The Octempo:RM Blog

Bank lending to small businesses in June was over a third lower than in the previous year, despite the British Bankers’ Association (BBA) claiming that its members were making loans of around £27m to small businesses every day. Total loan value in June 2010 was £598m but this is a 31% drop on last year when loans for the same month reached £867m.

We are past the halfway point of 2010 and so far monthly average for lending to small businesses is around half the amount banks lent two years ago. 

So, forget the spin that the state owned banks want us to believe. The real story is the trend that shows lending is going down and considerably decreasing. Fortunately it appears that Vince Cable is at least on top of this, having warned bankers that their bonuses could be linked to lending - a statement likely to get their attention.  

It's unlikely to change in the short term though and, as always, there is a solution easily at hand - get your customers to pay your invoices on time.

Sounds simple but newly released Business Link data shows that nearly half of UK small and medium sized businesses have no efficient system in place to chase unpaid invoices. Efficiency is one thing but effectiveness is more fundamental. Many businesses use very traditional credit control processes with a lot of manual correspondence and little use of the phone.

If you fail to be pro-active in chasing up your invoices then you will get what you wish for. A lot of credit controllers I've come across are actually afraid of using the phone, largely because they only chase invoices after they are overdue so every phone conversation is negative and defensive. It doesn't need to be this way. Pro-active credit control and invoice chasing is really just good customer services and handled properly can boost the professional reputation for your company.

Next time you're looking at your cash flow and bank balance, take a look at how long your debtors take to pay before you pick up the phone to the bank. 

We all love our customers, but some demand a disproportionate amount of our time when it comes to getting paid. All businesses have them: they are well meaning but disorganised; great business partners but just awful at paperwork. And if you're not careful they divert your credit control resources away from good paying customers and before you know it you've got credit control challenges everywhere.

If this has happened to your business, or is about to happen, follow these simple steps to avoid it hammering your cash flow:

1. Take a look at your customer list and the average days they take to pay. If you're not sure how to do this take the month end debtor balance, divide it by the annual turnover of that customer and then multiply by 365 days. This will give you a rough measure of the number of days an invoice from your business remains unpaid
2. Compare this list to the standard terms you give your customers. Surprised? Most companies are and that's why it's a useful activity
3. Of those customers who pay late, try and estimate how much time you spend chasing invoices each month. Then do the same for the good payers. Big difference isn't it

Chances are that your good payers will also start to take longer to pay as you divert more credit control resources to the slow payers and away from the good payers. Remember, many businesses don't pay invoices until they are chased for them, on the basis that 'if you don't chase you don't need the money'. I'm not suggesting this is good practice but it is often the reality.

So, you've done the analysis and identified the problem, but what's the solution? You either take it on the chin and suffer, or do something about it. If you want to do it yourself internally then you will probably need to hire more people, but is this the most cost effective solution. A better idea would be to pass these customers out to a third party to manage - you pay for what you use, get access to their software and efficiencies, and allow your staff to focus their energies on strengthening the relationships with your good payers. The third party, either working in your name or theirs, can then work on improving the payment behaviours of your consistent late payers.

There you have it - how to avoid 20% of your customers consuming 80% of your credit control resources, and boost cash flow.

As markets across the world fall it is worth understanding that these macro economic problems will impact directly on businesses that engage in export from the UK. It is sometimes easy to see stock market falls and IMF bail outs as 'big stage' problems that do not impact individual businesses, but the reality is very different.

With a GDP of only 2% of the Euro zone the major risk to UK exporters is not Greece itself, but rather a more widespread public debt problem that exists within all major developed economies - a problem that all will have to deal with at more or less the same time.

The austerity measures that have been enforced on Greece by the IMF are brutal - examples include a VAT rise of 2% to 21%; public sector salary bonus cuts of 30%; tax rises on fuel, tobacco and alcohol; and a state-funded pension freeze - but Greece has no choice but to reform its economy. Whilst the IMF/EU bail out also includes measures to stimulate the economy the short term impact will be a choking off of domestic consumer demand.

The falling demand is important for exporters as it will quickly lead to tighter cash flow problems for businesses in Greece, extended invoice payment and an increased probability of default and bad debt. We are advising all our clients, with our support, to keep very close to their customers in Greece, to re-evalualate the credit status of those customers and also review existing terms of trade for new business.

And whilst the problem currently impacts Greece directly, there are fears that other economies such as Italy, Spain and Portugal could go the same way. These risks cannot be controlled by an individual business but they can be identified, managed and mitigated. For more information please visit www.Octempo.com and request a free no obligation call back.

Whilst we successfully support a large number of clients who trade overseas we are constantly reminded of how important cultural understanding is when it comes to successful debt recovery. It's not just about language, though clearly without it you are unlikely to make any progress at all in getting paid - in France for example, attempts to collect debt in English will generally result in the call being ended abruptly.   

To illustrate the point about cultural awareness, we recently signed up a client with significant debt collection needs in Russia. Russia is a distinct cultural environment when it comes to business and debt collection - a fact which the following case study explicitly highlights.

One particular debt placed was for £25k. The debtor was an established company in Moscow and the contact was a Mr. Fydorov (the names have been changed):

• Our first contact attempt was met with a stonewall - not unusual
• The second attempt was slightly more successful in that we were informed that Mr. Fydorov was on a special project for 5 months and was not contactable
• Undeterred, our third attempt resulted in a conversation with Mr. Fydorov's deputy
• The fourth attempt still didn't result in speaking with Mr. Fydorov but we started to build a relationship with his deputy
• The fifth contact received a sympathetic response from the deputy, and an outline of a way forward
• After further correspondence exchange the debtor sent a letter offering settlement close to the value of the original debt

There are three main points to take away from this if you want to collect international debt successfully:

• Persistence is key
• You have to speak the language
• You absolutely have to understand the culture

In the above example we used a Russian national on the team, based in our main office in Warrington, and they fully understand the subtle nuances that would generally pass even a fluent Russian speaker by if they were not a Russian national. It also helps to be able to manage the process from within your home country too - the cultural differences work at both ends of the process and often UK companies can become frustrated by dealing with the cultures of debt collection partners based in a particular country.

For more information on our Russian debt recovery services please visit http://www.octempo.com/Debt-collection-recovery-russia.aspx 

Newly released Business Link data shows that nearly half of UK small and medium sized businesses have no efficient system in place to chase unpaid invoices. Implicit in this statement is that systems do exist. Efficiency is one thing but effectiveness is more fundamental, yet the two are closely related. Many businesses use very traditional credit control processes with a lot of manual correspondence and little use of the phone. A lot of credit controllers are actually afraid of using the phone, largely because they only chase invoices after they are overdue so every phone conversation is negative and defensive. 

Equally, in smaller businesses it is a real challenge to employ, in one or two credit controllers, the mix of skills required to effectively support trading, manage credit risk and minimise DSO. Modern businesses realise that credit control is an increasingly specialised area and needs to be resourced and managed as such. 

With increasing levels of business fraud, heightened credit risk and delayed payment by customers, effective cash management and credit control has never been more important. Today's credit control team needs to have a broad range of skills and software tools to support the business. Look at your team. Does it meet the demands of your business today and tomorrow? If not then you need to take action, but before your recruit take a look at outsourcing. You will get a higher skill level at a lower cost. For smaller businesses you can get a full time credit control provision for the cost of a part-time clerk.      

Over the course of the last few months we have been carefully expanding our international collections service to enable us to provide SMEs with a viable alternative to faceless credit insurance giants. We have built up a team of largely foreign nationals to help exporters collect debts from companies overseas, and have expanded the service to cover all aspects of the order to cash cycle.

Our commercial experience of business cultures around the world gives also us a key advantage over many debt collecting insurance companies. Previously SMEs would have had to rely on huge multinationals like Euler Hermes, Atradius and Coface – a one size fits all service generating large bills in the process. This service doesn't meet the needs of the SME market where often debt values are smaller. 

As more SMEs look to export, they have to deal with language barriers and more importantly misunderstandings about business cultures in other countries. This means they can have problems and delays, not just with getting paid on time, but through the whole order to cash cycle.

Most collection agencies don’t have the capability to handle international collections, which in the past left global credit insurance companies as the only alternative.

We have also linked up with a network of international legal firms, meaning clients don’t have to source help themselves. And unlike many lawyers in the cash flow management field, they operate on a ‘no win, no fee’ basis for international debt recovery work. 

No win no fee international legal assistance is long overdue in our field - it makes commercial sense for SMEs and also ensures clients will not fall foul of specific countries’ laws on debt collection.

One of the great aspects of the Christmas break is it allows time to spend with family, to switch off from the pressures of day to day business and reflect on the passing year. Most of us will look to the New Year with optimism and a sense of hope and, in the run up to a general election, our politicians currently holding power will encourage this feel good mood. There will be many upbeat phrases deployed over the coming weeks - 'emerging from recession'; 'the worst is over'; 'economy starts to pick up' - but a cautious optimism is by far the safer route.   

A word of caution though. Whilst we may well be seeing the start of the end of the recession no business should neglect cash flow or credit control. The dead cat bounce - when a cat falls from a tall building, dies on impact with the ground but bounces up and gives the appearance of still being alive - is the perfect analogy of those commentators predicting the start of economic recovery. 

We still have a huge deficit to deal with and, like it or not, it will need to get repaid. This will mean increased taxes and cuts in public spending. Insolvency body R3 has warned that the next few months could be the most dangerous time for businesses. Matt Dunham, North West regional chairman of R3 and a partner at Grant Thornton, said: “Once the recession ends, there is a delay before businesses start to feel a sense of relief.” R3 estimates the number of corporate insolvencies will reach 26,675 in 2010, with March being the worst month.

However, there are actions all businesses can take to protect themselves from defaulting debtors:

1) Credit policy and trading terms - establish, communicate and enforce

2) Credit checking - new customers. Existing critical customers. Make sure you understand the information you receive

3) Pro-active credit control - regular scheduled contact early in the cycle after invoice issue. Allocate specific resources and incentivise against cash collection targets. Keep close to your customer

4) Invoice queries - deal with them quickly and professionally and analyse what causes them. Go and fix the cause rather than always dealing with the effect 

5) Good housekeeping - make sure your data is always up to date - contact details, payments received and correspondence

6) Always do what you say - threatening to escalate a debt and then doing nothing wastes your time, makes you look a chump and worsens the likelihood of forcing a debtor to pay  

More and more businesses are looking to grow by building links and trading with companies in other countries.

While this is a bold, and intelligent, step, it can lead to some pitfalls. Not only do you have all the same problems as you would growing a business in the UK – primarily finding customers and getting paid – but you will also have to contend with countries where English is not the first language.

While the language barrier can be overcome directly, perhaps by employing someone who is fluent in that tongue, there are other things to consider – especially when managing your credit control and collecting payments.

A knowledge of the country’s business culture is vital, and probably more important than speaking the lingo. We have dealt with lots of companies who have struggled to win contracts, and then get paid, purely because of their ignorance of the country they are dealing with.

Whilst Government organisations like UK Trade and Investment do a great job of helping businesses develop trading links in Europe and further afield, businesses still have to address the issue of how then to deliver that business, at an operational level, to ensure those international business cultures are identified and sympathetically managed.

Recognising this need, and in the spirit of giving in the run up to Christmas, we have put together our 'Lucky Seven' tips on collecting payments from foreign companies:

1. Speak to the right person: in some countries, businesses are organised in a very hierarchical manner, so decision-making powers lie in the hands of very few people.

This is particularly true in Greece, where senior managers make the decisions and you’ll be wasting your time speaking to anyone without real authority.

2. Make sure you have a clear agreement: in China it is very difficult to say ‘no’ directly, therefore be circumspect about anything other than a direct ‘yes’.

Similarly in South Africa, make doubly sure of every aspect of the business arrangement before starting to trade – especially with recently privatised companies – because high levels of bureaucracy are common.

3. Humour: Use wisely. In Germany, humour is generally considered to be out of place in business, so avoid it in all difficult or important business situations.

4. Small talk: many countries, including The Netherlands and Germany, prefer you to get straight to the point in your business dealings with them.

Alternatively, in countries like Spain, Brazil and Hong Kong, your rapport with them is the most important part. You need to spend much more time developing a friendly relationship with Brazilian companies to get ahead. Similarly, in Hong Kong, you should display an interest in family, general health, and even your impressions of the country to make a success of your trade links.

5. Get straight to the point: Subtlety, diplomacy and coded speech can all lead to problems, so don’t beat around the bush.

6. Follow up your initial communication: some countries place more importance on the written word than the spoken word, and vice versa.

In Spain for instance, it’s important to follow-up an email with a phone call, but in Germany you must do the opposite and put your phone conversations into writing.

7. Free online translation websites - don't use them for business! They are free for a reason. In many countries, including France and Germany, the written word is more important than the spoken. Get your message wrong in your initial communication and you could have problems.

Always check and double-check before sending correspondence, particularly to French companies. In France perhaps even more than in other countries, the ability to produce correct written language is seen as a sign of intelligence and good education. Written business French is also extremely formal and full of protocol - you have been warned.

Octempo:RM specialise in supporting SME businesses that trade internationally. We have over 20 years experience in international trade and currently help clients exporting to over 30 different countries.