Earlier I blogged about a story by George Cloutier in BusinessWeek’s The Turnaround Ace blog. Now that I’ve had some time to fully digest it, I have to say his advice is not only bad, but it’s also flat out wrong. Worse, it’s downright dangerous. It’s exactly the kind of counsel that can cause confusion among small business owners and frankly, its publication is irresponsible. Scan through the growing list of scathing comments about this article, and you’ll see I’m not alone. There are many troubling aspects of this article, but let’s hone in on a few:

Troubling Statement #1: “Never Pay Your Vendors On Time”

This is an unfortunate headline in an advice column. Instead of focusing on the true problem (“…but payment on outgoing invoices isn’t getting collected for months. One large organic foods chain owes six figures on an order it placed six months ago”) of the invoices that they are owed to this small business, Mr. Cloutier is focusing on spreading cash flow problems to other businesses. Shouldn’t they work with their customers to speed payment and/or perhaps consider putting these customers on cash only plans until the payment pattern improves? The true issue here is a collections problem. There is definitely a cash crunch for many small businesses, and I feel their pain, but this is not the way to solve their problems—ultimately it will only make things worse.

Troubling Statement #2: “Wendy is balking at the idea because she is under the false impression that paying on time will help her maintain a good credit rating. She also wants to keep her good relationship with vendors. But this has nothing to do with her credit score.”

This is totally incorrect. Wendy is right to challenge Mr. Cloutier because her instinct is right on the mark. If you slow or stop your payments to your suppliers it will most definitely impact your business credit rating. Payment behavior is how these scores are generated at all of the major bureaus. That fact is, suppliers will cut you off and will put you on cash terms if you drag your payments too far out.

Troubling Statement #3: “Same goes for your landlord. Pay him late, too. He’ll scream his mortgage is due, but that’s not your problem. He won’t evict you because he needs the rental income, especially in these times. Send him a check at the end of the month, not the beginning. He’ll soon get used to it.”

Again, bad advice. If you start paying all of your core bills late, this is a major signal that you are struggling and close to failing. Trade credit for small businesses is especially hard to earn and establish. If you slow payments across the board this could be extremely damaging in the long run. The pass-the-buck tone by Mr. Cloutier is just appalling. If every company in America started doing this, the whole US economy would grind to halt.

George Cloutier’s Advice: “Over the years, my turnaround firm has found millions of dollars in extra cash for companies by delaying payments this way. In good times and bad, it’s simply good business practice to stretch out payables…All the big retail chains do it, so why shouldn’t you?”

He is right. Big companies do use their market weight to force unreasonable terms on their suppliers, but is this really the message that we want to send? Let’s tell every business owner in the country to just ignore the terms of their invoice and pay late. While we are at it, let’s just stop paying our mortgages and credit card bills, too. The banks are hurting. I’m sure they’ll understand.

The fact is there is a huge difference between a big company and small company when it comes to credit and credit evaluation. Many business credit reports on big companies do in fact reflect poor payment behavior. But when it comes to credit analysis, a large public company benefits from public financials, large bank credit lines, public debt and public ratings that ultimately prove their credit worthiness. A small business does not have this luxury – they will be judged on their payment history, their trade references and other public records. If you stop paying your suppliers in timely manner, your credit report and trade references suffer, and you may find that your well earned trade credit has dried up. Keep up the pattern and you may even end up with a lien or two filed by a supplier.

Small businesses have enough to worry about and getting bad advice from a supposed expert, shouldn’t be contributing to their worries.

What do you think? Does his column bug you as much as it does me?

An article in BusinessWeek’s Turnaround Ace blog entitled “To Improve Cash Flow, Stall Payments to Vendors” is causing quite the reader negative reaction. The gist of the article: You should pay your vendors as slow as possible to help manage cash flow (in good time and bad). For the profiled company in the article they are suffering from extremely slow payment by their customers, so instead of focusing on collecting these payments faster, he is arguing that they should push out their own payments. Here is sampling of some of the reader comments:

“This guy is part of the problem we have with our economy. Wendy and Ted need to stick to their business ethics and demand others do the same. If I slow pay my suppliers, they stop selling to me and send me down the street to the higher priced vendor to slow pay them. If you want good prices, you have to pay your bills.”

“Yeah no wonder the country is in a s#@t storm.”

“This is the worst business advice I have ever read. Period. You want to know the number one problem our business has in this recession? Getting paid in a timely basis for work performed. Want to know why? Because of fine, upstanding people like “Wendy and Ted” who don’t pay their bills on time. I honestly can’t believe Business Week considers this to be great advice.”

“I really couldn’t believe what I was reading…Pay promptly is the best way..and I agree with all the ones who have written opposing the practice of delaying payment..I have been in business a long time …if start off doing it right ..it will work..I disagree with delaying payment unless it is absolutely necessary.”

“Congratulations on writing a column that illustrates one of the many reasons this country is going down the toilet.”

“I agree with everyone else here. This is an atrocious way to conduct business. This will eventually lead to mass layoffs of people. I pay all my bills on time. And if my customers don’t pay in time then I cut them off credit as well. No wonder the banks have cut so many businesses off of credit.”

There is certainly some passion there. As I have blogged about in the past, there is a rough “dual credit crunch” that is squeezing small businesses and hurting their cash flow.

What do you think? Is slowing payments as form of a short-term loan a valid technique? Or is it one of the primary reasons that we are still in a recession?

Last week I received an email from a customer asking a simple question.

“How do we go about contributing credit information about companies? If we run into problems with a customer, we would want the market to know what problems with payment we had.”

The standard and historic answer that most credit bureaus like Cortera would give is this:

“Please send us a cut of your monthly accounts receivables information according to our standard format and we’ll incorporate it into our database.”

This is the way it has always been. Sounds simple enough – right? Well, it is not. For most companies this task requires some kind of technical expertise to get that information out of their accounting system and into a format that a bureau can ingest and then report back on a credit report. Plus, this can take weeks by the time the request has been made to IT and then the information actually shows up on a credit report. In the mean time the debtor could continue to be granted credit without the greater market having any knowledge of their payment problems. Obviously we are talking about reporting on customers that are well past due and are not likely to be a customer again – in common terms we are talking about deadbeats.

Of course my answer is different now.

My response back:

“We just launched a new free website that makes reporting on a specific company and telling the market about them very easy. You can go to Cortera’s community ratings website and from there you can search for the business that is giving you trouble and use the “Rate Company” tab to provide your payment experience and comments.”

Within 5 minutes he was able to report on the two customers that were giving him trouble.

Have a few customer (or should I say ex-customer) deadbeats in your portfolio? Tell the world about yours and who knows you must just catch one reported by another member before you get in too deep.

The good news: The vast majority of your customers and partners are paying their bills on time. The bad news: The delinquent minority is only getting worse.

Having access to the A/R activities of millions of businesses provides us with a unique view into the nation’s cash flow. And since the beginning of the year, we’ve been seeing a steadily improving trend in the amount of corporate accounts receivable debt that is current (see chart 1 below). In fact the vast majority of debt tends to be current – most companies simply pay their bills on time. Even at its worst in February of this year, on a national basis 81% of debt was current. Today that number stands at approximately 83%.

However, companies still must deal with the other 17% of businesses that fail to pay on time. While this number is not dramatically out of line, we’re seeing unsettling growth in the amount of debt over 90 days past due (see chart 2 below). This is not surprising given the well reported growth in amount accounts sent to collections agencies since the recession started, but it is causing finance staff and business owners to be more diligent and get more creative when it comes to dealing with a deadbeat drag.

Have you seen your 90+ days aging bucket growing? Please share a story or two on how you are dealing with this growing problem.

Chart 1: Percent of Current Commercial Account Receivable (US National Average)

Chart 2: Percent of Over 90 Days Past Due (US National Average)

Yesterday we focused on how companies in Nevada have the highest amount of past due accounts receivable debt in nation for the first 9 months of the year, giving the recession weary state another dubious distinction. On the flip side, businesses based in all 6 New England states have maintained better than average – or in this case below the national average – payment behavior throughout 2009.

In other words, New England businesses are among the most reliable in the nation when it comes to paying their bills on time. And at a time with tight lending conditions and strained cash flow, this suggests that these regional businesses are experiencing less economic stress than counterparts in other states.

This month’s numbers are no different (see table below). A quick look at the rankings and you can see that three out of the top 10 are in New England, with the remainder falling in the top 25.

Today we issued our monthly best and worst states in terms of the payment behavior of companies in those states. We started this reporting back in January and one data point has been consistent: the state of Nevada has remained at the top of worst performing states with over 25% of corporate receivables past due (see below). That is over 50% higher than the national average of 16.99% past due and over 262% higher than Alaska the current state with the lowest percent past due. Simply put, companies in Nevada are paying their bills dramatically slower than the rest of the country. Nevada is certainly not alone with Utah and Minnesota not far behind.

Bottom 10 States with Highest Percent of Accounts Receivable Debt Past Due

1. Nevada (NV) 25.55% corporate A/R debt past due

2. Utah (UT) 24.38%

3. Minnesota (MN) 24.02%

4. Colorado (CO) 21.92%

5. Arizona (AZ) 21.64%

6. Wisconsin (WI) 21.37%

7. Hawaii (HI) 20.71%

8. New Mexico (NM) 19.73%

9. Oregon (OR) 19.63%

10. Texas (TX) 19.52%

Top 10 States with the Lowest Percent of Accounts Receivable Debt Past Due

1. Alaska (AK) 7.05% corporate A/R debt past due

2. Maine (ME) 7.25%

3. Kansas (KS) 8.50%

4. South Dakota (SD) 8.98%

5. Wyoming (WY) 10.24%

6. Montana (MT) 10.89%

7. New Hampshire (NH) 11.36%

8. Vermont (VT) 11.55%

9. Louisiana (LA) 12.22%

10. West Virginia (WV) 12.26%

On Monday, the New York Times detailed how the worsening credit conditions are affecting small businesses, as banks take on an increasingly risk adverse approach to lending and credit lines. Yesterday we talked about how small businesses are getting squeezed by increasingly late payments. Today, the Dow closed above the 10,000 mark for the first time in a year, buoyed by better than expected earnings from a few bellwethers and early signs of improving consumer confidence. The common thread in all of these events? Conditions do indeed seem to be improving for many of the nation’s large businesses. Unfortunately, a dual credit crunch conspires to thwart similar growth by the small businesses that make up the majority of the nation’s jobs engine and 50% of the GDP.

The NY Times article covered the familiar credit crunch: small businesses can’t get the loans and credit lines they need to expand operations, grow payrolls and pay their bills. In contrast, Cortera’s new Small Business Index™ focuses on the other side of the credit coin: Trade credit. Trade credit focuses on payments terms and behavior for advance products and services (e.g. inventory) – and more specifically cash flow.

What is interesting is that big companies are forcing their smaller customers to pay them faster, yet within our SBI we can see that these same small businesses now are taking longer to pay everyone else. And the Times reported, “As the financial crisis has largely eased in recent months, big companies have found credit increasingly abundant, with bond issues sharply higher.” Thus large businesses have been largely immune to the dual credit pressures facing small businesses.

To understand this dual credit crunch and its implications, one need look no further than cash flow. Many small businesses live under a tight cash conversion cycle so if they are pushing cash out the door quickly for one class of suppliers (big companies), but not being paid quickly enough by their own customers (other small businesses) then they can’t pay their own bills. Given that small companies have less access to other forms of lending (the larger credit crunch) that once they get behind it’s hard to catch up and harder to reinvest in business growth.

You can see how this starts to spiral if small businesses can’t tap other sources of lending to manage these cash crunches. Small businesses lack a financial cushion that large businesses enjoy through alternative cash sources like securitizing accounts receivable, new bond offerings, and new equity. Their only choice for a short term loan is to use their suppliers and stretch out payments. Essentially small businesses end up paying their smaller suppliers (that likely have less clout) more slowly as a form of a short term loan until more cash comes in the door (or they have to make cuts in other areas with layoffs, reduced hours, less inventory etc…).

The all too often result is, at best, little investment in growth (new products, hiring, expansion) and at worst leads to even more cost cutting (pay freezes, reduced hours, layoffs or even closures).

Such conditions require far more diligence when it comes to evaluating the credit viability of business partners and customers, and they require keeping a close eye on the changing payment behaviors of existing partners to detect early signs of risk.

As a small business owner, how are you managing this crunch? We’d love to hear your story and tips for surviving.

A few weeks ago, The Wall Street Journal explained how small companies are getting paid more slowly by their large company customers while those same large companies are forcing the little guys to pay faster. Well, Cortera’s data is showing that the little guys are getting paid more slowly by their small business customers, too.

Our Small Business Index (SBI) shows that while small businesses (companies with less than 500 employees – the SBA definition) are improving, but they’re paying 25% slower than a year ago and 20% slower than the overall business average. It is also important to note the widening gap between big companies and small companies. Pre-recession, the measures for the average, small and big companies tracked in a tight range, but since late 2008 we’ve seen a significant gap open up. Small businesses have a 55% higher DBT than large companies.

This is a dangerous situation for small businesses and a bad trend for the economy as a whole. When the payment flow between small businesses slows, the resulting friction impedes their ability to plan, grow and sometimes even survive.

As covered in past Cortera SCI reports, confidence in sales normally spurs companies to grow inventories with the belief that they will be able to move those goods in the future. Cash flow to suppliers tends to tightly match the demand for their goods by the end customer. In a healthy economy companies are paying their suppliers in a timely manner as those inventories are efficiently sold to customers. In a poor economy, companies tend to slow payments to suppliers as inventory sits on the self to help manage their working capital.

Cortera’s Supply Chain Index (SCI) measures the relative health of this flow of cash to suppliers. The most recent Cortera SCI figures indicate that, while there remains more payment friction than a year ago, confidence in sales may be starting to return to more normal levels. A few trends continue from our last report in the September analysis of business accounts receivable data through August 2009:

• The amount of late A/R is decreasing. In August, the amount of A/R in the SCI more than 30 days past due fell to 10.05%, approaching levels not seen since October of 2008, an improvement of nearly 23% from its peak level in December 2008. This represents nine straight months of improvement over that high water mark. Payments more than 30 days late are often the equivalent of missing a payment. That’s a marked change in financial behavior that can signal dramatic changes in a company’s financial situation. An improvement in this measure suggests a return to normalcy and financial stability in companies.
• Late A/R, now standing at 20.9%, has also flattened out and is hovering in the ~21-23% range over the same nine month period—well off the December 2008 high of 27.1%, and nearly in line with the pre-October 2008 run up.
• With the SCI Days Beyond Terms (DBT) now standing at 8.56, on a year-over-year basis, DBT has worsened by nearly 15%. Still, with nine months of improvement behind us and a drop of by over 20% since the December 2008 peak it is clear that cash flow is improving and confidence growing.