(MoneyWatch) Even in what appears to be the best scenario for businesses, sooner or later receivables you counted on will be severely delayed, or worse, never paid.
A rapidly growing trucking company had a terrific contract with a Fortune 500 company in the oil industry. As long as they delivered on the work nothing could go wrong, right? Double wrong! Things went wrong when a new person was put in charge of the company's accounts payable department.
The new person disputed billing and the billing procedures that had always been accepted. The unilateral decision was made to stop all payments until a lengthy audit was completed.
This story was told to me by Cole Harmonson, president and CEO of Far West Capital, a company that specializes in asset-based financing and factoring solutions. Far West stepped in and saved the day.
The trucking company was blind as to the solution, and Far West came to the rescue. As Harmonson puts it, "We don't just lend money. We partner with our clients to understand the dynamics of what can go wrong -- or, to put it another way, what must be done right."
Far West actually made the trucking company interim loans and helped them collect their money from the Fortune 500 company within 30 days.
"If your company is growing rapidly, your business will not only have challenges with cash flow, but your internal resources as well as how you respond to your customers may need to change," Harmonson said. The way you do business internally -- down to the very way you put out invoices -- will need to be changed. "Just because you've always used Sue or Bill to do your bookkeeping, as you grow, your business may require more sophisticated skills."
From the start, Harmonson realized that he was more than an asset-based lender. He described it this way: "I saw that people had potential beyond what they saw themselves, and I began to want to help them realize that potential."
Far West has grown from nothing to 8 billion dollars in asset management. What sets them apart is their understanding of entrepreneurs, as they are entrepreneurs themselves. They go in and help identify what you need as a growing business, and they consider their process to have three prongs. One is recognizing a client's potential. Second, being there as the resource for them to grow.
And the third? Taking it to the next level by saying "if you do x, you can get y." They actually show their clients potential they may not have realized. Taking it to the next level means you have to reinvent yourself. You're going down a road that you've never been on, and any number of surprises can and will occur.
What the best asset-based lenders like Far West bring to their clients is support when difficulties come up. They also show you how to prevent difficulties that may come up in the future. They are problem-solvers that can help you with unexpected liabilities, sudden HR issues, and/or problems that are unforeseen to you.
Here's the process such lenders use to make it happen, which you can emulate:
- Evaluate the clients' customer relationship dynamics
- Understand how they manage existing customer relationships
- Analyze how growth will impact this structure
- Enhance the adequacy of the back room
What we learned from Harmonson is to not just look at the transparent credit-worthiness of your receivables. That's just the beginning. A more comprehensive due-diligence process covers the nature of your customers and your customers' customers. You will make better decisions on who you give credit to as a result of knowing this.
Far West sees themselves as that second set of eyes, evaluating whether your financial team is as top-notch as it needs to be. They drive the relationship from the perspective of the entrepreneur based on his or her goals and aspirations. They also encourage you to look at what you need to do to protect your personal net worth. They ask questions to find out what's important to you as the business owner, like "Do you want to grow or sell?" or "Do you want to grow to pass it on?" or "Do you want to grow to diversify assets?"
To summarize, Harmonson's rules for accounts receivable management are:
1. Go over contracts and make sure you have a plan on how to fulfill your contractual obligations. This will help ensure that your contracts are serviced correctly.
2. Evaluate the creditworthiness of your customers, and your customers' customers. Understand the dynamics of the cash flow.
3. Always be watching for sudden charge backs or worse.
4. How do you best ensure the customer will pay that last bill? You may have had a great relationship with a customer, but if and when the customer changes vendors, what can you do to ensure that you are paid? It's critical to know your leverage points. Can you "not" deliver a deliverable when not paid? You may find out that you have a lot more or a lot less leverage than you really do.
5. Make sure that all offices of your company handle situations with customers uniformly.
6. The last, and most critical: PAY ATTENTION TO DETAIL. Totally understand your client's Master Service Agreement, and perform according to that (otherwise you could not get paid!).
Make sure your lending institution has your back. Make it a priority to implement Cole Harmonson's rules of accounts receivable management. Sooner or later you'll be glad you did.