Factoring Blog - For Small Businesses

I happened to be perusing over at the Allbusiness.com bloggers’ sites, and found this surprising statement:

“Unfortunately, some of the worst fraud cases I’ve seen have been perpetrated by family members.”

The author, Tracy Coenen, is a forensic CPA and fraud expert. I don’t question the statement or her article. She sounds like she has considerable experience and knows what she’s talking about.

I just found the notion of family members stealing from other family members in a family business to be counterintuitive.

My natural inclination would be to trust family members more than someone without blood ties.

But therein lies the point of the article — it’s precisely the family relationship that gives rise to the temptation to embezzle and steal from the company:

“When a family member is put into a management position, there is often the risk that the new executive is not fully qualified for the job. This can increase the potential for fraud, as an underperformer may feel the need to enhance the financial performance of their department or division in order to meet expectations. Many times there is also a feeling of entitlement by a family member in an executive position. This can lead to an abuse of expense reporting, payroll irregularities, or other theft of assets.”

So, what’s the bottom line? The author suggests fraud prevention is the best protection: Better controls over the money and financial reporting.

That squares with something a colleague of mine swears by: my colleague says NEVER let any employee handle the bank records in a small business.  She suggests having the bank records sent to your home address, not the office. And that as the business owner, you personally reconcile the bank account and review all deposits and withdrawals at the end of each month, to make sure they square with what SHOULD be in the account.

You see, years ago her business had been the subject of a trusted friend and long-time employee embezzling, to the tune of mid 6-figures. It nearly bankrupted the business.

My colleague says she simply put too much trust in one individual, who was a bookkeeper who handled invoicing, accounts receivables and the banking. Bad combination, to have one person handle all 3.

And as she points out, the mere fact that an employee knows you will be reviewing the bank account and deposits/withdrawals each month, may be enough to prevent that employee from giving in to temptation and going over to the dark side.

I’m sure there are other ways to put financial controls in place without having the bank records sent to your home. But she swears by it.

SCORE, which stands for Service Corps of Retired Executives, is a great resource for small business owners. Here from the About page:

SCORE “Counselors to America’s Small Business” is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA). (www.score.org)

I want to highlight two features under the “Summer Finance Fix-Up” section that you may find of interest. First, register with SCORE and the participate in a workshop on how to create a cash reserve.

Why you should do it
You can’t be competitive if you are unable to survive. No matter how good your business or how much expertise you have, once you run out of money the business is in danger of collapsing. Many businesses (and not just the small ones) have gone out of business even when they have been very busy. (www.tsbc.com)

Then do a quick guide in how to manage your cash flow.

60-Second Guide to Managing Cash Flow
A common problem for small business owners is the struggle to maintain adequate cash flow levels. Without cash, a business must eventually close its doors. Understanding and managing your company’s cash flow will help you measure the amount of cash on hand and prepare for cash flow shortfalls in the future. (www.score.org)

I found a really interesting article by a U.K. businessman who goes by the nom de plume of the “Unknown Entrepreneur.”

The title of the article is a tad sensational, but the article is actually well-balanced despite sounding negative at first.

In it the Unknown Entrepreneur talks from personal experience about the positives and negatives of his experience with factoring in the U.K. He writes:

“The positives

1. Increase your cashflow - allowing you to focus on your daily business activities.

2. Insure your risk - it can cost you but remember if you have a net profit of 10%%, any loss your suffer you will have to write ten times the revenue to recover the loss.

3. Fees can be negotiated - as you grow and if you have a clean book you can negotiate your fee down.

4. Your own back end office - if you opt for for confidential factoring your client will not know that you factor and you then collect out your own ledger then pay your factor the money you collect out.

5. If you do not have a back office then non - confidential factoring can be a great bonus as the factors chase the money that you are owed and this can be an advantage as the factors will apply pressure when you need it.”

The author also includes some negatives relating to invoice factoring, including several points that were lessons learned from a particular instance where his company had made an operational mistake. But even though that situation was difficult for his company, he says he would use a factor again, noting in part:

“Keep your operations tight and you will benefit from using factoring services… I would absolutely use factors again but this time would ensure that we would not make a operational mistake like we did.…”

Robert S. Bernstein has written a book called, Get P.A.I.D. — A Guide to Getting Paid Faster. He explains the four pillars of “getting paid” (Preparation - Assessment - Implementation - Defense) in his article, Credit to cash. Businesses desiring payment must give credit wisely.

Two of the key points he makes are:

(1) that most small businesses extend credit to their customers whether they realize it or not, by performing services and providing goods before getting payment, and

(2)  that there are hidden costs to operating your business by extending credit, whether you realize it or not.

He writes:

Small businesses and entrepreneurs need help deciding when to extend credit to customers and how to make sure they get paid. In case it isn’t clear, when a business extends credit to a customer (selling goods or services on credit), it is risking a loss in order to make a profit. If the customer doesn’t pay, all the materials, labor and know-how to produce that order have gone for naught.In addition, there are many hidden costs to extending credit for a business.

The cost of capital (that could be used elsewhere), the cost of staff to monitor credit, the cost of collecting delinquencies and the cost in damage to the relationship with delinquent customers.

These costs escalate the longer-past due a customer gets. Thus, it is very important to have the correct business processes to know how to extend credit, how to manage the credit you extend and how to collect from your customers.

I would suggest that those hidden costs are ones to consider in weighing factoring as an option.

Yes, with factoring you pay a fee to a factor.  In exchange for that fee, you receive a large chunk of the money owed you right away, within a few days, sometimes within one day.  And the remainder of the money (less the factoring fee) is paid when the invoice is collected.
However, as you decide on a course of action and consider whether factoring is right for you, you might want to balance those “hidden expenses” against the factoring fee.  You may not necessarily be saving any money if you have to wait  months to get paid.

A movement is growing — albeit slowly — to require small businesses to offer sick days, health insurance coverage and other benefits for employees.

Traditionally small businesses under a certain size have been exempt under state laws requiring benefits. Small businesses are also exempted from the Federal Family and Medical Leave Act, requiring employees to grant leave for various family situations such as the birth of a new child.

California joins other states (Ohio and Massachussets, along with a Federal proposal) that are considering legislation to mandate paid sick leave.

Much as we may feel for employees who become ill, the economics are such that many small businesses cannot afford paid sick leave. Consider the business owner interviewed in a recent Sacramento Bee article:

Bill Reed, owner of Reed’s Ribs and More in Sacramento, said he’s sympathetic to workers getting ill, “but there’s really nobody you can pick up to fill in. And you would have to pay that person to fill in. I only have three employees.

“And on top of that, I have workers’ compensation (to pay), so, yeah, it would be tough.”

The plight of this business owner is pretty much the same all over. You only have a few employees to begin with. Profits are not robust enough to bring in replacement workers, let alone have to pay the sick employee, too. It’s an unfortunate situation, but the financial consequences of mandating sick leave could cause some small businesses to shutter. There’s just no leeway to pick up those extra costs. Then where would ALL the employees be if that happened?

The amazing part about the proposed legislation is how the proponent has managed to convince herself that businesses would actually SAVE money by taking on this extra financial burden. Supposedly the lower turnover would save money. The problem with basing your fiscal calculations on lower turnover is that it’s a soft cost, yet your cash flow needs are based on hard numbers — real money you have to come up with each week, here and now.

In Grant Thornton’s International Business Report you could find payment periods in different countries (page 36). The global average is 46 days for payment of sales invoices. In the United States of America you get paid after 41 days. Could you guess where you get paid after 23 days? In one country in Europe, you have to wait for 83 days. Click here for the list (PDF).

Here is a part of the list, from position 11 - 20:

• Australia - 39 days
• Argentina - 40 days
• Sweden - 40 days
• Canada - 40 days
• Brazil - 41 days
• USA - 41 days
• Thailand - 44 days
• Great Britain - 47 days
• Botswana - 49 days
• Luxembourg - 50 days

So, in the United States it is an average of 41 days to receive payment on invoices. But much better than Spain and Italy, at 73 and 78 days respectively. How does your business compare?

Hat tip to Martin Lindeskog for the links. The PDF article is in Swedish, but it’s pretty easy to figure out the countries.

Courtesy of the blog at Paymo, a time-tracking software application, I came across the Better Projects blog, which lists important reasons to do track time on projects and deliverables. One recent post, Good reasons to do time tracking, you’ll find this point

There are many reasons that time tracking is important. In order to make strategic decisions, you need data. The only place to get data that can be aggregated is to have the detail that rolls up. The types of decisions that have been made based on the time tracking data I’ve collected over the years include:

* Staffing - Several people avoided layoffs because I could show exactly what they were working on and how long they spent doing it. We also could show that we needed more people in order to do additional projects in the time frame management required it.

* Project delivery dates - Because we had good historical data on actual times vs. estimates, our estimates were given more credibility by management. Instead of management insisting on an unreasonable delivery date, they accepted ours.

* Planning when new projects could be started - When management saw that staff was fully loaded for the next few months, they reprioritized their projects to fit the staffing schedule.

I would add one point to the above: without tracking time, in a service-based business you may not have accurate financial projections and budgets.

Service-based businesses that essentially sell time (law firms, consultants, engineers, marketing, software development, Web design firms, etc.) need to be aware of time spent on offerings on a unit basis. Otherwise, you’ll never understand your true cost structure. What’s more, you won’t have a real handle on the upper limit of your revenue growth or what it will take to grow.

Wilson Ng, who is the CEO of a technology company in the Philippines, is now writing a regular business comic strip along with two of his employees. The comics are called It’s NGenius and they are sponsored by the NGenius chain of computer stores.  The main character is Engy, the General Manager who “reads a lot of management books.”

I thought you’d get a kick out of this comic strip, which points out the importance of prompt billings in order to get paid faster. Of course, just don’t make the same Freudian slip as the comic strip character makes.

Talk about low overhead!

Over at AllBusiness.com they’ve got some short video clips they call Small Business School. Most are only a minute or two in length, so unfortunately they are more entertainment than useful advice. But still, you can find a few good nuggets, such as in one video called “Keep Your Overhead Costs Low.”

It features the owner of a construction company whose first office was “in a phone booth.” Literally.  The company used a phone booth, and the gas station attendant would answer calls. Each week they’d tip the attendant.

Of course these days you could get a mobile phone and a super-powered voice mail system with an automated attendant to answer calls. No need to do the phone booth thing.

But the point remains valid. Keeping your overhead low is especially important as the economy gets tighter. Overhead costs creep up on you. $950 here, $1500 there — keep piling it on and before you know it you’ve eaten up your profit margins.

Mostly on this site we write about factoring, economic news and business finance-related information.  But a related topic I like to focus on is how to operate your business better.  We point out ways that make you more efficient or save you money.  That directly impacts your bottom line.

So I was intrigued by a recent Forbes.com article by Gene Marks.  Gene is very focused on saving money in business, as he writes the Penny Pincher list about ways to save money in your company (I’ve even contributed a Penny Pincher List as a guest writer for Gene). 

Gene’s latest Forbes column is about automating your customer support functions, using self-service tools.  It’s about using technology, especially Web-based technology, that lets customers service themselves as much as possible.  The typical choices we think of include help-desk software and knowledge bases.  But, as Gene writes, other Web features offer a way of helping customers, including articles, videos and an interactive map with directions to your place of business:

“Just ask Jeff Stibel, chief executive of Website Pros (nasdaq: WSPI - news - people ), a 700-employee company that provides Web site hosting, marketing and lead-generation services to more than 250,000 paying customers. How does Stibel keep his sanity? A bottle of Jack Daniels comes in handy, but mainly it’s because he leans on the latest in customer self-service technology.

Self-service software lets customers create their own orders and check on their status — no human intervention required. Those that need instant, interactive troubleshooting without an extended phone call can use online-chat software. Other self-service tools include basic “how-to” and tech-support videos and articles — or something as fundamental as mapping software that offers driving instructions to your office. And don’t forget “wikis” — online information repositories that can be shared and updated by customers.”

Not only does online technology save you money, but it can make your customers happier … less frustrated. Customers  feel empowered because they can get access to information any time of the day or night.

Facteon has invested in Web materials to make it easier for you to find information about factoring and check your account.  What have you done in your business?