Cash Flow Is King

The number one mandate of any business is to survive. This mandate supersedes any other.  An organization must generate enough cash flow to meet its obligation such as payroll, taxes, and payment to trade suppliers and avoid being insolvent.

During negotiations with many debtor companies, the #1 response we typically hear is “We had tons of orders- I don’t understand why I’m in trouble”.  These “successful” business people become insolvent because they simply didn't have enough cash to meet operating expenses, including the added cash requirement that increased sales generates. Without adequate cash planning these debtor companies were not capable of meeting payroll and the purchase of raw materials to meet the sales demand.

With any business the cash cycle looks like this:

Cash is used to buy raw materials or pay for services rendered in the production of the final product or service. The sale of the goods or services produces cash and accounts receivables. When customers pay their bills, the accounts receivable goes down and the bank balance increases. Unfortunately the cash doesn't usually come in the same month as the sales generates.

If a business finds itself short of cash, the options are:

•       The owner can inject more cash into the business.
•       The business can use a pre-existing bank line of credit.
•       The business can slow its payments to trade suppliers.
•       Sale of fixed assets.
•             Sale of non-current inventory.
•             Issuance of company stock.

One of the easiest methods of raising some fast cash flow is to ensure you are collecting money from your credit customers in a timely matter. Your collection efforts should include a systematic and consistent follow-up. This is vital to the establishment in the credibility of your credit terms in the minds of your customers. Time is of the essence when credit and collections are concerned. To be effective one must follow-up diligently. An accurate, timely report of your aged trial balances is crucial to the efficient control of collections and release of new orders.

Putting a customer’s order on credit hold is an excellent way to get their attention. Prompt contact with your customer in a professional, tactful manner usually produces the desired effect. Make sure you respond quickly when your customer pays his account to make sure there are no delays with their next order. 

Trust - But Verify

The Value of Validating Your Customer & Supply Chain 

     The phrase “Trust-But Verify” comes from an old Russian proverb. Ironically in the 1980’s it was a favorite mantra of Ronald Reagan.  Wikipedia defines it as: a form of advice given which recommends that, while a source of information might be considered reliable, one should perform additional research to verify that such information is accurate, or trustworthy.

     Back when I was a kid and just got into the receivable management business, I had a boss that used this phrase all the time – and it drove me nuts! Today we have staff in two countries and thousands of clients and can now tell you unequivocally that he was right. Trust your customer but don’t be naïve. Trust the information on the new credit application but complete your due diligence check list anyways.

It’s All About Risk Management

     Trusting your customer and vendors is important in business. Validating that your customer and vendors are capable of fulfilling their obligations is of equal importance – maybe even more so.

 So How Do I Trust But Verify?

     There are many ways to satisfy yourself that your client and vendors are capable of doing good consistent business with you. If possible, we recommend visiting your customer or vendors place of business where practical. Have a look around.  Is the yard busy? Does the stock on the shelves look current? What’s happening at their loading dock? Do the employees look busy? Are the phones ringing?

All these indications are good signs of the level of activity that your client or vendor is operating as a going concern.

What If You Can’t Visit?

     If the physical location of your client or vendor makes it impractical to do a premise visit, we recommend retaining the services of a credit investigation firm that maintains the ability to obtain information not readily available. They should have access to corporate records, land titles or deed information. They should have access to construction project data. Additionally they ought to maintain the capability of performing reference checks on trade suppliers and obtaining a bank check. It should be simple to use an investigation firm. Look for a vendor that provides online access and is equally easy to call on the phone.

Surprises are for Birthday Parties – Not Your Business

     In negotiations, information is power. Access to reliable current data on your customer and supply chain will help you to plan and source alternate suppliers if appropriate. Don’t get caught with no place to sit when the music stops.

About the author:  Brad Lohner is a Director of the PCR Group of Companies which owns Priority Credit Recovery, a Canadian commercial collection agency and AccountAdjustment Bureau, Inc., an American commercial agency. The PCR Group also consists of Lien-Pro – Canada’s only Construction and Builders lien filing firm, and Credit Process Advisors – a strategic credit management and accounts receivable outsourcing firm. Priority Credit Recovery and Account Adjustment Bureau are authorized agents of Lumbermen’s Credit Group, a construction and mercantile credit bureau with access to data throughout North America. 

Staying Out of The Doghouse

In the receivable management world, we see the good, bad and ugly of both business and human relations. While we have touched on this topic before. we believe it is a good time for another review. Let's review the secret to good business.

When I was a kid, my dad had a saying whenever I got into trouble. He would say “What are you in the doghouse for this time?”  As we work through our clients disputed receivables and consult with prospective clients, my dad’s question still rings in my head. Approximately 40% of the cases assigned to our firm in the last 24 months have not been a result of the customers inability to pay, but rather a dispute with delivery, quality, supply chain disruption, unfulfilled promises...and the list goes on. In these situations our firm acts more as a mediator than professional debt collector.

There is a way for creditors and their customer to stay “stay out of the doghouse” and that is to not be afraid of tough conversations. Addressing tough issues head on without your pride or ego getting in the way is difficult. For some, admitting mistakes is tough. Creating an environment where staff and customers can fess up to mistakes can be equally challenging. Trusting your boss to not crucify you for making a mistake can be tough.

So What Do You Do?

A young Jewish man was once quoted by his friend John as saying “… the truth shall make you free.” As was true over 2000 years ago – the same is true today. Phone your supplier or customer and admit you screwed up. While the recipient may not like the message initially, they will come to respect you for admitting the mistake.

Taking this approach will accomplish two things:

1)      Position yourself as a person or company of integrity, and/or;
2)      Establishing yourself as someone who can be trusted during a difficult negotiation.

Managing Expectations

The best way to position yourself as a person or company of integrity is to talk about the “tough stuff” up front. As mentioned earlier, if everyone did this, 40% less receivables would end up in third-party collections and business relations may be stronger than ever! The best way to minimize these troubles is to do your due diligence on your vendor supply chain and customers at least once each year. Check their credit rating, review their warranty claims, review their track records.


If you need assistance with the due diligence process contact our business partner Credit Process Advisors Inc. to obtain information such as credit information, bank checks, Mechanics Lien information, law suits, and receivable monitoring.

Managing Your Receivables for Top Performance

There are certain key performance indicators (KPI’s) that any business can implement to significantly increase its odds of not only surviving but help it to thrive.

Each segment of your business, including your credit department, should have its own sub-set of KPI’s to ensure your cash flow is optimized while managing costs. 

Here are the compelling reasons to carefully manage your accounts receivable:

•  If one maintains a systematic method of managing accounts between 30-60 days past due, you should see an 85% reduction in accounts aging past 60 days.
•  After 60 days, the probability of collecting your account is 80%, at 90+ days, it slides to just 70%
• If allowed to age past 90 to 180 days, the chances of a full recovery are now 54%!

So what steps can you take to maintain control of your receivables?

         Know Your Customer - Paretto’s Principle holds true in most companies that 80% of your revenue is generated by 20% of your customers. Segment your customers by assigning codes. For example:

A.      Best customers, great margins, pays within terms, few service issues.

B.      Bread & butter clients, consistent orders, no price haggling, pays no later than 45 days,

C.      Complains about everything, many warranty issues, stretch payables for a long time, takes unauthorized discounts. Customer you wish you hadn't met.

D.      Dead. These are customers purchased from you once and you haven’t heard from in a long time.

    Start the Collection Process Early - Sometimes all it takes is an automated email reminder, or a copy of a statement, that can get the job done. This is the first step in helping to classify/segment your customer base. When the early reminder doesn't elicit a response, these are the customers that may require personal contact. Always make contact with these customers no longer than the mid-point of your first past due period. For example if your terms are 30 days- make sure you personally contact your customer at day 45. Studies indicate that personal contact at this stage of delinquency can reduce that number of customers reaching 60 days, by as much as 85%.

     Follow-Up – If your receivable still remains unpaid by this point, and there’s no diligent follow-up, then you have effectively given your blessing to be paid sometime after 60 days. Talk to the right person at your customer’s office who can sign a check. Get a firm commitment as to a date when the funds will be received. Confirm your understanding of the arrangement while you have your customer on the phone and again via email right after you hang up.

     Pull The Trigger – if by 120 days you still have not received payment- it’s time to take further action. This is the point where most customer-service oriented creditors blink as this step can be uncomfortable. If an individual runs out of money – you can still collect from them when they get back to work. 

                                    If a company runs out of money – it’s dead.

At this point we recommend a Ten Day Demand letter be sent advising the customer that unless fall payment is received by a specific date, their account will be placed for collection.

To make the decision to take action easier for creditors, the Third-Party Collection industry has developed a Ten Day Demand letter which creditors can use free of charge. It works like this:

·         Letter sent to customer on collection agency letterhead giving the debtor ten business days to remit full payment directly to the creditor.

·         If the debtor pays the bill within the ten day period, there is no charge to the creditor.

·         Should the debtor pay only a portion of the bill or nothing at all, then their account rolls into the regular collection process of the collection agency. Funds paid after this date will be subject to your pre-determined fee agreement.

All creditors, who use this service, like the certainty that they made the right decision at the right time. If the customer fails to remit – then it was the right time to hire a third party.

To learn more about our Ten Day Demand System, CLICK HERE and fill out the form. 

Credit Literacy for a Young Person You Love

Generally our focus is on commercial debt and commercial transactions; however in this issue we will be discussing credit and financial literacy for high school students.  Take this home and have a discussion with your own children or someone you care about.

Some of our community involvement activities centre on personal credit issues. We provide a credit seminar to local high schools. It is part of the Career and Life Management program (CALM).  There is only a paragraph dedicated to credit and its use in the textbooks. As older consumers will attest, there is much more to be learned about the subject and it would be great if it didn’t have to be learned the hard way!

Here is the seminar outline that we use:

Credit is defined as: confidence in a purchasers ability and intention to pay, displayed by entrusting the buyer with goods or services without immediate payment.

Examples of credit: cell phones, gym memberships, library cards, student loans, Visa, MasterCard, store credit cards, utilities.

How do you get credit? 1) Capacity – Cash Flow (job)

                                       2) Character – Attitude

                                       3) Credit worthiness – Payment habits

                                       4) Conditions – Layoffs (bad economy)

Cost of Credit:

Examples of common credit issues: roommates, cellphone bill, gym membership

How long do I have to fix the problem? Generally 90 days to pay all arrears.

Collection Agencies – What happens if I don’t pay?

Bankruptcy – A Credit “Mulligan”

Budgeting - Importance

Q & A

It has been our experience that gym memberships, cell phones, and roommates are the most common reasons a young person will have credit troubles. Have this conversation with the young person and explain to them the responsible use of credit and how it will either help or hinder them in the not too distant future. A great credit rating opens up many possibilities whereas a poor one can hold you back for a long time

Priority Credit Recovery Inc. and Account Adjustment Bureau save US Producer with Innovative Solution.

PCR received a collection account from one of their Multi-National Canadian clients for over $100K against a USA Producer.  PCR engaged their USA subsidiary Account Adjustment Bureau. The documentation consisted only of invoices, a name and number.

An investigation was conducted; the debtor was contacted who admitted to receiving and selling the product. There was no dispute. They cited poor financial planning and cost overruns as the cause for non-payment. They could not pay and legal action appeared to be the only recourse. It was clear to PCR/AAB the debtor needed to restructure, increase profitability by lowering production costs, plus they needed better equipment.

A solution was proposed by PCR/AAB and accepted by the client and debtor. PCR/ AAB drafted a loan agreement, incorporated Personal and Corporate Guarantees, interest and a fee structure for the service. The debtor converted the payable to a term loan, which enabled them restructure, obtain capital financing, increase profitability and expand their market share. The client converted the receivable to an investment asset and continues to do business on a COD basis.

The supplier and producer continue to have a mutually profitable relationship. USA/Canadian International Relations improved with this innovative solution proposed by highly trained professionals who went outside the box.  

This example is proof that PCR/AAB professionals look beyond the obvious when collecting a debt. 

A Credit R.I.P. – It’s Not What You Think It Is…

Here’s a simply strategy to clean up those year-end slow-payers before the holidays.

In this issue we will discuss the costs and benefits of having a solid plan of attack for your slow-paying accounts.

Cash flow is the lifeblood of any business. Without it your company will have a financial heart attack. Therefore it makes good sense to have a consistent strategy for collecting your receivables. And while large businesses generally have a consistent approach when managing their receivables, many small and medium sized businesses do not.

The owners of small and medium sized business are usually pretty close to their customers. This can be both good and bad. Good if the relationship is respected bad if your “friend” uses it to take advantage of you.

So What’s a R.I.P?

A R.I.P. is defined by Brad Hams of the book “Ownership Thinking” as a Rapid Improvement Plan for the financial health of your business. He calls missed opportunities “cracks in the table” where your profits can fall. A R.I.P. is an initiative that you and your staff can implement easily to improve your business right now as well as creating a fun activity in which all of your staff can participate. An example of a year-end receivable clean up R.I.P. might look like this:

ACTIONS:

1.      Produce clear, accurate, and timely invoices

2.      Ask for deposits and/or progress payments

3.      Implement a seven day customer service call (seven days after performing your work and invoicing the job, your customer service dept. will call the client and ensure they are happy with your work and inquire if there are concerns about the invoice) This is looked upon by your customer as a pro-active service call, yet provides you with the ability to discover or eliminate potential excuses for non-payment of the invoice.

4.      Complete credit approvals BEFORE the order is processed

5.      Create and send (by email) monthly statements to customers

6.      Have the sales team keep track of past due invoices and report on these at a weekly management huddle, after which the next action would be determined.

7.      Customers that are past due 91 days and longer to be sent to a professional collector with the view to collecting the funds and retaining the customer.

Key Concepts

a)      A R.I.P is a tool to engage all employees in improving the performance of one Key Performance Indicator at a time.

b)      R.I.P’s shouldn’t be difficult to design and can be created in just a few hours

c)      Non-management people should be involved in the design of a R.I.P.

d)      Your organization should have at least one R.I.P in process at all times

According to the author of Ownership Thinking, Brad Hams, R.I.P’s are powerful tools for a number of reasons aside from profit enhancement. They also identify process improvements