How to make sure you get your money

LendingWhilst the general business outlook appears to be on the up with, it appears, only Greece bucking the trend; there are some cautionary tales that should be borne in mind.
Rather than just wanting to rain on your parade by suggesting that all is doom, gloom and despondency (far from it) I suggest that you ride the current business thermals. You just need to use your innate good judgement and watch the signs.
It is a proven fact that businesses that have stayed afloat during recession often fail in the post recessionary climate. Why? Surviving the downturn is a case of battening down the hatches, keeping business tight and riding out the storm but the period following the storm calls for cash. Surprisingly businesses that fail during this period rarely go down for a lack of profit but are crippled by lack of cash flow.
The danger for businesses such as a motor factor, is that being one step removed from the car-repair coalface you will take the full force of an account failure caused by a garage running into trouble.
Certainly the composite detail on motor factors suggests that both debtor and creditor days are extending significantly and that sets the alarm bells ringing. The difficulty with agglomerated information is that you can see trends… but is this a general trend or another Finelist in the making?

Extending credit

One way for a garage business to extend its credit line a little further is to drop one factor in favour of their competitor. The breathing space thus created rarely, if ever, cures the ills that the garage is suffering, usually badly taken business decisions and imbalance of funding, and so the merry-go-round will continue.
The danger that stems from all of the above is that the parts distributor can be so locked-in that they in turn cannot get out – the problem is how to avoid getting drawn in in the first place. In a business all aspects need to be policed. Within my own businesses we never sent reminder letters, as they just go in the bin. A senior member of staff, most importantly always the same member of staff (reducing the likelihood of being fobbed-off) always phoned immediately the account went outside terms and asked the pertinent questions: When can we collect payment – at this point this is not a demand but a polite ‘It’s that time of the month again….’ Just as you will pay attention to a customer who ‘makes the most noise’ your customers will pay those who ask first.
Just as with any other form of relationship there is a need for honesty and, surprisingly, people do business best with people that they can talk to. Just as important as gathering business information on a would-be customer is the need to explain clearly your trading terms – I have used standard terms for all customers with volume discounts, loyalty bonuses and other incentives dependent on the account being kept clean i.e. within the terms agreed. There is no advantage to you in offering the best terms and then not getting paid.

On the rails

The objective is to keep your customer, the garage, on the rails rather than let them turn into a runaway-train. Let me make absolutely clear, you do not want to lose a customer, any customer, and the best way of achieving this is by keeping the relationship honest. Your terms and conditions of business need to be made clear and concise and remember that ‘all goods remain the property of the company until paid for’ isn’t worth a candle when the motorist has paid the garage for them and they now form a fundamental part of his vehicle.
I was doing some work for a wholesaler a short time ago who was lamenting having to pay a claim on a part he hadn’t yet been paid for. We reviewed and reworded their terms and conditions of business to include elements of accepted Service Level including warranty and withheld payments – as warranty is accepted on goods purchased and this does not take effect until, guess what, – they’ve been paid for.
I’ve heard all the excuses; the accountant’s on holiday, the chequebook has run out, the cat’s been run over and of course I’ll love you in the morning; yada, yada, yada… You are a business not a bank, if you were a bank, I’d be a lot less polite to you (I hate banks) as a business you are involved in commerce, you sell things – they are not sold until payment is taken; if your customer needs money to pay you, they must go to the bank who will take out references and make them jump through hoops before they lend them a penny – are you as diligent as the banks before extending credit? You’re one of the few if you are.
Now is the time to tighten up on payments. It is a high-risk time to be in business. Ensure that your credit terms are strictly adhered to and that ‘good old Bob, who’s been there for years’ isn’t running up a huge bill that, ultimately, you’re going to pay for.

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