Extending Credit

So often I have had clients complain about getting paid (or worse not getting paid at all) by customers to whom they have extended credit. I know how exciting it is to sign up a new customer and, with the intent of doing the right thing for the customer, immediately shipping goods along with a net 30 invoice. Big mistake!

Never, ever, extend credit terms until you can get a solid sense that the customer is credit worthy – especially when the business is a small privately held company.

Your process for extending credit needs to include a credit reference form. After signing on the customer, fax your credit form and ask for it to be filled out and faxed back. (There are a number of web sites and office supply stores that can provide standard forms). The information should include: complete contact information of the company owners as well as the accounts receivable manager; a Dun and Bradstreet DUNS number; banking information including bank address, phone number, manager name, account number; and trade references for at least three suppliers. Call the suppliers and ask how promptly the customer pays, and whether they have ever had problems collecting. If possible run a D&B report and carefully review it.

If the customer appears to be solvent and credit worthy, go ahead and extend credit. Track payment history on the first shipment before deciding to sell additional product on credit.

If the customer does not appear to be credit worthy, or you are otherwise concerned about their ability to meet your terms, suggest either: a) shipping COD, getting advance payment, or getting paid by credit card.

If you lose a customer because you will not offer credit – you have probably won! You most likely would have eventually either received payment very late, received partial payment, or not gotten a red cent!

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com

Business Credit

This morning I listened with great interest to a local show on WCPN discussing, what else, the current financial meltdown. Several listeners called in saying that banks had terminated their home equity lines of credit; others called in saying that even with FICO scores of 720 and 750 they were unable to get new loans approved.

The tight credit is both a challenge and opportunity for the small business owner. In my experience consulting with small troubled companies, most of their problems can be traced back to wreckless use of credit which has, up until recently, been so easy to obtain. OK – maybe large debt is really the symptom and not the problem – the inability to control costs is one of the real problems.

So now that credit is tight, business owners are being confronted with not only being forced to repay loans, but to improve profitability and cash flow. This is good. If the business is to survive, the owner will have to start paying attention to the business and exercise best business practices.

One of the first places to look is cost of goods sold. Many business owners do not really know their total labor and material costs, and therefore cannot control them. In one recent case, I noticed that cost of goods was about 65% of sales, leaving very little left to cover fixed costs and profit. A bit of quick research revealed that the industry average was 47%. By reviewing production process, loss reduction, and better purchasing, we we able to significantly reduce cost of goods. Now profitability has increased, cash flow has improved, and there is less reliance on borrowed money.

I’m afraid that businesses that do not reduce their reliance on lines of credit, credit card debt, and other credit to meet short term needs, are not going to fare well in this troubled time. The key to survival is better management of the resources that are available.

WIll Limkemann
Limkemann Buiness Advisors
440-871-0976
www.neobizadvisor.com