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?

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)

In case you missed it, there was a great front page article yesterday in the Wall Street Journal entitled “Big Firms Are Quick To Collect, Slow to Pay” about how, you guessed it, the biggest companies are speeding up their collections efforts while slowing payment to their small business partners. In essence big companies are squeezing the little guys, slowing the flow of cash to small businesses while at the same time requiring these companies to more rapidly pay their bills. This helps the big guys build their cash position, but strains the cash flow of small businesses. There are several examples in the article of bigger companies pushing out their payments to their smaller suppliers simply because they can, a trend that’s to be expected. But the article and trend raise bigger questions. With over 20 million small businesses in the US, could the credit actions taken by the largest 1% of companies temper the reinvestment and expansion activities so vital to fueling a tentative recovery? By withholding cash from the small businesses who most need it, is big business, inadvertently, prolonging the credit crunch — or at least passing along the pain?

The analysis by REL Consultancy, a division of the Hackett Group showed that “Companies with more than $5 billion in annual revenue took an average 55.8 days to pay suppliers and trade creditors in the second quarter, up 5% from 53.2 days a year earlier, according to REL. They also collected faster on their bills, taking an average 41 days versus 41.9 days a year earlier. Businesses with less than $500 million in sales paid vendors in an average 40.1 days, down 6.5% from 42.9 days, REL found. They took roughly 8% longer to collect payments, or an average 58.9 days, versus 54.4 days a year earlier.”

Has this practice started to impact your business? Are you getting squeezed by your biggest partners? Seeing shortened cash cycles? Have best practice tips for dealing with such practices? We’d love to hear from you.

You might have noticed that we launched a new, satirical marketing campaign a couple of weeks ago to help bring attention to the important and increasingly difficult commercial accounts receivable management function. Now more than ever it is essential that organizations operate at peak performance across all levels of risk management, yet often times credit and collections functions are still viewed as back-office non-essential departments. Obviously this is not the case, especially in 2009.

In the world of “do more with less”, we hope that “Collectile Dysfunction” added some comic relief to your increasingly busy and often stressful day. Whether you love it or hate it, laughed out loud or think it is just another juvenile stunt to get attention, there is common ground among credit and collections pros that companies now more than ever need to keep pace with the current economic challenge. I’ve been on the road visiting customers throughout the spring and every company lists off a common set of stress points:

• Increased DSO and delinquencies
• Increasing internal reporting requirements for lenders, senior management and auditors
• Layoffs throughout the finance organization, especially analyst and collectors
• Reduced budgets
• More time in court because of customer bankruptcies
• Added work of analyzing partners and suppliers
• More analysis of private company financials
• Higher than usual friction with sales
• Collections challenges as entire portfolios are becoming more risky
• Surprises in the portfolio as good customers are going bad

We reported just this week that the national percent past due average now stands at 12.95% with 40 states worsening month over month. Clearly, despite some well publicized “signs of improvement” businesses are still struggling to pay their bills in timely manner stressing the entire cash conversion cycle. To make matters worse the aggregate amount of US commercial A/R debt over 90 days past due has grown 15.4% over the last four months. This is a concern given the fact that the later the payment, the more likely the supplier will not be able to collect.

While the Collectile Dysfunction or the CD Campaign is a tongue and cheek approach, the message is clear and well known by credit and collection professionals-many organizations need help and need help now to regain control over their portfolio. This is not a criticism, but simply the current reality and result of long-term company cultural norms that tend to focus on near-term sales goals with little attention to the risk of being ultimately paid for their products and services. As result the upfront risk assessment and ongoing management of the A/R portfolio tends to be underfunded and under staffed.

Do any of the following sound like your company?

• Sales & senior management overriding credit line decisions
• Orders being released off credit hold to make a shipping deadline or quarterly number
• Auto setup of “courtesy credit lines” without credit providing guidance or input
• Credit decisions based on “personal” relationships or history rather than factual analysis
• Requests for modern software and information falling to the bottom of the IT & budget priority list

Perhaps one of the positive outcomes of the credit crunch and recession is that senior management is now increasingly listening to their A/R leadership while in boom times perhaps they did not-hopefully in an effort to eliminate their “CD” for good.
We are passionate about bringing attention to the often overlooked trade receivables side of the struggling US economy. If the CD campaign helps draw attention to the issue and gets you the support and tools you need most, we’ve succeeded.

Tell us what you think.

Commercial Credit & Collections Professionals (within corporations and at 3rd party collections agencies) face one of the most challenging collections environments in a generation. With the economy in a recession and with many banks unable or unwilling to provide debt financing, companies are being forced to rely more and more on their vendors to finance their working capital. As a result, both collections departments and agencies are facing rapidly increasing volumes of delinquent accounts. Lurking inside those increasingly delinquent portfolios are tomorrow’s dead beats and bankrupt companies. However many of those accounts are just temporarily slowing their payments in an effort to get back on their feet. How is a collections or credit professional to tell the difference? How can a collections department maximize performance against key objectives such as Days Sales Outstanding (DSO) in such a challenging environment?

With this tough environment in mind, we are pleased to announce the launch of Cortera’s Collections Priority Rating – CPR℠ to help you prioritize your collections efforts. These days it is essential for businesses to focus their collections activities on their increasing challenging customer portfolios. Cortera Collections Priority Rating – CPR is designed to assist collections departments do just that.

Cortera CPR assists collections departments of all sizes in evaluating customer portfolios for signs of delinquency, highlights changes in payment behavior and provides indications of internal and external events that could impact future payment behavior. Cortera CPR also provides a unique segmentation feature that groups accounts based on overall payment risk. This can assist customers in prioritizing, assigning and ultimately the treatment of past due accounts.

Like all Cortera products, Cortera CPR is offered in a variety of flexible delivery methods:

• Online via our DIG web portal in report form for individual company analysis at $2.00 (discounts are available for data contributors)
• Batch via our BOOST product for rapid analysis and segmentation of all or part of your customer portfolio at $0.60 per account scored (discounts are available for data contributors)
• Web Service via our CONNECT XML for access to all Cortera CPR data elements and easy integration to your existing accounting and collections software.

If you are interested in learning more please call 877-LOWR-DSO (877-569-7376) or complete a short form for a free trial.