Small business: Getting customers to pay their bills

Excerpts from NZ SME Business Network members on the challenges of getting customers to pay bills in good time, tagged Move Money Faster on the LinkedIn Group.

Anonymous 1: We can adopt a strategy called Move Money Faster. Change paying accounts by 20th and instead pay weekly or fortnightly. Councils, government, older folk who pile bills until 17th can we change this?

David Mossop, MBA, professional director:

I have conducted qualitative masters level research concerning trade credit issues among NZ SMEs. As this discussion correctly indicates; cash flow is critical for SME survival, especially if working capital is lean and strategic trade credit policy is thin or typically even non-existent.

Moreover, cash flow is the new model for business value (net present values; NPVs) and therefore requires 'hands-on' planning, monitoring, leading and control by the SME business owner.

Unfortunately, for most SMEs, advice about cash flow tends to come from their friendly accountant who still work with an 'efficiency' mind-set more so than 'value' based. Such advice tends to come 'after the fact' and so the humble SME owner operator having already experienced their suffering and pain quickly adopts short-term measures as their accountant suggests; (Receive prompt debtor payments and make payments to creditors as late as possible).

Doesn't this sound like an oxymoron piece of advice? Presumably the debtor (seller) is also a creditor (buyer) and so we have a viscous circle revolving here.

The critical issue is actually receiving the cash for invoices more so than the timing. If timing patterns are identified, then planning and costing (including the cost of capital) can and should be included in product and service costing budgets. My research uncovered the possibility that product and service demand is somewhat elastic when it comes to extending terms of trade in favour of the debtor. In simple terms, debtors might pay more when the extended credit period is longer. So long as they do pay, then the real issue is the timing pattern and the cost of capital and the impact of this on NPVs.

Sadly though, if customers are willing to pay more for products and services in order to receive longer payment periods and sellers do adopt 'building in the cost of capital' to their prices, then the whole NZ economy has an on-going additional expense. The only reason business don't pay promptly (apart from the professional advice) is because someone in the chain doesn't pay at all and so the ultimate cost is 'bad debts written off'.

Anonymous 1: Interesting isn't it, how the SMEs pay but big business and organisations, who have far more opportunities given to them ("they are more professional/knowledgeable about business etc.etc. than small operators") are actually what? Greedy? Have poor systems?

The perception this should create is that big organisations operating in this way are out of date both in their operations and so - their thinking? Does this mean that they are not the dynamic, forward thinking organisations they portray themselves as? Should government and local government be seeking to contract to SME's first?

Anonymous 2: As a business currently being squeezed extremely tightly because there is no hard bottom line anywhere that says you must pay your accounts by a certain date, I am to some extent at the mercy of our debtors who in a very competitive market for us will simply take their business to the next supplier who will let them stretch out o 90 days plus.

At the risk of drawing a big ugh from people at the thought of more regulation/legislation could we not put a future date in 2 or 3 years and say that all businesses must pay their accounts within 14 days. We have customers who are not being paid until 90 days for contracts by large forestry companies.

They can't pay us until they get paid. What moral right does a large corporation have to hold the lesser of us to that kind of ransom! Put a regulated deadline in place would ensure that all SME's managed their businesses properly, but this would also require a very accessible and effective support network to provide education/resources to equip SME's to do this.

David Mossop: These claims about larger firms and government agencies/departments are right on. My masters research uncovered these same opinions, yet the perception from SMEs is that they are 'good customers' to get!

If you are an SME and you do have one of the above as a customer...you might be surprised that they are also likely to absorb your slightly inflated prices that can help cover your cost of capital. This is worth considering.

If your cost of capital is say 10 per cent PA and they take 90+ days to pay, then I suggest 'for these slower paying customers' at least, you add (90/365days) x10 per cent+ 'a bit more' if you can to your quoted prices to cover this cost.

While you might perceive these customers as 'cost conscious', the reason they've chosen you for supply is probably not entirely for pricing reasons. This is especially so if you have a high service component to your offerings.

Larger firms and government departments are slow payers generally, but you will find they mostly do pay in the end so the issue is more the cost of capital for your business and you having access to this capital.

The research also suggests that when assessing new customers for credit worthiness, one should be cautious among other things of the following types;

Customer's (the principal's) character, capital and behaviour namely;
-Overtly demanding and/or impatient types
-Actual business experience (time in business, knowledge and skills, resources). E.g. new start-ups by 'seasoned types' v's 'first-timers'
-Those that 'flaunt' assets such as 'flash-new' cars and other material items.

With respect to anyone herein who considers themselves to be one of the above; this doesn't mean you are a bad payer, just that SME businesses might be cautious of you.

Every small business with a product to sell is talking about it on social media but how effective is their online chat really being? Our experts will give some tips next week on how to optimise what you do online. Tell us your stories of successes and failures. Please email me, Gill South, at the link below.