Death by Net

May 19th, 2009 by Sharon Larsen

The second cow pie for entrepreneurs is death by net.   

 

If you’re going to bootstrap a business, you need to internalize this irrefutable truth: nobody cares about your money like you care about your money. Nobody! That’s why you track your cash flow daily, and why you must also articulate and enforce your net due policy. A net due policy has to do with when your clients’ payments fall due.

 

Generally, businesses do not expect the complete fee for their service before starting work. Some ask for net-60, net-30, or even sooner terms—that is, they require their clients to pay the full balance within 30 or 60 days of the invoice. Articulating your policy is important—“net terms” could mean anywhere from seven days to sixty. Enforcing your policy is crucial—just because you say you have a two-week net due policy doesn’t mean that everyone will pay in two weeks.

 

Your net due policy determines the promptness and amount of your accounts receivable. This is vital; accounts receivable, after all, are the flow to your cash. You must have cash coming in—and you must know when, where, and how much—because otherwise, you will only have cash going out. If you aren’t careful with your approach to your net terms, you will experience leakage. Leakage is bad. In cows, it makes for an extra mess. In business—well, you get the picture.

 

I have sometimes had large companies as clients that have systematically tried to get out of paying their bills, particularly those submitted by smaller vendors. They would purposely delay payments for 30 days, or even 60. Why? Because these companies had discovered that if they held off payment long enough, the smaller businesses would either lose track of the payment or else just tire of the continual ankle biting in the money chase. They could usually trust small business owners to forget about the invoice altogether—or just give up on collecting it. For you, then, the moral is clear: don’t let anybody bully you into losing track of your receivables—and don’t lose track of them yourself!

 

A second angle on this cow pie: if the money isn’t in the bank, it isn’t in your pocket. Once you’ve trained yourself or your multipurpose first hire to think in terms of cash flow, it’s really exciting to go into QuickBooks and see that you’ve got a huge balance. That definitely ups your confidence—as does writing your checks out of QuickBooks and seeing that there’s money there to cover them.

 

Confidence usually deflates at the next realization, though: QuickBooks is not the bank. Even if you have pending payments showing up as assets in your balance sheet, it’s not real money until the bank says so. Actual money needs to come in.

 

A firm net due policy will help both of these issues. What kinds of terms do you give for payment? Do you allow 45 days? 30 days? 15 days? I always submit seven-day terms. Sometimes they stick, and sometimes they get bumped to 15 or 30 days—but I never permit a company to take more time than that to send me my payment.

 

When I sit down to my QuickBooks, it is usually a very close representation of what is in the bank. Many small-scale businesspeople will allow longer terms so that they can charge a more expensive rate. Getting paid big amounts is nice, but if your accounts receivable start to lag, it means that your vendors get a bite out of you before you even sit down to eat at the buffet they are supposed to be providing. The speed of your pay is every bit as important as the amount. As with anything else, you have to strike a balance, and I far prefer to get paid quickly especially in the tender stages of the venture.

 

Short-range net terms are good, but what if you have a particularly stubborn customer? Having seen many small businesses die because some accounts receivable were never collected, I have established a “collection escalation path.” Most of the time it works, and the method only involves a simple conversation. My partner or employee brings up the topic first, as the deal is being settled. It goes something like this:

 

“You’re going to love working with Rich—he’s a savvy businessman, good at what he does, and for the most part easy to talk to. But the one place you don’t want to go with him is late payments. If you don’t pay on time, and Rich gets wind of it—well, no one wants to be in the building when he makes that call. I’ve overheard a few, and they can get ugly. Very ugly! Whatever you do, don’t be late with a payment—but if you’re always on time, you’ll never get better work done than what he will do for you.”

 

Do they make me sound a little like a Mafia boss? No, because I’m a really nice guy—I’m just a nice guy who wants to be paid on time, according to policy. I’ve seen this work with small and large companies alike.

 

If the payment is a day late, have your administrative assistant place a call. Giving the company the benefit of the doubt will sometimes result in an immediate payment. If the company gets to be a week late, have the accounts receivable manager place a call. Have the person make a statement to this effect: “Your account is going to show up on Rich’s report. He’s going to see this shortly, and we need to get it resolved or you’re going to get a call and, let me assure you, you don’t want that call from Rich.”

 

Nine times out of ten that solves the problem. If for some reason it doesn’t, all I have to do is place a phone call, even just leave a voice message, and say: “Hey, this is Rich. I’m really concerned about the finances here.” After all of the suspense that has been built up, a simple call like that is usually enough to get the people owing me money to take care of the situation. It is remarkably effective for collecting receivables on time.

 

No amount of accounts receivable, though, is any good unless you have a plan behind it that you are committed to follow. The questions that you ask while constructing your net due policy are also good for checking up on yourself later on. Some of these questions are: what is the state of my accounts receivable? What is my net due policy? How about my suppliers—thirty days net? Sixty? How do those all affect each other? When do expenses fall due? Will I have enough revenue flowing in at the right time for that? How about rent and utilities—when are they due and how much are they? How often do I need to pay insurance and taxes?

 

If you don’t have answers to these questions before you start, get some. You don’t want to empty yourself of cash at the beginning of the month, waiting around for your net-30s or net-60s to kick in.

 

Later on in your venture, if your plan doesn’t line up when you check up on it, look at your feet! You’re still walking through the pasture and might end up on the squishy ground of lagging accounts receivable. Create a calendar to organize your payments or have your miracle first hire help you out. Get and keep a visual of how all the financial pieces fit.

 

While we’re on the topic of your money as it relates to your clients, be careful about who you extend credit to. It can be tempting to be liberal with credit in hopes that extending it will somehow come around and benefit you on the upside. While money is definitely a method for friend-making in the business world, foolishness with money is great for bankruptcy-making. Be smart about to whom and how much you extend credit, and be sure to keep accurate records. Secure yourself first. Do background checks on anyone you give credit terms to and always follow up. Bring out the big, bad Rich if you have to. You can’t be too careful with your credit.

 

Whatever the financial scenario, if your money goes out, make sure you bring it back in. Don’t let your services go unpaid and don’t be afraid to be blunt about it. If you don’t care about your money, nobody will—at least, they won’t care about getting it back to you.

 

Porter’s Points – Death by Net

·         Avoid spending money you don’t have yet. Part of avoiding death by net is checking your cash flow—and checking it against your actual bank balances.

·         Net terms need to be set so payment comes as scheduled. Firmly back up the terms of your client agreements, and be prompt, friendly, and effective in providing your services. They want you on the job. Give them what they pay for—and don’t let them delay paying you.

·         Credit can do great things for your business relationships, unless it runs away from you unchecked. Keep a tight lid on who you loan to.

                 

 

Now we’ve covered the first two cow pies for small businesses: cash flow and death by net.  Next time we’ll talk about the stability cow pie.

 

 

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