Thursday, October 16, 2008

Credit and Cash Flow


In a recent article from the Daily Oklahoman, they discuss the effect of the credit crunch on local builders. They remark that credit has dried up for construction subcontractors, 'with lenders no longer making loans based on accounts receivables.'

If you are running a business or thinking of opening a business that depends on getting a loan to do work, then using the sale of that work to pay off the loan, this tight credit market is going to be very difficult to work within.

Now is the time to reevaluate your recievables: are there any good customers whose bills are starting to age much longer than usual? You might need to call them to find out what is going on. Hopefully they are just being careful, but if they are struggling, it is better to know now, than have an uncollectable later.

Sometimes as small businesses we think 'I can't be tough on my outstanding bills because I am small' - but that is deadly. Larger businesses would not expect to give you extra time to pay your bill - you must act big, even if you are not.

Remember cash flow - if you are giving net 30, but then not sending a bill notice until 35-40 days, then not getting paid until 60 days - you are giving 60 days of free money to your customers. In a down economy, those extra 30-45 days waiting for payment could cripple your ability to meet payroll, purchase equipment or inventory or ride out the tough market.

It is no help to you or your business if you are generous with terms, yet cash flow negative.

It is also time to reconnect - or if necessary, get started connecting - with your local banker. You need to have a good relationship with your banker before you need to come in on a Friday afternoon needing a bridge loan. Bankers are just like the rest of us: they feel more comfortable dealing with someone they know.

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