September 10, 2007
Show me the money
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''Show me the money!'' Tom Cruise's mantra in the film, Jerry Maguire is set to become a catchcry for small business as it starts to feel the full impact of the looming credit crunch.
While cash flow maybe the lifeblood of business, many small businesses are already dangerously exposed to bad debts. But with a pre-emptive strike on bad payers, small business may be able to avoid the worst.
While the effects of the sub-prime meltdown and the resulting credit crunch may seem remote to Australian businesses and consumers Peter Schiff, head of United States investment advisors Euro Pacific Capital, believes the knock-on effects will extend far beyond the esoteric world of hedge funds, bond and capital markets.
Along with mortgage-holders everywhere, he sees consumers and small businesses as its next big victims. With a tightening of liquidity and credit standards' ''all those secondary markets (for finance) will dry up,'' he says.
That's bad news for small business.
The days of genies flogging endless cheap credit may be coming to an end. Mr Schiff says the no-deposit, interest-free, payment-holiday deals that have been used to drive sales may also dry up.
And business financing costs are also set to become more expensive.
It comes at a time when many small businesses are already dangerously exposed. According to credit reporting agency, Dun & Bradstreet, the overall picture for small and medium businesses, even in Australia's fair-weather economy, is precarious.
''Cash reserves are stretched very tight and payment terms are blowing out across the board,'' says Dun & Bradstreet Australia chief executive officer Christine Christian.
Dun & Bradstreet figures reveal the average time taken to pay accounts across all industries in the June quarter remained at ''an alarmingly high level of 53 days'' - more than three weeks above the standard 30-day payment term.
Ms Christian says that while the average days wait were marginally worse in July, as a lagging indicator, she doesn't expect the credit crunches first impact to show up for at least 90-120 days (one full payment cycle).
She says small businesses are ''notoriously bad'' at collecting their overdue accounts.
So much so that small business is regarded as a ''soft touch'' by big business. ''As a result they end up at the bottom of the food chain,'' she says.
David Vasudevan, insolvency expert at accounting firm Pitcher Partners, says failure to keep on top of outstanding accounts is a common cause of small business failure.
Pitcher Partners partner Mark Harrison says many small business operators don't understand the real cost of finance.
''Allowing payment terms to blow out has a real cost, which has to be financed.''
That's a view echoed by Christine Christian. She says ''a sale is not a sale until the cash is in the bank''.
''Small business needs to start acting like big business,'' Ms Christian says.
She says that small business needed to recognise that cash is going to be scarce and they needed to take action now to avoid becoming a victim of the crunch.
To keep the cash coming Pitcher Partners says small business can adopt some very simple strategies:
* Offer discounts for earlier payments;
* Maintain good dialogue with debtors;
* Conduct credit checks;
* Agree on terms beforehand;
* Be brave enough to enforce them.
Ms Christian believes it is not the time to look weak. Credit terms need to be clearly articulated at the outset. It's the most important time for setting expectations.
But Harrison says that is only the start to insulating a business from a cash flow crisis.
He says its vital to ensure stringent inventory management and control of overheads to unlock precious cash.
Mr Harrison says not matching financing with purpose for example buying depreciating assets with short term debt - is also a big problem.
And if all else fails, having a line-of-credit lifeline locked in to side-step unexpected cash flow shocks is vital. Mr Harrison says that small business should be shopping around now for best rates and terms.
Dun & Bradstreet's top five tips for overdue accounts
*Assess risk closely before extending credit to new and existing customers.
*Consider shortening your terms of payment.
*Be rigorous about debt collection - chase debts before they are 150 days past due - you are four times more likely to collect them; and jump on to large debts immediately - there is a 55.2 per cent success rate of recovery of a $5000 debt, compared to a 31.2 per cent chance of recovery of a $25,000 debt.
*Build automatic reminder dates into your receivables processes to ensure a rigid plan of debt recovery is maintained.
*Consider outsourcing to professionally trained debt collecting staff if payments are getting slower or the numbers are creeping up.