EXTENDING BUSINESS CREDIT FROM JANUARY 2012
The news last week included media stories about the major banks cutting their sales and finance staff.
Currently there is a great deal of noise and media talk about credit and sales risk in our current business environment. The volume of information about these subjects, makes it difficult for business people to discern what is a "red flag" warning for them. This is especially difficult for business people involved with, and in micro, small and medium sized business.
So what is it in these media stories which makes it look like a red flag warning story?
I believe there are two reasons which make these stories a red flag warning for all business people, especially if their business extends credit to customers.
First, the banks are saying there will be less lending and finance opportunities in 2012.
Secondly, if the banks are going to slow-down on their lending, where will business people go to finance their business interests in 2012?
My thinking is that they will head straight to their suppliers.
The fact is, we know the banks have been restricting their lending to the business community for some time. It has also been apparent, unless you have the assets available to provide security, plus strong cashflow potential, obtaining finance for your business is extremely difficult.
Furthermore, should you actually obtain the finance, you will also know, it will mostly be at a premium, because of our risky economic times.
The effect on the business community has been pronounced. The banks have now provided additional information of critical importance to your business, especially if you extend credit to your customers.
With the banks reducing the availability of credit for business, there are now only six other sources of finance available. These are:
1 your family and friends - hopefully;
2 finance companies - which charge higher rates of interest than banks;
3 equity finance - only obtainable for a business with a history of good profits and strong assets. Even then, these investors will probably want more of your business then you might want to give them;
4 invoice discounting/factoring - if you qualify;
5 loan sharks and other dubious lending agencies - which the government fails to acknowledge exist, or believe will not be used by "sensible business people";
6 and the cheapest source of finance of all - YOUR BUSINESS WHICH OFFERS CREDIT TO ITS CUSTOMERS.
SO WHY IS THE BUSINESS EXTENDING CREDIT SO VUNERABLE?
There are many factors that make your business venerable. I could write a whole Blog on each of these factors, but will only offer a few now.
1 In smaller businesses, most owners are 'nice but naive people" who often lack business training and do not wish think ill of their customers. In addition, particularly in the new business, there may not be the structures to manage the granting of credit adequately. Therefore many new business people are caught out by their cunning and manipulative customers.
Many business owners also hate to make calls for the unpaid invoice(s), and/or do not have the time, or contact their customers at the wrong time of the week/day/hour for the unpaid invoice(s). Therefore invoices remain unpaid for longer periods than stated terms.
2 In larger businesses, there can be manipulative managers who encourage sales and purchase fraud to meet their personal own needs ahead of the long-term interests of the business. In these situations, both the sales and credit staff can find the following situations.
Sales employees are often trained to sell "at all costs" and to "get the signature". In these instances, they are not trained on how to "sell" the getting paid component of the sale. A dud sale in these situations, causes increased costs and slow recovery of cashflow from sales.
Alternatively, credit and accounts receivable processes are marginalised as they are deemed to 'lose' sales or do not add value to the business. Therefore when credit and accounts receivable staff point out that customer “X” is unreliable, their views are over-ridden.
3 In the business community, often there is the dominate thought - rightly or wrongly - that the customer is always right! In the business where this ethos exists and dominates, it will affect how sales are made, under what terms and when issues occur because of slow payment. Again, we see the business suffering cashflow and probably, increased bad debt problems.
4 Terms and conditions of trade are usually ignored, or do not adequately support the suppliers' rights or are not used to enforced the supplier's rights to be paid.
5 Customer service is usually a myth in most businesses which have a cashflow problem. the result is poor cashflow from sales and reduces the potential to increase sales.
The news that banks are cutting sales and finance staff is a clear sign tough economic times are here. This news is clearly one of those red flags warnings which all business people can clearly see and should act upon.
The wise business person will use this red flag warning as an indication on why they must change the way they do business. If your business sells on credit, then this red flag warning is even more important to you and cannot be clearer.
May you be paid today rather than tomorrow.