Money in your pocket

How do you avoid a cash flow squeeze? How do you chase money when clients are taking longer to pay?

If you think you’re alone when it comes to bad debtors, don’t worry – you’re not alone. According to the latest figures from credit reporting firm Dun & Bradstreet, Australian businesses are now taking almost a full month longer than average to pay their bills. National payment terms reached 53.4 days during the June quarter. There’s a perception it’s even worse for printers. Payment terms can run to 60 to 90 days, which means one thing: tight cash flows.

This is where concepts such as factoring and invoice discounting come in. No doubt most ProPrint readers have come across it, but in case it’s a new on you, the explana­tion is simple. Essentially, a printer will “sell” its invoices to debtor finance specialists, usually linked to the banks.

Here’s how it works. As a printer, you do a $100,000 job and sell the invoice to the specialist. They will check the credit-worthiness of customer and printer. If it’s all kosher, they will buy that invoice for about 90% of the value, or in this case, $90,000. After 60 days, the customer pays the bill in full. The money goes straight to the specialist. They take 1-2% as their cut and the rest – in this case 8-9% – goes back to the printer.

The beauty of the scheme is that it frees up cash flow, quickly. The printer gets the invoice “paid” within 24 to 48 hours. Instead of waiting three months for the money to come in, they have free cash to pay wages, suppliers and other pressing bills. More to the point, they are not being held captive to a slow paying customer.

The downside: giving away margin. In some industries, 1-2% does not constitute a huge slice of the total profit. But on a print job, it might be a big cut; in extreme cases, it could be the whole margin.

What about the risks? It’s simple – if the customer doesn’t pay, the printer has to pay the money back to the debt specialists.

It is estimated that about 5,000 businesses in Australia use factoring or invoice discounting, many of them printers. The factoring sector turns
over an estimated $60bn. One of the other reasons for the growth in factoring is that banks are now more reluctant to lend money, so invoice discounting becomes a form of loan.

Easy cash flow

The managing director of a very large printing company, who did not want to be identified, told ProPrint that his company used this strategy with every customer. The result: easy cash flow.

“The reason we are doing it is because we are expanding quite a lot. We had a
$1 million bad debt back in 2005 and our cash flow dried up, so we decided to do the invoice discounting. You have to remember that a bad debt comes out of your cash flow and that tightens you up. If you’re invoice discounting up front, you get the money in, although they take it back. It makes growth easier.”

He says it’s a system that ensures customers pay up. “With the ones we chase, we tell them that if they don’t pay within the nominated time, they are reported to the bank. That affects their credit rating.”

That MD thinks invoice discounting is a good financial tool. On the other side, PMP chief financial officer Geoff Stephenson doesn’t agree. Stephenson says that ultimately, the factoring boom is bad for printers because it puts the squeeze on the industry.

PMP does not do factoring or invoice discounting. It doesn’t need to. Its largest customer is Woolworths and – like just about all of PMP’s client base – Woolworths is a low credit risk.

The big corporates generally always pay on time. “We produce strong cash flows, our debt is low and we’re trading well within our banking covenants so we don’t have a gun to our head,” says Stephenson.

“People who tend to get into invoice discounting and factoring are generally people who need financing and cash in quicker than they otherwise would get.”

Two-speed economy

He anticipates that with sectors of the Australian economy such as retail and manufacturing effectively in recession at the moment, more printers will turn to factoring and invoice discounting.

“Since the GFC and with what’s happening in Europe now, a lot of small to medium people are going to have more trouble getting capital. So the struggle to fund your business is going to get worse and more acute. I imagine people will be driven towards creative and expensive ways of solving their cash flow problems

“The growth in factoring will put more pressure on the profitability of the industry,” adds Stephenson.

There are other ways to raise cash in tight times. In January and February, for example when business is slow, some small to medium sized enterprises take out an overdraft. It doesn’t carry the same risk as a discount invoice, just a different one.

With most overdrafts, the banks require property as security. With discount invoices, the invoice itself is the security. Furthermore, an overdraft tends to be a fixed amount linked to the value of the house. With invoice discounting, it’s linked to the value of the business.

Discount invoicing is a finance tool that grows with the business. An overdraft is nothing like that. And with an overdraft, if property prices fall, it will affect the line of credit provided by the bank. Another issue with overdrafts – and it is a major one – is that the bank can call it in, in full, at any time, especially if you fall behind in payments.

Finance broker Wade Oldham explains there are two types of invoice discounting. One is confidential invoice discounting. In this case, the customer does not know about a debt specialist is involved. The printer retains complete responsibility for the sales ledger and the debt collection, so the customer is completely unaware that there’s a third party involved.

The second system – factoring – is where the bank or debt specialist collects the money. In this case, the printer is selling the entire rights of receivables to the debt specialist.

Oldham says most printers prefer the confidential method. “A lot of printers believe that if a factoring company is picking up its debt, it doesn’t understand the relationship between the customer and the printer and would not manage it as well as the printer would. So they continue to manage the customer and the collection period knowing they must collect within 90 days or have to pay that amount of
debt back to the factoring company.”

Factoring gets bad press. There’s a stigma that says companies will only use this method because they are not creditworthy enough to raise money at a bank. Many see them as desperate for cash.

But Oldham says invoice discounting is a good product, perfect for companies that are doing well and keeping a steady cash flow. He says factoring’s bad reputation is not justified.

“What a lot don’t realise or don’t manage as well is that every day the debt is out there, interest is being charged. If you’re going to get factoring, you will be paid in 60 days and the cost of that might be $1,000 whereas if you don’t get paid for 90 days, the cost is $1,300 and where did that $300 come from? It came out of your profits. Now if there is a $400 profit in the job, you have a major problem.”

Weak companies

He says that there is still a view that factoring is only used by weak companies. He believes some printers are reluctant to be upfront that they are using invoice discounting because they don’t want to give their customers the wrong impression. That’s wrong, he says. If companies are going broke, they are going out of business regardless of whether they are using the services of a factoring company.

“There is a perception that factoring sends companies broke. So printers might be susceptible to the belief that if their customers knew they were using invoice discounting or factoring, they wouldn’t want to deal with the company for fear of its financial position.

“That goes back to the ’70s and the reality was, yes, a lot of companies went broke and the majority of those companies were using factoring at the time. But the reality was that those companies were going broke without the factoring.”

Similarly, he plays down the risk of losing a customer and having to pay the money back. Those companies were defaulting regardless of whether there was an invoice discount. It has nothing to do with the factoring. “A debtor not paying is not a risk of invoice discounting, a debtor not paying is a risk of being in business,” he says

According to Oldham, it’s a model suiting companies that are profitable and growing. “Basically a company that’s profitable and growing can use invoice discounting to support its cash flow. If it is smart, it will offset the cost of invoice discounting by obtaining a settlement discount with its suppliers.”

Which printers are not suit to this financial tool? “The companies that would be at risk factoring are the companies that have poor financial management, companies that have stagnant or declining sales, companies that are not profitable, companies that have a large proportion of their sale with one customer or that have a large percentage of bad debts.”

Indeed, he says factoring companies would reject any deal where the printer is largely dependent on one customer.

Rob Lamers, the head of debtor finance at debt management company Oxford Funding – which is owned by the Bendigo & Adelaide Bank – agrees that his company would look askance at any arrangement where the printer had one big customer. It is too big a risk.

“We prefer a spread and 30% is a trigger for us,” Lamers says.

“Any debt that’s over 30%, we would look at a little closer so that we can understand the impact that would have if they didn’t pay for whatever reason.”

He says customers will pay a lot quicker when a factoring company is involved. “We don’t take a heavy-handed approach. We understand their customer is the lifeblood of their business. It’s just about having a simple system of a statement issued each month, a reminder whenever that goes out and a phone call.

“The main benefit for our customers is that they are reducing the risk of bad debts. The longer an invoice remains outstanding, the higher the risk it won’t be paid,” he says.

Lamers explains that Oxford Funding conducts credit checks on all clients and their customers. It looks at their payment histories and their accounting systems. “If an invoice is being paid on day 60 every time, you know you have a debtor with the ability to pay. If we see the debtor hasn’t got the ability to within a 90-day period generally, then we don’t want to fund it.”

Bad debts can kill

He says bad debts can kill cash flow. “For businesses with bad debts, it is the most significant expense because it goes straight to the bottom line.

“You build a business, you build infrastructure, you have got people, you have got equipment, you’ve got rent, you’ve got borrowed money, you are supplying services and you’re not being paid. That’s a key risk, that’s why it’s important to have these types of controls to ensure your debtors pay.”

He says businesses can take several steps to manage their debts better.

“The first is to have good internal staff, experienced people who are diligent in their work to ensure your debts are managed effectively. If you are diligent at managing debts and managing that collection process well, you will improve your cash flow significantly.”

He says the next most important thing printers should do is have good procedures in place. “It’s simple things like issuing statements every month and issuing a reminder on day 45. All of that can be generated by IT systems, without any labour. Another way is to call debtors when payment is due. If you provide 30-day terms, you just make a friendly call the day before or the day after.”

Colin Porter, managing director of Creditor Watch, says printers often fail to chase debts. If they don’t have accurate documentation on their invoice, it can be a serious problem, he says.

“Every invoice needs a purchase order number or reference,” says Porter. “The worst thing that happens is that they say they haven’t received it or there’s an item on the invoice that’s incorrect and you have to start the 30-day process again.”

But in the end, he says invoice discounting is a good tool for anyone with a big cash flow problem. “It’s a very easy way to get cash flow quickly. It works particularly well when you have high periods of turnover,” he says.

“Where it works effectively is where you have a low-margin, high-cost consumable product so for printing it’s good.’’

Of course, if a printer goes down the confidential invoice discounting route, they will still have to learn how to manage their debts. And that, in these credit-constrained times, is a significant business risk. With the economy in such a fragile state and low consumer confidence hurting retail, many more printers will be asking themselves whether it’s worth giving away margin to get cash in. Ultimately, that can only be determined by their cash flow, sales and profitability.


Top tips: cash flow

Develop and implement a credit policy

A clear and concise credit policy should apply to all of your customers and clients. Have
them sign the policy.

Implement a policy for bad debts

To recover a debt, you may wish to take legal action. That said, it costs money and it can be a lengthy process, so weigh up the pros and cons. You could also use a debt collection agency. With an effective credit policy in place, bad debt
should be minimal.

Watch your cash flow

Create a cash flow forecast, invoice as soon as a job is done, make a schedule of what is owed and stick to it. Call in overdue accounts and make sure clients understand debt recovery procedure.

Hire good staff

Focused staff will help you manage the cash flow better. They will put in reminder calls and chase the money.

Have good procedures in place

Make sure your invoices have correct information, issue reminders and call debtors when payment is due.

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