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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | MAY 7, 2003 ENTREPRENEUR'S BYLINE By Leonard Green and John Altman Whose Money Is It Anyway? Tolerate uncollected debts and you might as well be giving your customers no-interest loans. Why would any entrepreneur do that?
That is the money they are owed after delivering a product or service to their customer and prior to receiving payment. In business parlance, this is an "account receivable," or simply a "receivable." And the process of assuring that money owed makes its way to the company's coffers is called "collection." Collecting well might be an entrepreneur's best strategy, as it enables the business to quickly turn receivables into cash. After all, whose money is it anyway? The answer is that from the time of delivery of your product or service, the money is really yours. In effect, itt has been "loaned" to your customer for the period of time you have agreed upon: your payment terms. What follows is a look at how to collect on that loan faster and more efficiently so that you get what is rightfully yours. The importance of cash flow. As former entrepreneurs -- we have been founders, sole proprietors, partners, or major shareholders of 10 businesses -- and now, professors of entrepreneurship, let us first put on our professors' hats to explain how collecting well boosts one of a company's most vital underpinnings: cash flow. The lesson is to recognize the importance of cash flow, which refers to the amount of money flowing in and out of an entity at any given time. Significantly, cash flow differs from profitability, which is revenue minus costs. A business can, and must, be profitable if is to survive, but it can be profitable while its cash flow is in the red. The difference lies, in part, in the timing of the money owed to the business -- its receivables -- and the money it must pay to vendors, staff, and other stakeholders. If invoice value exceeds the amount of costs, the transaction should be profitable. However, if you haven't yet received a check from the buyer of the goods or services, you still have to pay your suppliers in a timely fashion. More than likely you have just entered the perilous terrain referred to as "cash flow negative." Since a cash flow shortfall that persists can sink a business more readily than a lack of profitability, entrepreneurs must manage receivables with an eye toward maintaining a positive cash flow. Negotiating extended payables will also alleviate a potential cash crunch. We never pay suppliers late, unless we call them for permission in advance, or negotiate better terms before purchasing from them. Build collections into your terms of sale. Next, we are going to put on our entrepreneur's hat. In the course of presiding over several entrepreneurial ventures, one strategy that worked well for us in the early, and even later, stages was to introduce terms at the beginning of a sales presentation, rather than as an afterthought. At one of John's last companies, a manufacturer of acrylic plastics for the automotive and lighting industries, he would clearly emphasize terms of sale. For example, if he expected to be paid "Net 30" -- that is, within 30 days from time of shipment -- he would state this in the very first paragraph of his sales proposal. In this way he tied pricing structure to being paid on time. In addition, he emphasized what it was that made his company different from the competition, what merited it seeking and receiving timely payments of invoices. For example, he was able to process customer orders in three days, provide customized packaging, and provide technical service 24/7. As a result of stressing capabilities and the need for prompt payment as a privately owned entrepreneurial company, he found that most customers complied. General Motors even paid within its 30-day terms, though competitors often waited 60 or 90 additional days.
 Entrepreneur's Byline comes to BusinessWeek Online readers courtesy of EntreWorld.org, a resource for entrepreneurs that is sponsored by the nonprofit Ewing Marion Kauffman Foundation. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | MAY |
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