Blog Articles and Comments

Why UCC Article 9 is Important to Creditors?

Wed, 16 May 2012 18:48:00 GMT

Most trade creditors are familiar with the Uniform Commercial Code's article 9 that deals with secured transactions. Article 9 describes how a lender can become a secured creditor and "perfect" or establish priority over other secured creditors in the event their debtor defaults.

Uniform Law Commissioner Edwin E. Smith, who chaired the committee that drafted the article 9 amendments currently being adopted or introduced in state legislatures, says article 9 creates an "efficient system" to take a security interest in personal property, such as equipment, inventory or accounts receivable, to secure a loan or other obligation. "Article 9 has a very functional definition of what a security interest is."

"It sets forth the legal rules for how a lender or other secured creditor can obtain an enforceable interest against the personal property, what we call a security interest," Smith says. "It tells you how that interest can stand up and be superior to the interest of a creditor who is unsecured. That's what we call perfection. That's important because the trustee in bankruptcy has the hypothetical status of a creditor who has obtained a lien."

To become a secured creditor, a lender should:

Prepare a security agreement that describes the collateral and have the debtor authenticate it.
File a financing statement or UCC-1 form with the appropriate secretary of state's office.
Identify and notify other secured creditors within in a predetermined time frame associated with whether the goods are classified as inventory or equipment.

To learn if other secured creditors have filed financing statements, lenders search the appropriate state's database where financing statements are stored. A secured creditor searches the UCC records to see if anyone else has filed a financing statement covering the collateral of the company (borrower). It is very important to a secured creditor that they be in a first filing position on the collateral of their loan. If there is ever a liquidation or bankruptcy, the first secured creditor who filed a proper UCC1 will be paid out first.

How to Get Your Customers to Give up Paper

Wed, 16 May 2012 18:29:00 GMT

The benefits of electronic invoicing are REAL: accelerated cash flow, reduced days sales outstanding, increased productivity, elimination of human error, as well as the appeal of "going green." But, research shows AR is still a largely paper-based function. Why would a company be reluctant to adopt electronic invoicing if the benefits are so great? Maybe a little education will help.

What is an e-invoice? E-Invoicing Defined
Adding to the confusion is how to define an electronic invoice. Is it a document sent only by electric data interchange (EDI) or extensible markup language (XML) or is it an email with an attachment or a PDF file? The answer it is all the above. Larger companies will sned data via EDI or XML but that doesn’t mean small companies can’t adopt e-invoicing. With the wide acceptance and use of Adobe PDF, any company can prepare and send electronic invoices.

Still Wedded to Paper
There are two reasons companies do not want to receive electronic invoices. One is that they don't have the systems to process electronic invoices. Two is that some customers just like receiving paper. The good news is the trend is changing and in the future more companies may be willing to forgo paper.

Help Customers With Paper Withdrawal
The first step in moving from a paper-based invoicing system to e-invoicing is a proactive approach to encouraging customers to accept e-invoices. Give customers a choice about their invoice formats and gradually introduce electronic invoicing. While this approach may take more time, adoption rates typically are between 10 percent and 25 percent the first year.

Example: an AR department could begin by planning to send 20 percent of its invoices electronically during a six month period and distribute half of its invoices electronically by the next year. Within two or three years, the department could expect to send 80 percent of invoices electronically.

To give customers an incentive to adopt e-invoicing you can offer monetary incentives or more favorable payment terms. Remember, the more you can move toward e-invoicing the more benefits you can reap!

What is the Uniform Commercial Code?

Wed, 16 May 2012 18:38:00 GMT

The Uniform Commercial Code (UCC) has been described as one of the most important developments in American law. The code contains legal definitions and guidelines that can be helpful tools for companies.

The Uniform Commercial Code (UCC) was designed to promote interstate commerce by standardizing laws that govern business in the United States and in the U.S. Virgin Islands and the Commonwealth of Puerto Rico. The concept: businesses would be more comfortable and willing to conduct transactions across state lines if statutes were uniform or very similar.

The UCC is a "model" code or guidelines that do not constitute actual law. Each state legislature has to adopt the statutes for the laws to take effect. (Canada has enacted the Personal Property Security Act (PPSA) that contains guidelines similar to the UCC's. Nine of the country's ten provinces – Quebec is the exception – and all three territories have adopted versions of the PPSA. Quebec is governed by a Civil Code that is influenced by the French civil law system.)

The UCC comprises 11 articles. Many credit managers and analysts are familiar with article 9 – Secured Transactions – that contains statutes associated with granting and securing credit, as well as establishing priority in the event a debtor defaults. Article 9 also describes secured transactions and how trade creditors may protect their company's interests if a debtor defaults.

RDC: A better way to manage deposits

Wed, 28 Mar 2012 20:08:00 GMT

The daily dash to the bank to deposit a stack of checks is so 1980s! Waiting in long lines, the danger of losing the paper checks and the loss of valuable time are old business practices, and not the most practical way to get the money in the bank anymore.

Remote Deposit Capture (RDC) is the process by which a check is scanned and a digital copy of the check is sent to the bank electronically. Businesses can make deposits from their own offices, using their computers, scanners and remote deposit capture software, or by employing a third party to do it for them. The bank receives the digital check almost immediately; the bank can then send digital copies to the other banks to verify the funds and make the appropriate withdrawals and deposits, or produce an image replacement document (IRD).

The benefits of RDC for companies - from small to large - are many. Deposits are more convenient, since they're made from the office rather than a trip to the bank. For example, a small advertising agency may only get one or two large checks in a month. They would have to wait for the mail to arrive and have the check at the bank before 2:00 p.m. in order to have the deposit credited that day.

With RDC many banks have extended the time by which deposits must be made for the day; instead of 2:00 pm, many banks now allow deposits to be counted for that day until 5:00 or 6:00 pm. There is also reduced cost and risk connected to driving the checks to the bank, especially for larger companies which often hire a courier service or armored car.

To find out more about RDC go to www.remotedepositcapture.com, a one-stop resource visitors can learn about RDC and available products.

How Much Capital Do You Need To Grow

Tue, 13 Mar 2012 18:20:00 GMT

I am always impressed with the energy of entrepreneurs and their plans to move forward “full steam ahead” with their growth plans despite difficult economic conditions. Each entrepreneur can rattle off key concerns and usually at the top of the list is: how to figure out how much capital is really needed to grow. The overwhelming majority of small business owners that I have encountered always seem to underestimate how much money it really does take to grow.

Failing to prepare a proper budget for growth can have catastrophic consequences on your business. It’s very painful to set out on a growth plan only to find that you have run out of cash when you are on the cusp of achieving your goals. This happens to companies of all sizes and is most prevalent among business owners who have never managed a process of rapid growth.

When preparing your budget, keep in mind the following recommendations.

Your best case should not be your only case
Many small business owners prepare a single revenue projection for their growth plan and calculate their cash needs based on this scenario. Some wisely add a cushion to what their projections indicate they need and feel comfortable that this amount of money will allow them to achieve their needed growth. Unfortunately, many revenue projections aren’t realistic or assume that almost everything will go as expected, something that seldom happens. Most budgets are based on a best case scenario and are too aggressive. Entrepreneurs need to create a realistic base budget with at least a couple different revenue assumptions. This helps them see the good, the bad and the really ugly!

Run a cost sensitivity analysis
Scenario planning is also important for projecting the costs associated with your growth. If you have been running your business for several years, then you should have a good feel for your fixed and variable costs and your projections should therefore be defensible. This confidence can lead to overreliance on the projections. Surprises on the cost side can also kill a growth plan and for this reason you need to run a sensitivity analysis.

This analysis consists of modifying your assumptions for key costs and analyzing the impact of those changes on your overall projections. It’s important to run sensitivities on all important costs and combinations of costs. What would happen to your plan if you have to change suppliers and spend 20 percent more for your raw materials? And your liability insurance rates were to double? Or what if gasoline reaches $5 per gallon as some economists predict? Your model still needs to work under these new assumptions.

Seek someone with experience
Experience is the best teacher, but not the cheapest one. Rather than “learn from your mistakes” it’s better to work with someone who has already accomplished what you are setting out to do. Make sure that someone on your team (a partner, investor, advisor or consultant) has specific experience growing your type of business to the level you want to achieve. This is the best investment you can make towards your future success.

Don’t be afraid to ask for help. Chances are you know a lot of smart business people. Take them out to lunch or coffee and ask them their advice. People love to give advice.

Executing a successful growth plan is very realistic for small businesses because there really is almost unlimited opportunity relative to your starting point. But make sure you do it right and follow these recommendations.

Cash Management: Benefits of a Lockbox

Wed, 22 Feb 2012 16:14:00 GMT

Do your customers mail payments to you?
Are your customers dispersed across a region or the country?
Do you hold checks over a day or two because your staff doesn¹t have the time to process them?

If so, you may want to consider the benefits of automated lockbox processing services.

Using lockbox banking is a cash flow improvement technique in which you have your customers' payments delivered to a special post office box instead of your business address.

The difference between this special post office box and a regular post office box is that only your customers' payments are delivered to the box. Instead of you picking up the payments, your bank's couriers have a key to the post office box, and they remove its contents and deliver your customers' payments to your bank. Your bank opens the payments and then processes the payments for deposit directly into your bank account. Depending on the nature of your business, the contents of your lockbox can be removed and processed once a day, or more often if required.

You can establish lockboxes in several different post offices or cities. A basic rule is that your lockboxes should be set up nearest to your customers to reduce the amount of time between your customers' mailing their payments and the deposit into your bank account.

Lockbox banking accelerates the payment and deposit portion of your cash conversion period in two different ways. First, lockbox banking cuts down on any postal delays caused by having your customers' payments delivered to your business address. Mail delivered to your place of business entails some extra sorting so that your mail gets into the hands of the correct carrier, not to mention the added time it takes the carrier to actually deliver it to your address. Second, using a lockbox shortens the amount of time necessary to process your customers' payments, by having your bank open the payment envelopes and deposit them directly into your bank account. Since the payment processing is done at the bank, your customers' payments are received and deposited all within the same day. Doing this work yourself can delay the deposit of the payments anywhere from one to two days depending on how long it takes you to process your customers' payments for deposit, and to actually make the deposit at the bank.

Lockbox banking is typically used by businesses that receive payments from numerous customers. Lockbox banking can be expensive but don't shy away from lockbox banking just because your business isn't as large. Many factors utilize lockbox banking to reduce cash conversion and speed up collections. The good news is most factors will incorporate the cost of the lockbox in the overall pricing so it is a win-win for clients!

9 Best Practices for Credit

Wed, 15 Feb 2012 16:53:00 GMT

Learn the customer business practices that impact prompt payments, and eliminate barriers to prompt payment in your own processes. Partner with your customers toward developing best business practices toward effecting timely payments and alerting you of any issues in your organization that may adversely impact this.
Provide training across all departments that deal with customers to ensure understanding of company policy and objectives, in order to provide a consistent message to the outside world.
Implement a collaborative accounts receivable work-flow system with cross-trained staff so that any customer facing staff can initiate a solution when a customer calls about a payment, deduction, dispute, or credit related problem rather than delaying action with call backs and emails.
Use a credit and payment scoring model that triggers workflow actions; for example, at what point should you commence collection action? The scores should reflect credit risk, industry payment data, as well as your own experience with a customer.
Credit policy should be a tool used to expand company revenues as well as the customer relationship. In difficult situations, credit lines and payments can be worked out collaboratively with the customer, to achieve the objectives of both parties. This may require creativity on the part of the credit manager, and use of security, documentary and other credit management tools.
Be sure that collector performance goals are written down and that staff are held accountable for their results. The goals should be in sync with those that drive senior levels of management, but focus on more targeted metrics to draw team concentration to what’s important.
Automate the identification of delinquent accounts based on customer credit rating/ payment histories or customer class. This allows you to more efficiently manage the company's accounts receivable investment.
There is only so much time, so you must prioritize collection activities. Whether triggered by predictive payment scoring systems, or by manual ledger review, organize and plan your collection targets toward outcomes that will provide the highest return. This prioritization must be by employee as well, as some are better suited for volume collections as opposed to complex collections. Don’t shy from using collection outsourcing companies or agencies. While they will charge for their services, the alternative may be poor collections, higher borrowing, and bad debt write offs.
If you are experiencing an unacceptably high level of bad debts, perhaps your credit processes are inadequate to the task. Turnkey solutions to this include credit and collection outsourcing, or even factoring. Another possibility is credit insurance, although a credit insurer will also require that you implement effective credit controls and policies.

Understanding The Cash Conversion Cycle

Mon, 06 Feb 2012 17:36:00 GMT

The cash conversion cycle (CCC) is one of several measures of management effectiveness. It measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. Generally, the lower this number is, the better for the company. Although it should be combined with other metrics (such as return on equity and return on assets) it can be especially useful for comparing close competitors because the company with the lowest CCC is often the one with better management.

What is CCC?
The CCC is a combination of several activity ratios involving accounts receivable, accounts payable and inventory turnover. AR and inventory are short-term assets, while AP is a liability; all of these ratios are found on the balance sheet. In essence, the ratios indicate how efficiently management is using short-term assets and liabilities to generate cash.

How do these ratios relate to business? If the company sells what people want to buy, cash cycles through the business quickly. If management cannot figure out what sells, the CCC slows down. For instance, if too much inventory builds up, cash is tied up in goods that cannot be sold - this is not good news for the company. In order to move out this inventory quickly, management might have to slash prices, possibly selling its product at a loss. If AR is handled poorly, it means that the company is having difficulty collecting payment from customers. This is because AR is essentially a loan to the customer, so the company loses out whenever customers delay payment. The longer a company has to wait to be paid, the longer that money is unavailable for investment elsewhere. On the other hand, the company benefits by slowing down payment of AP to its suppliers, because that allows the company to make use of the money for longer.

What goes into calculating CCC, let's take a look at the formula:
CCC = DIO + DSO - DPO

Let's look at each component and how it relates to the business activities discussed above.
Days Inventory Outstanding (DIO): This addresses the question of how many days it takes to sell the entire inventory. The smaller this number is, the better.
DIO = Average inventory/COGS per day
Average Inventory = (beginning inventory + ending inventory)/2

Days Sales Outstanding (DSO): This looks at the number of days needed to collect on sales and involves AR. While cash-only sales have a DSO of zero, people do use credit extended by the company, so this number is going to be positive. Again, smaller is better.
DSO = Average AR / Revenue per day
Average AR= (beginning AR + ending AR)/2

Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP. If this can be maximized, the company holds onto cash longer, maximizing its investment potential; therefore, a longer DPO is better.
DPO = Average AP / COGS per day
Average AP = (beginning AP + ending AP)/2

What Now?
As a stand alone number, CCC doesn't mean very much. Instead, it should be used to track a company over time and to compare the company to its competitors.
When tracking over time, determine CCC over several years and look for an improvement or worsening of the value. CCC changes should be examined over several years to get the best sense of how things are changing.

The cash conversion cycle is one of several tools that can help you evaluate management, especially if it is calculated for several consecutive time periods and for several competitors. Decreasing or steady CCCs are good, while rising ones should motivate you to dig a bit deeper.

There are two types of factoring

Tue, 24 Jan 2012 17:14:00 GMT

Non-recourse factoring occurs when the accounts receivable are sold at an agreed upon price, and the factor assumes all of the risk for collecting the accounts. Non-recourse factoring is a more expensive form of factoring but the seller has no credit risk. Thus, if the invoice is not paid the seller has no obligation to pay the factoring firm back.

With recourse factoring, the factoring firm does not guarantee the credit-worthiness of the client’s accounts, and the client sustains losses from any uncollected receivables. Recourse factoring is less expensive due the fact the credit risk stays with the seller but if the seller has strong, credit worthy clients, then this is the best factoring option.

Top Tips for Successful Factoring

Tue, 24 Jan 2012 17:14:00 GMT

Small businesses and rapidly growing firms are often good candidates for factoring.
Factoring provides a source of cash for businesses that might not qualify for traditional bank loans or lines of credit.
Factoring offers a company access to cash while it waits for its customers to pay for goods or services provided.

How to use factoring to increase cash flow

Tue, 24 Jan 2012 17:12:00 GMT

Factoring can be an attractive alternative for companies that need to improve their cash flow but don’t have access to bank financing or don’t want to increase their debt load, such as small, newer companies and rapidly growing firms. The factoring firm typically charges a commission fee on the receivables. The business then can receive an advance on the receivables and is charged for interest on the advance.

The key advantage is that the business doesn’t have to wait 30 days or longer for its customers to pay for the goods or services. The business now has access to cash to meet current needs, such as payroll or other operating expenses.

Another advantage of using a factoring firm is the expertise they have in evaluating the credit quality of their customers. Companies also can save money by downsizing or eliminating their credit and collections staff.

Speeding Up Cash Flow - Invoice Presentation

Tue, 27 Dec 2011 17:45:00 GMT

How you present an invoice is very important. Most AP departments prefer to pay from an original invoice because payments made against copies of invoices represent a significant portion of duplicate and fraudulent payments. Some AP departments often have policies requiring payment from an original invoice and others have strict processes to follow when paying from a copy that requires additional research and delays payment.

Smudged numbers can cause payment delays and errors. An invoice's information is only as good as the equipment that produces it.

If your company sends paper invoices, present your invoices on white paper using black ink. Do not use colored paper, even if you are tempted to make your invoice distinctive. It does not help get your invoice processed more quickly, and in fact, slows payment if invoices are scanned electronically and the equipment cannot read invoices printed on colored paper. In addition, white paper is less usually expensive and will save you money.

Invoices should be clearly marked "INVOICE."

Speeding Up Cash Flow - Invoice Timing

Tue, 27 Dec 2011 17:43:00 GMT

If incorrect or untimely invoices are sent, it has a negative impact on a company's cash flow. Incorrect invoicing is the biggest reason customers do not pay on a timely basis, so distributing correct invoices helps improve your company's cash flow.

To obtain cash, companies must send invoices quickly and accurately. Invoice as soon as the work is complete. Ensure all documentation is collected and organized before an invoice is issued. The invoice process should begin as soon as the work order is fulfilled.

A contract or sales agreement may specify payment terms, such as when the invoice will be sent and when it is expected to be paid. Otherwise, a sale is considered to occur when a product's title of ownership is transferred to the customer or delivery of services to the customer is completed. If a company's financial records are maintained in accordance with Generally Accepted Accounting Principles (GAAP), sales are recorded once a service or product is delivered. So, invoicing should occur at - or as soon as possible after - this point.

A transaction is considered earned and revenue may be recognized when the following four conditions are met:

There is persuasive evidence that an arrangement exists, such as a contract, sales agreement or purchase order.
The fee charged is fixed or determinable.
The delivery or performance has occurred.
Collectability is reasonably assured.

Sound Credit Policy Means Better Cash Flow

Wed, 02 Nov 2011 19:42:00 GMT

To be sure your company has a sound credit policy, there are a number of steps you can take. First, you should have written credit policies and a well-defined document for credit agreements and credit applications. Contracts, invoices and follow-up letters should be clear and policy manuals should outline the guidelines for assessing credit risks. Methods for collections should be clarified for the customer and timetables for collections should be properly spelled out. As a backup, you should have a creditors’ rights attorney available and your company should also have an established relationship with an ethical, bonded collection agency. Finally, as a last resort, there should be well defined criteria for making decisions about when to further pursue or write off a delinquent account. Taking steps to be thorough will optimize the credit relationship with your customers and improve your chances of being paid in a timely fashion.

Credit Crunch - The continuing saga...

Mon, 24 Oct 2011 18:57:00 GMT

Credit crunch, part two? The latest data from the Federal Reserve show that banks are tightening their standards for loans to companies with less than $50 million in annual revenue, even as loan demand is ticking up. The good news: Plenty of small banks, asset-based lenders and factors are still willing to deal. But all that could change fast if the European debt crisis worsens (and spreads) and the U.S. economy continues to limp along. Our advice to capital-hungry entrepreneurs: Get it while it’s still lukewarm.