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(Sept. 2003) - My client roster has an abundance of micro, small, and mid-sized businesses that give off a perception of prosperity. These enterprises are making sales and attracting new business. And the proprietors and owners of these businesses often think that sales are the answer to everything. After all, this is key to the entrepreneurial spirit, so it is very easy to get caught up in this good feeling that things are going well.
Yet, they have often wound up on my client list, because these businesses have short-changed their backroom operation, or in some cases have ignored it entirely! This results in slower cash flow due to inadequate processes in their accounts receivable department. So for as much new business that comes through the door, the ability for the business to grow, develop value, or achieve profitability, becomes elusive. (As the owner of an accounts receivable management company, you can understand why these businesses would come to me for solutions and assistance.)
When advising their clients -- especially micro-business and small business -- accountants and controllers must put greater emphasis on the backroom. Unfortunately, human nature being what it is, this tends to get pushed aside when a business becomes stretched thin with people and heavy demands are made with sales and expansion.
Sure, the idea of new sales, more leads, closing deals, and greater production has excitement and appeal. But the more mundane issues like cash flow and the ability for a business to conduct itself from a position of strength have greater meaning in the final analysis.
Businesses are wise and prudent when they make it a priority to perform proper invoicing, prepare proper statements of account, offer sound credit policies to customers, have solid collection arrangements, and have proper financing lined up to deal with an operation's commitment and obligations. "Fortune 500" companies are the prime examples of this, which have such systems in place.
Many small business enterprises are reluctant to engage in an effort to seek out financing. They incorrectly think it is a negative stigma on their operation -- that perhaps they are not making money, not operating profitably, not able to pay their bills, and more. The truth is that business credit evaluators have enormous respect for enterprises that have developed extensive levels of financing. They want to see that these financing lines are properly used with consistent, regular ability for payback. The businesses that accomplish this often create additional corporate value and net worth.
At first glance, many small business owners feel that by using outside financing and lending arms, they are giving away their profit to payments on interest rates. They don't immediately recognize some of the advantages that adequate financing brings about, such as stability in paying bills and meeting payroll, taking advantage of discounts and credit opportunities when purchasing, having the funds to expand facilities and operations, and taking on new customers (who often demand credit terms when putting together an account relationship).
Lacking the short-term funds to move quickly handicaps a business owner, who then must spend an inordinate amount of time and energy away from sales and business expansion "robbing Peter to pay Paul" or devising schemes and gimmicks to cover up the cash flow potholes.
Invoicing clients in a timely, detailed, documented manner is essential. Failure to do this automatically creates unnecessary problems, especially in today's environment where most companies are demanding this quality of data and information. For instance, upwards of a third of our clients are using electronic billing and payment technology today. It gives a small business a sophisticated look to it. At the same time, it reduces costs and streamlines the entire protocol.
Taking it a step further, a company's policies for payment and collection must have integrity.
Many small business proprietors will find out that its customers demand credit terms, which are a necessary evil. The competitors of this small business are generally issuing credit so it is often an essential ingredient to making a sale and gaining a customer relationship. It is critical that an effective vetting process be used by the small business when issuing credit. The act of credit approval should not be treated on a casual basis. Again, the ability for a small business owner to line up adequate cash flow financing will have an impact of whether or not the company can issue credit terms for customers.
As a mentor and advisor on the team of a small business client, the accountant needs to advocate for a harmonious balance. A business must give equal priority to its showroom as well as its backroom in order to achieve true success. Many times, I have rescued businesses that have faced cash flow emergencies because they have neglected the backroom, or refused to acknowledge this, as an important function.
LEONARD R. LEFF is President of the CDS Companies, based in Lynbrook, New York. The CDS Companies and its affiliate, myreceivables.com, is a thirty-year-old national company that handles some $250,000,000 in annual financing transactions, some 10,000,000 transactions per day and 5,000,000 invoices per month. Visit www.myreceivables.com.
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