Are a lack of financial controls costing you money? Take the Consero Performance Assessment.

August 24, 2010 – 3:39 pm

By Rey Madolora – Vice President of Services, Consero

Poor financial controls can create significant waste, fraud, or decreased credit rating – yet it happens to thousands of businesses every year.  A sound internal control environment is the foundation from which a corporate finance function can be relied upon to protect and report on the company’s cash and general financial position.

Unfortunately many small and mid-market companies have completely inadequate controls due to the perceived expense and skill-set required to establish a strong internal control environment proper ones, leaving them exposed to several risks including:

* Lost revenue

* Over-payments

* Wasted spending

* Internal fraud

* Unavailability of credit

Improper controls in any of the different areas of the finance function can lead to the issues above. These include:

* Mistakes in the invoicing process (over billing, under billing or unclear billing) can cost the company money and/ or damage the company’s credibility stance in the marketplace with customers.

* Errors in the payment process (late payments, missed payments or over-payments) can damage a companies credit rating, can cause business disruptions through vendor credit holds or cost the company money as many vendors are not going to return cash that was overpaid to them.

* Lack of controls in the cash payment process or general accounting area open the company up to fraud that would be difficult to detect see.

* Incorrect or incomplete financial reports can adversely affect business decision making and can lead to the inability to get obtain financing, or to increased audit costs

Take the Consero Financial Performance Assessment

Nine Questions executives must ask to improve financial controls.

Invoicing

1) Do I have an invoicing process that I am confident yields consistently accurate invoices to clients?

2) Do I have the ability to automatically verify that ALL billable expenses (time, materials, sub- contractors, etc…) were passed back through to clients?

3) Are my revenue recognition practices compliant with US GAAP?

Accounts Payable

1) Does my current process ensure that invoices are received and can be tracked through all the way to payment?

2) Do I have a purchase requisition process to ensure that all material payments of any significance to be pre-approved?

3) Do I have separation of duties so that no one person in my accounting function can 1) create a vendor 2) setup a payment to a vendor 3) initiate/authorize a payment to a vendor?

4) Does my accounting system prevent entries from being deleted after a check was printed or a payment generated?

General Accounting and Reporting

1) Are bank reconciliations done each month to verify that the accounting system accurately  reflects bank account activity?

2) Are the people doing bank reconciliations separate from the people who have the ability to generate payments?

While all companies like to think things won’t happen to them, if you can answer “No” to any of the questions above, you are likely exposed to the risks outlined at the beginning of this note.

Contrary to common perceptions, proper financial controls for small and mid-market companies do not have to be expensive to implement and can have an extremely positive ROI in savings…not to mention peace of mind.

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Outstanding Idea: Outsourcing Trade

August 6, 2010 – 1:38 pm

For today’s corporations, the ground is shifting. Issues such as globalisation, business efficiency, increased specialisation and product innovation are percolating upwards in priority. And corporations are now focusing more intently than ever on profitability, working capital, cash flow, technology, risk management and investments.

To manage these priorities successfully, organisations are moving away from a longstanding business model. The traditional model has been subsumed by a new organisation in which employees focus on customers, information is leveraged to gain valuable business insights, and working and physical capital are optimised. Amid this upheaval, today’s CFOs and other senior financial professionals are expanding their focus beyond merely reducing costs, and taking a hard look at three primary areas:

1) Operational Efficiency – reducing the cost of operations, automating once-manual processes, managing global/regional businesses, and improving accuracy of transactions

2) Financial Efficiency/Effectiveness – increasing transparency, mining actionable financial information, and complying with regulations as corporations expand into different markets

3) Cash flow and risk management – minimizing market and client risks, improving cash flow from operations, and reducing Days Sales Outstanding (DSO).

To manage all of the above with maximum efficiency, financial professionals are employing a collaboration model that achieves a delicate balance of people, systems, performance, processes and policies. This is especially efficacious in the area of receivables management – specifically in three key functions: order receipt and fulfillment; invoicing; and collection and banking.

Originally posted by Citigroup Inc | SOURCINGmag.com | US Jul 21

You can read the extract of Outstanding Idea: Outsourcing Trade.

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Improving Growth and Profit Through Outsourcing

July 20, 2010 – 8:00 am

A very interesting article below on how leveraging outsourcing providers has been one of the factors common to the select group of companies who have been able to achieve sustained profitable growth over the last 10 years. These companies are also linked in leveraging outsourcing providers to gain capabilities they don’t have in-house or to improve on the capabilities they do have vs. thinking of outsourcing as simply a cost cutting measure. Also interesting in that the areas that outsourcers are leveraged in is expanding through their business.

How Outsourcing helps in improving growth and profit for organizations:

Companies that successfully create and sustain value year after year are rare. Many try to, but a recent study of 2,000 companies over 10 years by a consulting firm, Bain & Co., found that only one in 10 achieved sustained, profitable growth. One activity that sets such winners apart: They often use capability sourcing in more innovative ways than their competitors.

Outsourcing and offshoring began as cost-cutting measures, but companies that create real sustained value routinely use them for far more strategic ends–to gain capabilities that they don’t have in-house, or to strengthen capabilities they do have. One of the survey shows that 85% of those winners use capability-sourcing broadly and strategically for everything from developing world-class talent to bringing new products to market faster and enabling business model innovation. In other words, they’ve moved way beyond mere cost-cutting.

The leading companies use capability-sourcing to build five strategic capabilities:

1) To tap global talent:

Particularly in emerging markets, shortages of talent can impede a company’s ability to grow. Texas Instruments ( TXN - news -people ) has overcome this obstacle with an R&D center in India that has not only delivered cost savings but also nurtured a rich talent pool that has delivered an increasing stream of U.S. patents.

2) To build partnerships that both capture value and reduce risk:

Even though sourcing risks have increased over time, many companies continue to manage their sourcing relationships at arm’s length. The reality is that they need to exert control. Companies like the toy manufacturer Hasbro (HAS - news - people ) accomplish this by viewing their external relations as strategic partners tightly integrated with their domestic operations or overseas subsidiaries. That’s a major reason why Hasbro was largely unaffected by the toy industry’s lead paint crisis in 2007. Among its sourcing safeguards, the company prequalifies and continually monitors its overseas factories to ensure that quality management systems are in place. The risk of a quality issue arising can’t be totally eliminated, of course. The key is to limit potential problems and act quickly when one occurs to keep it from happening over and over again.

3) To seize new local market opportunities:

As new markets emerge, companies need ways to establish a presence before their competitors. By making large-scale, multiyear offshoring investments in everything from manufacturing to sales, partnering with local universities and government organizations.

4) To get to market faster and boost innovation:

Bringing out new products ahead of competitors is critical for consumer products companies in a rapidly changing market. When Procter & Gamble( PG - news - people ) outsourced some R&D activities it boosted its innovation productivity by 60%, to generate more than $10 billion in revenue from over 400 new products. Today, about half of P&G’s innovation comes from external collaboration.

5) To disrupt traditional business models:

Since the spin-off of its contract manufacturing operations in 2000, Acer, the Taiwan-based personal computer maker, has used capability sourcing to make itself into the world’s second-largest PC manufacturer. The company’s executives knew it was good at branding and marketing and chose to outsource everything it had a harder time with, like manufacturing. The move led Acer to faster-growing sales and gains in market share. The company now maintains a strikingly lean and flexible operation. Its 6,800 employees represent a workforce less than a tenth the size of its largest competitor.

Being a follower has advantages in capability sourcing. Fast followers can learn from others’ mistakes. There are capability sourcing models and offshore locations and vendor options today that didn’t exist five or 10 years ago, providing the chance to catch up faster. We’ve found that building a local team offshore with an independent charter and autonomy improves a company’s long-term odds of success.

There are capability sourcing models and offshore locations and vendor options today that didn’t exist five or 10 years ago, providing the chance to catch up faster. We’ve found that building a local team offshore with an independent charter and autonomy improves a company’s long-term odds of success.

In some instances, experienced practitioners have used outsourcing and offshoring to change the game in their industries. The semiconductor industry was redefined when companies started outsourcing manufacturing to low-cost Asian foundries. Those pioneers took off because their outsourcing strategies freed them to focus on R&D rather than pouring most of their investment into capital-intensive fabrication. Companies also have developed repeatable formulas that apply what they’ve learned from their increasingly complex outsourcing and offshoring activities, sometimes by building an internal organization to manage partner relationships and transfer experience from one project to the next.

In today’s uncertain business climate, adopting a strategic view of capability sourcing isn’t an option. It’s imperative if your company is to have any hope of leapfrogging the competition.

Originally posted by Michael Heric & Bhanu Singh | SOURCINGmag.com | US June 15, 2010

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Finance and accounting outsourcing expected to increase in 2010

June 3, 2010 – 5:02 pm
A new report from global consulting and research firm Everest indicates that the Finance and Accounting Outsourcing (FAO) market in 2010 is expected to resume a growth trajectory more similar to pre-recessionary levels, moving towards 20 percent and reach nearly $3.7 million in annual contract volume (ACV). According to the Finance & Accounting Outsourcing Annual Report 2010, annual ACV growth slowed to 11 percent in 2009, as compared to 20-plus percent growth rates in 2006-2008, according to the study. The FAO market reached $3.1 billion in annual spending (ACV) last year, representing about $24 billion in total FAO spending.

Although new contract signings were lower in 2009 compared to recent years, new FAO spending continued to grow organically through a sharp pick-up in contract extensions, which represented almost 40 percent of 2009 ACV growth. About 35 percent of all currently active FAO contracts, valued at $5 billion, are up for renewal during the next three years. This cycle of renewing contracts will continue to fuel organic growth in the market as buyers increasingly focus on expanding the value they generate from FAO.

“As the global economy continues its path towards recovery, we expect to see the FAO market regain traction, driven by new deals and scope expansions, as well as more than 45 contracts up for extension this year,” said Katrina Menzigian, Vice President, Research. “We foresee increased adoption across industries and geographies to continue. Beyond the United States, we expect contract signings in the domestic Asia-Pacific market as well as Rest of Europe to rise.”

Other report findings include:
  • FAO market growth continues to see strong adoption across manufacturing, consumer packaged goods, retail and high-tech sectors. Telecom and pharma are emerging sectors with the highest growth rates
  • The financial services sector saw stronger activity than expected last year, and pent up demand will contribute to growth in 2010
  • Asia Pacific started to emerge last year, capturing 35 percent of new contracts
  • Adoption by the mid-market was unable to sustain momentum garnered from 2006 to 2007 primarily due to the economic climate and lack of proven, successful FAO solutions
Established leaders Accenture, ACS-Xerox, Capgemini, Genpact and IBM account for nearly 65 percent of the FAO market’s ACV. Other suppliers included in the analysis include Cognizant, Compass BPO, EXL, HCL, HP, iGate, Infosys BPO, Intelenet, KPIT Cummins Infosystems, Outsource Partners International, Patni, RMS, Steria, TCS, Vengroff Williams & Associates (VWA), Wipro and WNS.
In this year’s report, Everest highlighted five suppliers as 2009 FAO Market Star Performers: Genpact, IBM, Infosys, Wipro, and WNS. These suppliers demonstrated the strongest movement forward across the following two dimensions in 2009:
  • Market success in 2009 based on ACV growth, number of contract signings, and value of contract signings in 2009
  • Capability advancements in 2009 based on expansion of scale, scope, delivery footprint, and technology investments
The Star Performers designation relates to year-on-year performance for a given supplier and does not reflect on overall market leadership positions. Those identified as the 2009 Star Performers include both leading suppliers and major contenders.
“Last year, successful suppliers fine tuned capability mixes and positioned for anticipated growth this year,” said Saurabh Gupta, Research Director. “Moving forward, successful suppliers will continue to identify and refine target buyer segments, meet client needs in terms of global delivery capacity and service, bring technology and process solutions that more closely link process operations with business outcomes, and focus on client relationship management.”

You can read an extract of the Finance & Accounting Outsourcing Annual Report 2010. For additional information, e-mail info@everestresearchinstitute.com or call 214-451-3110.
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Six Quick Ways to Reduce the Risk of Fraud using QuickBooks

May 20, 2010 – 4:17 pm

A small business owner typically can’t afford to hire enough people to have proper separation of duties to gain the internal controls needed to prevent accounting fraud. However, every business owner can achieve accounting fraud prevention by taking these simple steps:
1. Open the bank statement yourself

Every small business owner should receive the unopened bank statement and review each check for authorized payee and signature, and approved electronic payments, before you give it to the bookkeeper.

2. Don’t let your bookkeeper reconcile the bank account

The person who pays the bills should never reconcile the bank account. That’s how they cover their tracks. If you don’t have someone else to do it this is an easy function to outsource.

3. Close the prior accounting periods

QuickBooks now has a way to lock down the prior periods. Once you produce a financial statement that period should be “closed”. This reduces the risk of hiding a fraudulent transaction in a prior year.

4. Attach scanned images to each accounting transaction

Most fraud occurs from check tampering – the bookkeeper changes the payee to themselves. Prevent accounting fraud by scanning the bill and linking it to each accounting transaction inside QuickBooks. This makes it harder to fake a bill.

5. Set up username for each user

QuickBooks now has an audit trail report which can never be turned off. However if your staff log in as “Administrator” you have no idea who made what entry.

6. Restrict user access

QuickBooks Enterprise Solutions has the ability to restrict access per user per screen. Make sure you have separation of duties between authorization, recordkeeping and custodial responsibilities for each accounting transaction.

No system of internal control should be built on trust. The best accounting practice is to separate out the following functions: authorization, record keeping and custodial responsibility for assets in each accounting transaction.

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A Growing Contagion: Accounting Fatigue Syndrome

May 15, 2010 – 4:04 pm

Like many finance executives, Terry Lillis, CFO of Principal Financial Group, is tired. The constant stream of guidance from regulators and accounting standard-setters — plus the expected inflow of more to come over the next few years — has created “huge accounting fatigue” among his finance staff, he told a roomful of finance chiefs at the CFO Rising conference in Orlando this week. In fact, he put employee fatigue at the top of his list of concerns for 2010.

Judging by the grumblings we heard at the conference, he’s not alone. Companies that are trying to keep up-to-date on changes that could have a significant impact on their financial results will see the burden on their staffs only worsen, predicted panelists at the conference, as accounting rulemakers approach their deadline for converging their standards.

Indeed, six major projects are under way and are expected to be revealed next June, although their effective dates have yet to be determined. These new rules entail major changes to the way companies account for leases, pensions, and revenue, and even to the way they present financial statements. To deal with the new lease-accounting rules — which will require companies to capitalize all lease agreements — some companies may have to hire “an army of people,” particularly retailers that have hundreds of leases, warned Jay Hanson, a partner at McGladrey & Pullen. Moreover, the employees won’t be cheap: the more principles-based rules will require seasoned professionals, not recent graduates, according to conference speakers.

While the panelists gave no hope to CFOs who wish the standard-setters would either slow down or cut back on their agenda, they did offer one tip for ending accounting fatigue. “If I were a CFO, the first thing I would do is look at my early-retirement provisions,” quipped J. Edward Grossman, a Crowe Horwath partner, which earned him some uneasy laughter from the audience. Indeed, we overheard conference attendees half-jokingly respond to the panelists’ warnings about pending rule changes by noting that it’s a good time to back out of the profession.

Originally posted by Posted by Sarah Johnson | CFO.com | US March 9, 2010

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Markup vs. Margin. What is the Difference?

May 10, 2010 – 4:13 pm

Markup vs Margin Differences
Is there a difference? Absolutely. More and more in today’s environment, these two terms are being used interchangeably to mean gross margin, but that misunderstanding may be the menace of the bottom line. Markup and profit are not the same! Also, the accounting for margin and mark-up are different! A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line. Terminology speaking, markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit.

So, who rules when seeking effective ways to optimize profitability?. Many mistakenly believe that if a product or service is marked up, say 25%, the result will be a 25% gross margin on the income statement. However, a 25% markup rate produces a gross margin percentage of only 20%.

How to calculate markup percentage
By definition, the markup percentage calculation is cost X markup percentage, and then add that to the original unit cost to arrive at the sales price.

For example, if a product costs $100, the selling price with a 25% markup would be $125:

Gross Profit Margin = Sales Price – Unit Cost = $125 – $100 = $25.

Markup Percentage = Gross Profit Margin/Unit Cost = $25/$100 = 25%.

Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125.

How to calculate gross margin percentage
Gross margin defined is Gross Profit/Sales Price. In this example, the gross margin is $25. This results in a 20% gross margin percentage:

Gross Margin Percentage = Gross Profit/Sales Price = $25/$125 = 20%.

Not quite the “margin percentage” we were looking for. So, how do we determine the selling price given a desired gross margin? It’s all in the inverse…of the gross margin formula, that is. By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

For example, if a 25% gross margin percentage is desired, the selling price would be $133.33 and the markup rate would be 33.3%:

Sales Price = Unit Cost/(1 – Gross Margin Percentage) = $100/(1 – .25) = $133.33

Markup Percentage = (Sales Price – Unit Cost)/Unit Cost = ($133.33 – $100)/$100 = 33.3%

Reprinted with permission from WikiCFO.com.

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Slouching Toward Recovery

May 5, 2010 – 3:56 pm

CFOs see several positive economic signs, but employment isn’t one of them.

At last, some good news. For the first time in more than a year, finance chiefs expect double-digit growth in earnings and significant growth in capital spending over the next 12 months, according to this quarter’s Duke University/CFO Magazine Global Business Outlook Survey. Finance executives also plan to loosen the reins on spending for technology, research-and-development, and marketing and advertising.

This welcome news comes with a few caveats, however. The 15% expected growth in earnings and 9% growth in capital expenditures start from low bases after a dismal couple of years. And employment will continue to be a drag on the recovery, with CFOs saying they expect to expand their full-time domestic workforces by less than 1% over the next 12 months. Temporary hiring will also increase by less than 1%, but outsourced hiring will grow by 4%, indicating that companies are reluctant to commit to full-time workers amid ongoing uncertainty. More than half of finance executives say they don’t expect their companies to return to prerecession staffing levels before 2012.

Nonetheless, nearly half of CFOs are more optimistic than they were last quarter, while 14% are less so and 39% say their optimism levels are unchanged. “What I think has changed is that for the 80% of the population that is fully employed, there’s less worry that they’re going to lose their jobs,” says Mark White, CFO at enterprise-software giant SAP America. “They have a lot more confidence than they did a year ago.” White says increased spending by this group should trickle through the economy during the first half of the year.

Lingering Doubts
White hesitates to claim a recovery, however. “What worries me is that there is still no hiring and there are a lot of people who are still underemployed,” he says. “Until that’s fixed, the economy doesn’t really come back.”

Gayle Anderson, CFO of online dating site Match.com, a division of IAC, shares White’s concern, even though her company’s business held up well through the recession. “If this is truly a jobless recovery, the longer people are out of work the more they will start cutting back on anything that is not a staple,” she says.

White worries about the many regulatory uncertainties on the national agenda as well. “Until we know where we’re going on health care, free trade, clean energy, mortgage relief, unemployment benefits…all of that is so up in the air, it freezes people and prevents them from making investment decisions,” he says. “I think CFOs are saying, ‘Where are we going? Do we have enough confidence to start this project?’ And they’re waiting. I know I’m waiting.”

Tight credit also poses an obstacle to a robust recovery and has caused many companies to postpone or cancel expansion plans or new projects. Seventy percent of finance chiefs at small and midsize businesses report that credit conditions are worse or much worse compared with the summer of 2008, prior to the collapse of Lehman Brothers. Even among companies with more than $10 billion in revenue, 40% say borrowing is more difficult now. Analyzing companies by credit rating reveals that while 87% of companies rated B or lower are finding borrowing more difficult than they did before the crisis, 50% of the highest-rated companies are, too.

Nearly half of CFOs are planning to reduce their inventory during the first half of 2010, in part due to supply-chain improvements that allow them to hold less product, but also because of reduced demand.

Global Differences
While the U.S. economy appears to have hit bottom and begun to improve, albeit slowly, Europe’s CFOs continue to face serious challenges. As the region struggles with Greece’s debt crisis, European firms will continue to make layoffs over the next 12 months, according to finance chiefs, although at a slower rate. Earnings will grow slightly, but firms are not yet ready to spend. Most spending categories remain flat, with marketing and advertising spending expected to decline slightly.

In Asia and China, however, finance executives are notably more optimistic than their European and U.S. counterparts. CFOs in the region expect strong growth in earnings over the next year: capital spending will soar by 16% in Asia. Finance chiefs also plan to spend in other areas, including technology, R&D, and marketing and advertising. In a key difference from the United States and Europe, CFOs in Asia and China say they will be hiring and raising salaries significantly.

In the United States, while lingering unemployment and credit-market concerns pose obstacles to a robust recovery, positive trends in many key spending categories are a big change from even three months ago, when CFOs were predicting more layoffs and very limited spending on everything from capital equipment to technology. Says Match.com’s Anderson, “I’m encouraged by the fact that things are at least not getting worse.”

Kate O’Sullivan, CFO Magazine

Kate O’Sullivan is senior editor for strategy at CFO.

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Give Them Credit

April 25, 2010 – 6:11 pm

Numerous regulatory proposals aim to reverse the ebb in small-business lending. But will any of them actually work?

Vincent Ryan, CFO.com | US
March 5, 2010

How can access to capital be improved for small businesses so they can create jobs and accelerate the economic recovery? There is no silver bullet, but President Obama and Congress are floating multiple policy and legislative options to spur small-business lending.

At a House Financial Services Committee hearing last week, bankers and business owners testified that access to credit is still widely constricted for small businesses. The numbers back that up. In the Duke University/CFO Magazine Global Business Outlook Survey for the first quarter of 2010, 60% of executives at companies with less than $25 million in revenue said borrowing is much more difficult today compared with the summer of 2008, before the collapse of Lehman Brothers. By contrast, only 25% of companies in the $1 billion to $4.9 billion revenue range answered that way.

Also, a net 14% of respondents to the latest monthly survey of the National Federation of Independent Business, a small-business association, reported that loans were tougher to get in January than in their previous attempt at applying for a loan.

One proposal by the Obama administration is to take $30 billion of unused TARP money and create a Small Business Lending Fund for banks with less than $10 billion in assets. The amount of capital a bank could receive would be a percentage of its risk-weighted assets. The government would get at least a 5% dividend from the capital investment, but that rate would fall if the bank demonstrated an increase in small-business lending compared with a 2009 baseline. For every 2.5% increase in incremental business lending over a two-year period, the dividend rate would fall one percentage point. After five years, the dividend rate would increase to encourage timely repayment.

But the stigma associated with taking TARP money would discourage banks from using the fund, claimed some witnesses at last Friday’s hearing. Bank of Alameda CEO Stephen G. Andrews, testifying on behalf of the Independent Community Bankers of America, said the fund would have to avoid some of the entanglements that arose with the TARP’s Capital Purchase Program, in particular the issuance of stock warrants to the government and restrictions on banks’ compensation and dividends.

House Small Business Committee Chairman Rep. Nydia Velázquez (D-N.Y.) was also critical of the idea, saying that “taking $30 billion and simply handing it to banks in the hopes that they will make loans is not sound policy.” Instead, Velázquez wants the $30 billion sent to the Small Business Administration for development of a direct-lending program. But the SBA’s own administrator, Karen Mills, admitted that the agency has neither the expertise nor the infrastructure to lend directly to small businesses, and said that those businesses would be better served if the government just improved its loan programs already in place.

The SBA and the administration want to boost the volume of government-backed SBA loans for working capital, the so-called 7(a) loan program, by permanently increasing the maximum size of a 7(a) loan from $2 million to $5 million and by continuing to temporarily guarantee 90% of each loan and waive borrower fees. The latter two measures were instituted last year under the American Recovery and Reinvestment Act.

The 90% guarantee has enabled Bank Rhode Island to boost SBA lending, says Scott Lajoie, vice president of business banking. In the first two months of 2010, Bank Rhode Island approved 48 loans totaling $5.2 million, compared with 17 loans totaling $1.9 million in 2009. “We’ve had a number of applications where the 10% exposure compared with a 25% exposure offset the risk associated with the credit, such as a shortfall in collateral or time in business,” Lajoie says.

But some SBA lenders aren’t convinced that any of the government’s existing measures or proposals will turn on the spigot and lead to jobs growth. If Congress and the administration want to stimulate hiring by small businesses, they’re focusing on the wrong segment, claims Tim Jochner, CEO of Superior Financial Group, a nonbank SBA lender based in Walnut Creek, California. “History shows that the smallest nonemployer firms create the most jobs in recessionary times,” Jochner says. In both the 1991 and 2001 recessionary periods, firms with 20 employees or fewer had positive net job growth, while larger companies of all sizes shed jobs, Jochner says.

Congress should focus on boosting the ability of banks to underwrite loans of $100,000 and under, Jochner says. To be able to lend to the smallest companies, firms like Superior need to be able to originate more loans under the SBA’s Community Express program, in which firms borrow $250,000 or less. One thing Congress could do is lift the caps on the Community Express program, which limit the total number of loans and the number of loans an individual lender can originate, Jochner says.

“I don’t know of any firms with fewer than 20 employees that can afford the debt service of a $5 million SBA loan,” says Jochner of the proposed increase in maximum 7(a) loan size.

SBA statistics back up claims that money is not reaching the small nonemployer firms that Jochner serves. Although Community Express lending is up at Superior Financial, nationwide only $27.9 million of Community Express loans were originated in the quarter ending December 31, 2009, compared with $67 million two years ago. Meanwhile, 7(a) loan originations last quarter increased to $3.8 billion, up 19% compared with two years ago.

Smaller loans, under $250,000, can be the toughest loans to underwrite, says Bank of Rhode Island’s Lajoie, because they are generally based on the individual business owner’s credit score and decisioning is automated. “We have seen time and time again where credit card companies have reduced an individual’s credit limits, causing a credit-score drop that leads to a business loan decline,” Lajoie says. In some cases, a second look from the underwriting team is then called for. “Some borrowers are able to repair their personal credit to the point that they are able to obtain financing within six to eight weeks,” Lajoie says.

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Day Sales Outstanding – Ignore it at your own risk

April 20, 2010 – 6:00 pm

One of the critical keys to managing your company’s receivables is to measure and control your Day Sales Outstanding, the average number of days your company takes to collect sales revenue. Treat a high DSO number as a red flag — it means you’re taking too long to collect revenue and extending credit to customers with an overly generous hand.

Controlling Credit

Smart, firm credit policies and practices can help keep your DSO under control. Review your current credit policy for weak spots in your qualification, payment or collection terms. Who qualifies for credit? What requirements must they meet? What level of deposit must they put down as security? How long is the payment window, and what consequences do slow-pay and no-pay clients face? Any confusion over these questions on your contract documentation will lengthen your DSO.

Taking the Lead on Billing

Obviously, the longer you take to bill your clients, the later the payment period starts, but there’s a psychological factor at work as well. Your seriousness about the billing process sends a direct message to the client that you want your money as soon as possible. Drive the point home with an aggressive approach to collecting overdue receivables, including the imposition of late fees according to the credit policy your client signed.

Banking on a Low DSO

A regular, efficient deposit plan can help keep your DSO down. Set an ongoing deposit schedule that your receivables staff will follow like clockwork so that revenue doesn’t remain outstanding a moment longer than absolutely necessary.

A lockbox account can shave valuable time off your DSO by allowing you to mail payments directly to a post office box. The bank has access to the lockbox account and will process these incoming moneys on a daily basis. This process not only eliminates the need for you or your staff to stand in line at the bank — it bypasses the teller’s window entirely, with receipts going directly to the bank’s processing department as soon as possible. You can even set up multiple lockbox accounts near your clients’ locations if you use a regional or national bank, further reducing the postal travel times.
If you employ disciplined use of the right credit, billing and banking strategies, you will most likely see your Day Sales Outstanding drop dramatically, helping you regain control of your receivables and improving your cash flow management.

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Posted by admin Filed in Cash Management, Definitions Tagged , , , , , , | Comments (0)