Dowsing for Dollars

This past week marked more conversations with people who say their business is picking up than I can remember in a while. This got me wondering if small business access to credit is picking up as well.  From what I can tell, it’s getting better, but not in the usual way.

Financing consultant, Multifunding pulled together a fascinating post on how banks’ number of loans of less than $1 million is much lower than the number of small business loans they report.  There are small businesses that get loans of more than a million dollars, but not that many.  (It’s worth noting that the smaller number is in regulatory reports and the larger number in press releases.)  This discrepancy between bank publicity on small business lending and regulatory filings is consistent across all the big name banks. 

On the other hand, people who provide alternative financing are so busy they can’t keep up.  So the banks say their small business loan portfolio is growing and the factors are busy, and the economy is slow!?  That would be impossible.  Business Week’s piece on small business funding through receivables (a.k.a. factoring) has pages of testimonials from small business owners who are growing their business thanks to alternative financing.  Not to say that this is all good news.  Factoring loans are expensive.  In addition, Factoring is essentially unregulated.  So it’s higher cost and higher risk.  This creates a potential vicious circle for small business credit scores where they are compressing margins, adding debt and therefore look even less attractive to banks.

Despite the outrage expressed by ”Occupy…” it’s hard to make the case that banks are aligned in a conspiracy against small business lending.  Banks with a successful small business loan portfolio make more money than banks that just hold cash in the vault.  The issue is that the analytics that used to signal the loan would be good; don’t work well in the current environment.  There are alternatives out there, like On Deck Capital, but my guess is the shortest route to losing your bonus as a banker these days is to try something new.  It was new analytics that short circuited the whole system.  I’m not saying I agree with this logic, but I do think it’s a dynamic driving behavior.

Factoring is clearly a much used source of working capital by an increasing number of businesses.  This starts to create a virtuous circle around increased liquidity and increased competition.  The growth in receivables financing infrastructure companies like the Receivables Exchange  adds weight to the idea that so-called alternative financing is becoming more mainstream.  While the world of finance doesn’t move at the speed of tech gadgets, traditional bank loans could be heading down the path of phones without a touch screen.  Seen any lately?

Buddy Can You Spare a Dime?

With or without a double dip, Monday morning usually means the start of another work day for a small business.  This week in particular is a good time to review how effective your cash management strategy is, and if you don’t have a cash management strategy, a good time to implement one.   There’s a great Open Forum piece on this that lays out 3 areas to look at in your business to get a better handle on cash.  Their first piece of advice is to plan how you think cash flows will look for the year.  If you didn’t start the year with this, it’s never too late.  Their second point is to make sure you get paid.  Review when and how you bill, and then when and how you do collections.  Add to that, when and how you give credit.  A client who operates almost exclusively on credit told me he’s improved his credit granting process to the point where he doesn’t think about bad debt allowances.  He’s confident if the customer made it through the credit process, he’ll get paid.  Finally, the Open piece talks about the importance of benchmarking how cash is flowing vs. what you thought would happen.  Needless to say the two are not always the same. 

This brings us to the topic of Plan B.  While I am an advocate for and user of Plan B, I would also tell you to take extra steps in setting up Plan A, so Plan B is more of a safety net than a likely outcome.  As you look to manage cash flow, make sure you have someone with expertise to talk to, so both your time and money are being invested wisely.  If you can get a line of credit, do so now rather than when you need it.  That’s when it won’t be available.  If you can afford a cash reserve, set one up.

The other obvious, but not necessarily well used cash management tool is focus on cost management.  Angel Business Advisors put together some great practical tips for studying your costs.  I was taken by this list because if reflects things you can do even if you’ve already done cost cutting.  On the first round you cut what you can do without.  A next step is to think about lower cost or free substitutes, as well as reducing utilization.  Sometimes you can share resources and the cost. The same client I talked to about credit has also saved serious money by deferring capital purchases and renting instead.  While small businesses have difficulty accessing capital, interest rates for big companies are at historic lows.  Renting from a big firm can help you arbitrage the credit market.

The persistent economic uncertainty inevitably flows to small business as inconsistent access to credit.  There’s only one solution to that, and it involves cash.   

Working Through the Crisis

In the spirit of focus on a solution, rather than the problem:

Here are my top five things a small business should prioritize in the coming week default or no.

• Know where you stand on important metrics.  (If you’re a QuickBooks User here are some thoughts on how to implement this advice.) When times are tough, it’s critical to understand how you are doing compared to plan.
  • Focus on collections, cash on hand and expenses. 

•  Know where your employees stand.  There’s been a lot of talk about how tough things are for small business owners, but it hasn’t been a picnic for employees either.  A new study by Met Life shows  44% of small business employees feel loyal to their employer – that’s down from 62% in 2008.  More than half of employers (54%) think their employees have a strong sense of loyalty to the firm.  A little more than a third of small business employees report they would rather be working somewhere else right now.

• What would you do if a critical person walked out the door? 

• Cash has been king for a while, but clearly it’s even more relevant than ever this week.  For capital intensive business it’s time to make sure you’re on top of either inventory or the lease / buy question.  Professional services want to monetize time.
  • If you don’t have a set of tasks that keep you apprised of key cash flow metrics (see #1) make sure that gets on your calendar ASAP.

•  Find out what other businesses are doing to cope.  There is no play book for this level of lingering economic stress combined with dynamic marketplace change.  If you have a circle of trusted advisors, continue to utilize that resource.  I’d also find out what you can about competitors, and consider giving some time to “hate-surfing”. 

• The whole idea is to find out perspectives that won’t naturally occur to you. 

•  Make sure your record keeping is where it should be.  If this year isn’t going to go as planned, knowing when you went off course is a big help.  If you think you don’t have time now, think how much less time you’ll have if you’re dealing with (insert name of unexpected crisis). 

Still in a Cash Crunch

As I’ve been cleaning up client books for tax purposes, there are two things that stand out about being a successful small business in 2010 (and therefore hopefully in 2011).  One is that all that cost cutting and focus on creative ways to get around the recession are starting to pay off in better margins.  The other is that cash flow issues surrounding late payments are still a big problem.  Everyone I looked at (and it’s mostly companies that have year over year revenue and margin growth) had more, older receivables than even in previous years.

I don’t see a statistically valid sample, (though at this point in tax season it sure feels like it) but among those who do see enough data to show definitive trendsetting in action, the conclusions are the same. 

According to an article in Bloomberg Businessweek, average accounts receivable collection for private companies went up by four days between 2009 and 2010 to 27 days.  If you’re waiting for payment from a large company, find something to do while you wait.  The average S&P 500 company pays in 59 days and collects in 46 days.  The data also shows credit agreements don’t necessarily help.  In 2010 average delinquent dollars went up from  12.5% to 14.3%. 

So besides being frustrated, what should your business do to improve cash flow.  Unfortunately it all comes down to the “eat your vegetables” common sense advice that is so common in business.  The fact is, if you pay attention to cash flow it will improve.  Some fundamentals to work on:

-           Check the buyer’s credit before you extend it

-          Get some payment in advance

-          Bill promptly and mention timely payment

-          Follow up on outstanding receivables

-          Reconcile your bank statement and your receivables every month

o   Notice repeat offenders and consider if the relationship is a net positive or negative to you.

§  Communicate the results of this analysis to the specific customer(s)

o   The reverse is also true.  Thank prompt payers with discounts and words (if applicable). As the mom of a 12-year-old I will tell you repeated positive reinforcement can institutionalizes good behavior.  (Haven’t found the miracle cure for the reverse problem.)

While late payers are an insidious problem that cost you serious money, paying attention and responding persistently can make all the difference.