Eight dark clouds on the horizon
Wednesday, 10 September 2008
By Brendan Lewis
Last time we had a recession in Australia I was working as a branch manger with an electrical components wholesaler (and re-training to be an accountant). Our customers were generally electricians and small manufacturers of electrical components.
Life was reasonably depressing and you were used to bandying about terms such as "provision for doubtful debts". When I think back to those times (go misty and fade out) I remember what used to get me really agitated.
- Salespeople who have compensation based on what they sell only, do not care whether the debt is actually collected or not. (They might say they do, but they lie!) In a recession all customers are not created equal. Unfortunately it’s really easy to sell to, and get a great price from, people who don't intend to pay you.
- Customer payment terms will start slipping and all of a sudden it’s no payment until you chase it. You will start hearing things like "We pay all our suppliers at 60 days" and of course "the cheque’s in the mail". Expect to see credit control courses appearing in the mailbox. My advice is to go on one early.
- Customer credit limits become important again. How much are you prepared to risk. Are they worth $1000, $2000, $10,000? (Remember that creditors are the cheapest source of working capital).
- Credit applications and credit checks become a worthwhile activity, not just a chore. If you don't know what a Romalpa Clause is then you better look it up. Have a look at your terms of trade. If you haven't got any, then it’s time to get some and have customers acknowledge the new terms.
- Know exactly who your customer is. Just because you think you are dealing with a customer listed on the NYSE, make sure you actually are and not just a subsidiary company. I can personally tell you $127,000 worth of reasons why you may not get the money back from the parent when the subsidiary goes under. If you haven't heard the expression "lift the corporate veil", time to look that up as well.
- Understand how liquidators rank creditors and where you sit. It’s not lonely at the bottom, but it’s unrewarding.
- A debt isn't paid until the money is in the bank, and it has cleared. The guy that comes in and hands you a cheque to clear his account before picking up more stock is likely to burn you twice.
- Remember that just because the funds have cleared, doesn't mean a liquidator can't come and claw the money back.
Unfortunately the above eight lessons have all been learnt with pain. The upside is that I am sharing them for free.
Brendan Lewis is a serial technology entrepreneur having founded : Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club, Flinders Pacific and L2i Technology Advisory. He has set up businesses for others in Romania, Indonesia and Vietnam. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.
To read more Brendan Lewis blogs, click here.
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