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Credit May Be King, but Cash Trumps Kings Every Time!

Written by: Marijo McCarthy

Article Overview: The news reports these days are bullish on very few segments of our economy and that includes gambling, which lives and breathes on cash. Less cash circulating throughout the economy means fewer folks losing hand after hand in Las Vegas. And that means Donald Trump is breaking bread with his bankers way more often than he would like.

Credit May Be King, but Cash Trumps Kings Every Time!

The news reports these days are bullish on very few segments of our economy and that includes gambling, which lives and breathes on cash. Less cash circulating throughout the economy means fewer folks losing hand after hand in Las Vegas. And that means Donald Trump is breaking bread with his bankers way more often than he would like.

Casino owner or not, there is a lesson here for all of us: If your customers have cash, take very good care of them. If they don't, be careful of how long you wait for their cash to come in.

A few months ago, I suggested we revisit some basics, since the deteriorating economy required prudence and caution in running our respective businesses. I also suggested that an area where you could have some control was your customers' credit.

What was true in October is growing in truth and value as we proceed into 2009... so let's revisit in more depth.

According to Wikipedia: "Cash is King... refers to the importance of cash flow in the overall fiscal health of the business.... It describes the importance of sufficient cash as an asset in the business for short term operations, purchases and acquisitions. A company could have a large amount of accounts receivables on its balance sheet which would also increase equity, but the company could still be short on cash with which to make purchases, including paying wages to workers for labor. Unless it was able to convert its accounts receivable and other current assets to cash quickly, it could be technically bankrupt despite a positive net worth."

So, what is a beleaguered small business owner to do where cash is concerned? Here are my recommendations...

Review your company's credit policy for new customers. (Time to create such a policy if one does not exist.) Determine the characteristics of the customer, the length of the expected credit relationship and the potential limits of credit which you should extend. Make a decision based upon a D&B or similar business credit check.

Consider a credit application process. This will vary by industry, however if it's within the scope of what's considered customary, put this into place. Make sure your credit application captures the credit information that is important to your decision, including exact structure of the business, an employer identification number and a bank reference. Most credit applications also require a personal guarantee, something which can be useful down the road.

Don't skimp on the billing process. Be sure bills are sent out regularly (there is nothing worse than a business owner who neglects monthly or project billing, only to bill a large sum at the end and have a customer unable to pay). Be sure your customer pays within stated terms. Be sure your bills state any late penalties or delinquent interest which you may want to impose on a defaulting customer.

Document late payments and failure to pay. For example, if a customer assures you on the phone that "the check is in the mail," send a confirmatory e-mail when you finish that conversation "confirming" who made the promise, the nature of the promise and when you can expect to receive the payment. This will come in handy later.

Have a collection process in place before you need it. I usually suggest that clients send a polite, but firm letter initially, spelling out the situation, the collection attempts and any promises kept or broken. In other words, document the collection history and ask for payment within a time certain. Follow up lack of payment on that date with a phone call. If all this fails, you have a few options:

If it's too large to ignore... call your attorney for advice. You may be warned about the perils of litigation (i.e., expensive, time-consuming), but even so, it may be worth the effort.

If it's too small to pursue... don't waste further resources calling anyone. Just chalk it up to experience and report the delinquency to your credit bureau.

If it's somewhere in between... consider a demand letter from your general counsel (sometimes taken more seriously by the delinquent customer) or the services of a collection agency (sure, they take a good-sized percentage as their fee, but if they are successful, it might be worth it).

Remember, cash flow is the life blood of any business, including yours. Take it seriously - as seriously as you take marketing, selling, manufacturing, hiring, and every other part of your business!

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Article Tags: assets, bills, credit policy, donald trump, economy, las vegas, sufficient cash



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