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Receivables: Your Key to Beating the Competition in 30 Days

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What metric should you use to compare your business to your competition? There may be hundreds, maybe thousands of companies going after the same customers. Your product offerings, however, may be vastly different. You may not need as much marketing as they do. Your #1 competitor may be 10 times your size. Your cost structure may not even resemble that of your next door competitor. So, what can you measure as your competitive advantage? Surprisingly, there is one factor that all small businesses have in common when chasing the same customers: your receivables. This one factor may be your strongest weapon. Taking this one factor seriously will allow you to beat your competition even if your competitors DOUBLED their sales. This one factor can be put into a simple question every small business owner should ask him/herself: “how fast do I get paid by my customers?”. Your answer to this question also determines where your customers rank you among their “priority” list of suppliers.

Receivables: Your Key to Beating the Competition in 30 Days

Your receivables are what your customers owe you. Your ability to turn your receivables into cash directly impacts your profits and will allow you to operate with healthy margins. What is amazing about your receivables is that even if your sales stay the same, you can substantially increase your margins by reducing the number of delinquent invoices you have on your books.
To help you understand where you are in your industry’s receivables management rankings, we prepared a quick guide for you:

1. WHAT PERCENT OF YOUR CUSTOMERS FAIL?

Take a look at the failure index chart below. The data is from Dun & Bradstreet’s 2011 US Business Trends Report. The failure index is calculated as a failure rate for an industry divided by average failure rate for the US overall in the same year (You can check out the full report here).

Source: Dun & Bradstreet 2011 US Business Trends
The major industries in the US are included in this chart. If your industry’s failure index is above the index average of 1.0 (displayed as a yellow horizontal line on the chart above), then you need to be extra careful when selling goods/services to your customers on credit, and when purchasing goods/services from your suppliers. Make sure you closely monitor your customer’s financial standing and credit status before extending large amounts of credit, and avoid an over-dependence on a single supplier for a critical component in your business process.
Protecting your business from potential customer (and supplier) failures protects your profits, and gives you an upper hand against your competition. Thus, make sure you do your due diligence before extending credit to your customers or decide to purchase from your suppliers.

2. WHAT PERCENT OF YOUR CUSTOMER BASE IS DELINQUENT?

This is the second trick for your business to stay ahead of your competition. The number of past due accounts on your books directly impacts how much cash you get from your customers. The following chart shows you the percentage of accounts that are 90+ days overdue in each industry (yellow line displaying the aggregate average, 14.2%). Compare your books with the averages from your industry.

Source: Dun & Bradstreet 2011 US Business Trends
Obviously, the winner is ultimately determined by the ability to manage his/her receivables and the ability to promptly collect overdue accounts. If your business operates within the manufacturing industry, for example, and you manage to reduce the percentage of 90+ days overdue accounts to half of the manufacturing industry averages, your delinquency rates may be close to the US average but much better than those of your next-door competitor who operates on par with other manufacturers. It requires a delicate balance of refined collection practices (which we will go through in our articles) coupled with the right customer relationship management. It is well worth the effort. Especially in sectors with high delinquency rates, you need very strong credit policies to make sure you always stay in control of your receivables.

3. WHERE IS YOUR BUSINESS GEOGRAPHICALLY LOCATED?

You may have already taken a deep breath after comparing your business to the charts above. But unfortunately, it is not over yet. If you are happy that your delinquency rates are on par with the industry in which your business operates, you may be awfully wrong.
The US is the third largest country in the world according to land mass. Due to regional trade dynamics, it is normal for customers in different geographic locations to have different delinquency rates. You can get a better perspective by looking at the business failure and delinquency rates within your geographic area of operation.
According to the same Dun & Bradstreet report, continued residential housing instability and the steep drop-off in the tourism, travel and hospitality sectors made Nevada and California failure rates among the highest in the country (see the chart below for a list of 15 states with the highest failure rates. The yellow line displays the index average of 1.0). The next cluster is formed by New Hampshire, Colorado, Tennessee and Washington. North Dakota, Wyoming and Louisiana have some of the lowest failure rates in the nation.

Source: Dun & Bradstreet 2011 US Business Trends
But when it comes to delinquency rates, we see a different pattern across different states. This time, Arizona, Nevada and Utah top the list of states with the highest delinquency rates (the yellow line displays the national average of 14.2%).

Source: Dun & Bradstreet 2011 US Business Trends
We reviewed some of the methods that will be helpful when you are triangulating where your business ranks in terms of effective receivables management vs. your competitors. If you are one of the millions of small business owners and managers who go to bed every night thinking about ways to improve your company’s profits and stay ahead of your competition…start with better managing your receivables.

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3 Responses to Receivables: Your Key to Beating the Competition in 30 Days

  1. Thanks for the tips, and the web-site honestly looks amazing. Exactly what wp design are you using?

  2. meredithawood says:

    Thanks Jeffrey! We are using a custom design for our wp. Thanks so much for the kind words.

  3. J. Lindsey says:

    This is a great article. I plan to tweet this when I am finished. As the President of Cambridge Receivable Solutions, a professional A/R Management and Collection firm, I am constantly educating people on these same things.

    The information in this article is very valuable. I am always trying to get business owners and financial decision makers to take these things into account. For our select client base, we are definately a secret weapon.

    Experience is key when maximizing cash flow and profits. Partnering with a professional firm like ours will never leave you with less money. Whether you take advantage of our contingency services, management solutions, or consulting, you only stand to gain by allowing our knowledge, resources, and experience to go to work for you. You will save a ton of time in the process and be able to focus on attracting and nurturing new business, doing what YOU are good at.

    Don’t be a bad guy, but don’t be a sucker either!!!!!! Best of luck, everyone.

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