Entrepreneurs reveal their cashflow commandments

Senior account director at debt collection agency eCollect Lou McLeish has been on the phone chasing up a string of overdue bills for her clients, one for as little as $368, another for $7,000 that is 90 days overdue.

“There really is a big debt problem,” she says. “Collecting money is everybody’s least favorite job.”

But for some entrepreneurs, collecting debts is too important a job not to get personally involved in.

Co-founder of Emma & Tom’s, Tom Griffith, has built a system where he collects payments as he makes deliveries.

Well-known communications guru Paul Budde isn’t afraid to stop working for clients that aren’t paying.

And internet entrepreneur Simon Baker will personally make the “pay up” call to slow-paying clients.

Managing debtors is a serious concern for Australian businesses. A staggering 80% of businesses that fail in this country do so because of negative cashflow. In 2010, more than 10,000 Australian firms shut down, up 23% on the previous year, according to a February 2011 Dun & Bradstreet study of external administration and liquidation data.

And for those businesses that are surviving, there is an average of 53 days between date of invoice and date of payment for businesses.

“The time between the date of a firm incurring production costs and eventually getting paid would be even greater,” says CEO of Dun & Bradstreet, Christine Christian.

Business owners continue to ignore cashflow issues such as credit risk and receivables management, instead lavishing all the attention on the revenue and sales numbers (that don’t tell you whether you can pay the payroll or phone bill this Thursday).

While the Australian economy is outperforming most of the developed world, SMEs are being slayed by rising costs and delayed payments.

According to McLeish, a lot of problems start with not having a signed supply/trading agreement and it goes downhill from there.

“I have some clients in food supply and they don’t even know the surnames of the people they are supplying to,” she says.

“There’s no paper trail, no trading terms.” People also tend to use letters and emails to chase up bills, rather than open discussion over the phone or face to face.

Managing director of Boom Sales consultancy Trent Leyshan says it is important that businesses get over the reluctance to talk about debts.

“Every business is dealing with cashflow challenges, even clients, so remember that.”

Here is the SmartCompany cashflow boot camp checklist:

Make the payment terms crystal clear from the start. Get the payment agreement signed off

“Setting very clear guidelines for clients, both verbal and contractual is fundamental,” says Leyshan.

“Often business people ignore vital warning signs because they are too eager to get pen on paper. This is also applies to stretching the client beyond their maximum budget. Be wary of clients who go way outside their initial budget, as it much easier to agree to a deal than honor it.”

Find a commando accountant

A secret weapon for maintaining cashflow is hiring or at least sub-contracting a commando accountant that knows how to get on the phone, talk openly with the client in a polite and professional way and get a bill paid.

The commando accountant will also watch cashflow figures like a hawk and never let debts fester.

“I would have them monitor cashflow daily, monitor not by statement but by invoice, and I would also ensure that my supply agreements enable me to claim from the owner of the business personally, not the business,” says McLeish.

From McLeish’s experience, many SMEs hire young, inexperienced accounts staff that just don’t have the skills to make the difficult phone calls.

Chase hard early, not later

Co-founder of Emma & Tom’s Tom Griffith has a background in banking and chartered accounting so he doesn’t mess around when it comes to cashflow. He maintains a positive outlook on “99.9% of people”.

“People are fundamentally honest and trade on honest terms,” he says. “And I am not shy about asking to get paid.”

Emma & Tom’s supplies its juices, waters and snacks to more than 1,500 suppliers and tries to avoid occurring debt in the first place. Payment terms are clearly outlined and signed off at the start of the working relationship. Payment terms are seven to 14 days.

“We are not a bank, we offer a service to our customers not a lending facility,” he says. The business stays in close contact with customers, seeing most every week, often collecting payment with new deliveries.

According to his debt collector at eCollect, Griffith has a very low level of debtors that go over the trading terms and conditions. He does, however, have customers who are paying back debts to his business, $50 at a time; and a former employee with a “gambling thing” that is paying back a debt.

Managing director of Paul Budde Communications and special advisor to the ITU/UNESCO Broadband Commission for Digital Development has learned the hard way that it’s never smart to let things linger. Thirty years ago when he was starting out his business, two huge projects went terribly wrong. A company it was working with on an advertising campaign went bust and Budde was left with a $90,000 advertising bill mid-project.

In hindsight, Budde says that he was far too eager to get the business and not confident enough to stand up to the customer.

“That has set us up for the next 30 years,” he says. “We’ve never had to bring in the debt collectors.”

Communicate, communicate, communicate

Budde says he feels extremely comfortable talking about fees with clients. “I have learned to be far more transparent and far more upfront,” he says.

“It is not a good idea to plan to sort out problems later.”

Get disciplined

Dun & Bradstreet stresses the importance of getting the basics right – issuing correct invoices on time, following up the invoices (“the longer it takes to collect a debt the less likely it will ever be recovered,” says Christian) and being prepared to take action against delinquent payers.

Another fundamental way to avoid payment problems is being transparent about all service costs to ensure customers don’t get any “surprise” bills.
CEO of Classified Ad Ventures Simon Baker’s consulting and website building business works on building major property portals around the world. (Baker used to run realestate.com.au).

All CAV fees are clearly outlined in work contracts, bills are submitted on time and if the due date for payment passes, a debtors’ letter is dispatched. Failing that, Baker will personally make the “Come on, it’s time to pay the bill” call.

“I don’t want to work in a hand-to-mouth existence,” he says. “I don’t want to be the guy that doesn’t get paid. It’s as simple as that.”

During his days at RealEstate.com.au, if an agent wasn’t paying the bills, their access to the website would be cut off.

“You have never seen people pay a bill faster,” says Baker.

Budde agrees. If a project is underway and a scheduled payment does not arrive, “we basically stop.”

Credit checking customers and prospects also pays off for Baker. It is likely the bad payers have a poor credit history that will emerge in a credit report. In initial meetings with new clients, Baker sniffs out the potential customer’s capacity to pay, quizzing them on their funding position. He will walk away from business if he doesn’t believe they have the capacity to pay.

“I make sure we quote at full value,” he says. “If the potential client winces, it’s an indicator that there could be payment issues in the future.”

“Those who react aversely to pricing, you have to be very careful of them,” he says. Baker also structures different payment plans for smaller businesses. Payments are more frequent, staged in a way so that when the job is complete only 10-20% of the fee is outstanding.

For those companies worried that getting tough on late bills is going to damage the working relationship, Baker has this advice: “If the client is not paying you, you haven’t got much of a relationship anyway.”

Hedge your bets

For smaller operations that have clients with long payment terms, make sure there is a mix of smaller customers that will pay on much shorter terms. Leyshan has seen companies fold because of poor cashflow management and larger clients holding up payments.

“My advice is hedge your bets to ensure you’re not held to gun point by large debtors,” he says. “Have a mixture of clients on different terms and always try to build an annuity revenue model into your cashflow.”

Spread out payments to iron out cashflow bumps. Customers like this too

Leyshan previously owned a web marketing company. Cashflow was dire when clients would get halfway through a project and stall because they could not afford the next 33% payment for the project. Leyshan worked out that changing the payment terms to be equally spread over six months worked well. Less upfront for Leyshan but easier for the clients.

“The clients thought they were getting special treatment over and above standard payment terms, it also levelled our lumpy cashflow and in some instances the project was paid for in full months before completion,” he says.

Time to call in the heavy artillery

In McLeish’s experience, many companies will wait until a bill is 60 days late before calling in the debt collectors. In many instances, when eCollect makes contact with the debtor they say that they have not been told about the bill being overdue. eCollect works with a phone call, a written formal demand, SMS and email. When contact is made, settlement is negotiated.

Stay on top: Some final tips to keep cashflow fitness

• Don’t just send the invoice – call two days later and make sure it has been received. Organise credit card facilities for small payments.
• If an invoice is not paid on time, call straight away – don’t let it drag out.
• Stick this mantra on your office wall and say it out loud, smiling: “When I have provided the goods or services on time, I am entitled to be paid on time.”
• There are even pre-collection services (eCollect does this) where you can call a customer before the bill is paid and check to see that they are on track to pay. If not, work out a payment plan now, rather than in 60 day’s time.