherwise, I have surrounded myself with frauds and schemers, and I don't believe any of you are unethical.

Now, the asset portion of our discussion.

There are rules, of course.

1. Cash is king. This is self-explanatory. If you have cash, you have power. You have the ability to get into a price war with your competitor, so long as they have less cash than you do. You have the ability to pay for projects without borrowing (we'll discuss leverage in a later post.)

2. Inventory isn't cash. I have a friend that likes to show me all the "stuff" in his warehouse. Stuff in the warehouse equates to several things he doesn't understand. As his inventory sits there, it is taking up space and costing his company money. Lots of money. Additionally, if his inventory is perishable, the longer it sits, the cheaper it gets to his end customer. Valuing receivables can be a challenge. Turn inventory frequently. One of the ratios often overlooked is the "inventory turnover ratio." This is basically a number that tells you how often you sell out of your inventory on a yearly basis. The higher the figure, the better you're doing.



3. Receivables aren't a sure thing. While we might like to think that all of our customers are folks that like to pay on time, the reality is that some of them can't or won't. That creates headaches for us that often go beyond measurability. Sure, it's a tough call to make and say "Stan, I've known you forever and all, but I need paid." What we can't measure, however, is how much are you really losing by not having that money in your account for expansion, price wars, rising cost for fuel and production, etc? Remember, unless you are a bank, you ARE NOT A LENDER!

Many times you can arrive at this number by simply taking SALES/INVENTORY. Wow. That's hard math. A better method, however, might be to take your COST OF GOODS SOLD/AVERAGE INVENTORY. This second method is probably a better indicator, since Sales are recorded at MARKET PRICE, while COGS are recorded at COST. Additionally, using AVERAGE INVENTORY reduces the seasonality of your business.


4. Stocks/bond/securities aren't a sure thing. First, let me tell you that I am a big proponent of diversifying your personal portfolio so that all of your eggs aren't in one basket. However, business and personal are two different things.

I remember a case study I did on Intel back in 1999 and recall that over half of their income came from the sale of stocks and securities. This was INTEL, not Goldman Sachs or Lehman Bros. What in the heck was Intel doing buying and selling stock? Not surprisingly, they had a couple of rough years after that until they got back to focusing on their Core Competencies.

Remember, your company is in business to do "X." While I have no problem with a business that hedges risk through treasuries, derivatives or even businesses that have opposite business cycles, don't count on your investments to be easily liquidated in the future for the same value they hold today. There is a reason they are expected to have higher returns than that boring sweep account you have at the bank - they are riskier! As a result, they can, and will, rise and fall in value each day.

So how do we get to the cash?

First, do what you do best and rely upon your CFO/Banker/CPA when it comes to investments. Remember, you are not in the investment business.

Next, watch your inventory! Don't be proud of your warehouse facility unless you only have an empty warehouse that you are now leasing to your competitor since you've pushed back everything onto your vendors. For an example of his, just look at DELL. They are fairly successful, right? And they have no inventory.

Finally, and this is paramount, is if you must act as a bank to your customers, do so sparingly and cautiously! We will discuss payables in a later post, but the odds are good that you are more forgiving to your customers than you're suppliers are to you. Therefore, when you act as a credit facility, you are likely losing money.

I can't preach enough about this last point, folks. Too many great companies have gone down the tubes due to their inability to lend appropriately. Heck, even the big guys on Wall Street are having struggles right now, and they're supposed to be experts.

Receivables also create extra expenses in the form of a receivable clerk, mailing out billings, invoices, phone calls, collections, etc. Receivables can be a bad thing.

There are plenty of things to add to this, but I believe this is more than enough on a rainy Saturday. Can you tell that I had two glasses of iced-tea this morning at Suzie Q's?

Comments are always welcomed and appreciated, and please visit our sponsoring links provided at the top of this blog so that we can continue to move up Google's blog list!

Sunday, June 8, 2008

Finding the Perfect Balance

Okay, I confess.

This is a misleading title intended to draw in you readers that are opposed to doing hard numbers and would rather focus on the soft sciences of psychology, marketing, etc.

Gotcha!

The perfect balance I am referring to is the Balance Sheet. This simple, usually one-page document gives a snapshot of any given business at one point in time - typically at the end of the month of a business quarter/cycle.

The beauty with the balance sheet, though, is that while tiny in size, it is a magnifying glass to everything goin on within the business itself.

Remember, the left side has to equal the right side! As a result, the assets (left side) are equal to liabilities (debt) + capital (owner's equity.) Whew. That was hard.

Take a look at the one below:

Weeklybusinesstips
June 8, 2008
Assets Liabilities
Cash $50,000 Short-term Debt $30,000
Accounts Rec $40,000 Accounts Payable $50,000
Merchandies/ Salaries $110,000
Inventory $100,000 Total Current Liabilities $190,000
Total Current
Assets $190,000 Long-term Debt $20,000
Plant/Equip $30,000
Accumulated
Depreciation (2000) Owner Equity $8000
Total Assets $218,000 Total Liability/Equity $218,000
Yes, I know it's exciting to read a balance sheet on a blog; especially one as basic as this. But the ramifications from the balance sheet are enormous, and our understanding of the business grows tremendously once we begin to dig into the balance sheet and discover that things exist there.
First, and foremost, is notice that the assets are listed from most liquid to least liquid.
Why is this the case?
As business owners, I don't need to tell you that cash is king. It's the most easily understood, and universally accepted, forms of payment. You don't need to process anything more than a receipt and the corresponding deposit slip, as the bank accepts these funds the instant they hit your account.
Account receivable, on the other hand, are from your credit paying customers. Aside from the credit card comany taking their 2-3.5% fee on each transaction from you, there is always the risk of the purchase being disputed by the customer, and the processing time takes a few more days. Thus, AR is not as liquid as cash.
Finally, inventory is listed as a current asset and considered the least liquid. This is the result of fluctuations in the business cycle and an ever-changing consumer demand for your product. Additionally, your accounting method will need to be considered for the balance sheet, as the price you paid two weeks ago to make your product may be higher or lower than when you purchased the materials. FIFO and LIFO are important elements to consider for this entry.
On the liability side, the same science is applied, using short term debts and accounts payable as the most necessary payments, followed by longer-term liabilities.
So you don't need to be a rocket scientist to realize that if you reduce your liabilities, a.k.a. - costs, expenditures, debts, etc. and your assets stay the same, your owners equity has to increase in order to balance the account! That's why costs are so important with what we do.
Imagine how great this balance sheet would improve if we simply cut our accounts payable by 20% to a total of $40,000. The owners equity would increase from $8000 to $18,000! And that doesn't even factor the possibility of increasing cash balances with increased sales or higher prices.
A few final thoughts on the balance sheet.
1. It is not wise to skip over a balance sheet. While elementary in scope, that is intentional. The balance sheet is intended to be the glossary for accompanying financial statements such as the income statement, statement of cash flows, profit and loss statement, etc.
2. The balance sheet is a snapshot of one day in time! Keep it consistent and monitor your balance sheet frequently. If not daily, at least weekly, and make it the same time each week. For instance if you have large sales on the weekend, get a Monday morning balance sheet.
3. Pay attention to variables within your business that fall into categories that can jeopardize your equity position on the balance sheet, such as accounts receivable and accounts payable. While it might increase sales in the short-run, relaxing credit standards to sell more items is seldom a wise move for the long-haul. Similarly, review your vendor accounts frequently and push for better terms as your performance paying the accounts improve. For example, you may have a perfect record paying within 30 days to all of your vendors. Go back and ask for a reduced bill if you pay in full within 15 or 20 days, such as a 2/15 net 30 (this means a 2% reduced bill if you pay it within 15 days, or just full payment if you pay after 15 but before 30 days.) Most vendors will work with you so long as your credit history with them is positive.
4. Don't dwell over the numbers! It's too easy to become bogged down and get frustrated when things don't turn your way on the balance sheet. We will later discuss how to improve cash flows, so just be cognizant of your balance sheets and find ways to make minor modifications to your business process that result in increased cash balances, reduced inventories and lower costs.
Please send your questions and/or comments to me anytime! I'd love to know that you're reading and enjoying.

Thursday, June 5, 2008

Finance 101

The first question I ask students each semester is "who wants to be here?"

No hand ever goes up. The next, obvious, question is "who has to be here?"

All hands go up.

Such is the life of a Finance teacher and number junkie. My goal is to teach every person I come into contact with in an appropriate setting about numbers. There is no need to be afraid of numbers.

In fact, as business people, it is our job to EMBRACE numbers. This is the language of our business, folks! Regardless of what marketing people tell you, or your lawyers tell you, or your advertising department tells you, the bottom line for your business is, well, the bottom line!

Please understand something, though. Finance is NOT Accounting! Accounting is a tiny segment within Finance, kind of like being a quarterback is part of a football team or cheese is a part of pizza.

So why do we run from numbers?

The answer is simple - numbers paint an accurate picture. All the time. Everytime.

Reality is a hard thing to comprehend when we have plans for big things. Reality gets in the way of our dreams and desire to grow, grow, grow!

It's the same reason we don't write down our Mission Statement, Vision Statement, Business Plan or even a daily plan!

When we see it in writing, it becomes real to us. It reminds us that there are things left to do on our list - things we haven't accomplished yet, rather than things we have accomplished so far.

As business people, we don't like to be reminded of our failures, and finance does just that on a daily basis through our balance sheet.

Each week, I am going to discuss a different element of finance and why it is so important to simly learn the language of finance, whether you are the President of a billion dollar company or a sole proprietor doing part-time work to supplement your "real" job. Once you learn the language of business (finance) you will make smarter business decisions based upon increasing cashflow rather than simply focusing upon what is in the bank account each day. The difference between the two is like night and day, yet few business owners really "get it."

My job is to make you "get it," and I will utilize many means to get you there.

I urge you to write me with questions, comments or opinions, as I am a lifelong student of the game of business and finance. No topic is too small or too big, and I am also simply asking you to pass this site on to two people that you think could benefit from this site. I can also answer personal finance questions, although I am not a licensed financial advisor. (I am, however, in the process of trying to pass my series 6, 63 and 7 - but it's merely for my own skill set and not for profit right now.)

The blog will be updated weekly, most likely every Monday morning to get you started.

Thanks!