Maintaining Cash Flow to Survive the Downturn

Let’s face it; money is tight right now. All sectors of the economy are looking for ways to reduce spending. In many cases, this includes cutting costs in their core operations and not just on the “nice to haves”. If you are a professional services firm you’ve probably noticed that this trend is exacerbated by a new behavior; companies stretching out their payment of invoices.

Professional services firms have become accustomed to operating on a net-30 day basis. Most conscientious businesses pay their bills on time, or not more than a week or so late. This reflects a general discomfort with having invoices stack up. That has all started to change.

In my own business and those of people I know, I have started to see a trend where otherwise good companies are starting to delay payments to the point of being troublesome. With the tight credit market it is difficult if not downright stupid to hit your line of credit to float your customers’ projects, something we might have been willing to do even as late as this spring. So like everyone else, we have to find a way to strike a balance between dropping clients that are not paying and trying to preserve these valuable relationships for the future. We recognize that as vendors we are the first to get cut and it is rarely a smooth and equitable process. So how do you protect yourself?

We have two kinds of clients: large clients that have been good customers for years and everyone else. Here’s what we are doing to mitigate our risk during this period:

1. For large clients with a good solid history of paying their bills, we are trying to be as flexible as is reasonable. So long as they are making some payments each month we are staying in close contact with company leadership and trying to work within their means. We’ve made it very clear that we rely on them for cash flow and that we will continue to move their projects forward so long as we feel we are being treated fairly. My philosophy is that we will get through this downturn just fine so long as we are willing to compromise with our customers and they are with us.
2. For clients that are more than a quarter in arrears, we are calling the CEO or decision maker and having one more frank conversation. If they do not put a check in the mail then we will be dropping them as clients. At the end of the day, it is not reasonable for us to continue to prop up any business whose leadership can’t bring themselves to open a dialogue with us about their cash flow problems. These are companies that will most likely default on payments, but are selfish enough to get as much as they can from us until that becomes obvious. I don’t need clients like that. We will cut our losses early so we can reduce our operating costs related to their projects.
3. For companies that are somewhere in between, they’ve paid their bills in the past but are behind now, we will work with these customers for one more month. If no payment comes in then we will start to hold back source code and other deliverables. While this will not stop them from operating, it does increase their business risk and prevents them from totally ignoring our pleas for payment. The longer this goes forward the stronger our negotiating position becomes.
4. For chronic deadbeats and companies that simply will not even answer my calls anymore, we just write off the revenues and send them to a collection agency. Ultimately we do not like to do this as the collection agencies’ relentless approach virtually guarantees that you will not maintain a good relationship with that client in the future. But you have to ask yourself, if they are not paying their bills then do you really want them as a client anyway? So we cut our losses.

In the end, all businesses are different. Smaller vendors must be aware that they cannot mortgage their future for companies that will most likely not pay their bills anyway. They need to be honest with themselves about their cash flow and begin discounting receivables. It does not matter how much revenue you have accrued, until your customers pay you these assets are worth little. We all have to be careful about allowing our expenses to remain high or even grow when our cash flow is taking a hit.

Larger vendors will have to be just as careful as their clients about reducing costs, but they can be more creative. In this market , a large vendor may quickly find that they are suddenly bigger than some of their clients. They can use unpaid receivables to buy into their clients’ businesses and position themselves well for the economic upturn (whenever that happens).

The only way to manage your risk is to open an honest dialogue with customers and unwind from those that will just not pay their bills. This might mean working with your good clients to help keep them in business, something which is good for your business too. If you want to survive this downturn, you must manage your own business tightly and start to think defensively.