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Chapter 3
Men Are Cheaper Than Guns


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Intellectual Capital And Bootstrapping


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Accounts Receivable, Inventory, and .Com Recession

As many .coms continue their .death, other companies are pulled into the suffering. Cisco Systems, a solid business and maker of networking routers and other hardware, is facing a couple of billion dollars in inventory write-offs—gadgets that dying .coms won’t be needing anymore.

Many companies which have extended credit to .coms are finding their calls unanswered as the .coms struggle to find the money needed to remain in business or seek some other company to acquire them before the .com must file for bankruptcy.

At the same time, surprisingly, one Java programming company reports no slow down at all. Why? They weren’t selling their services to new .com companies which were untested. Their target market consisted of the solid, established businesses which have been profitable and have been around for quite some time. It just goes to show that you should, sometimes, choose your clients carefully.

Yet, all this suffering is good. A while ago I read about this Russian guy who had tremendous recall. He could mix-up six decks of playing cards. He’d just glance at the face of the card and put it face down on the table. Then, he'd glance at the next card and add it to his stack until he had gone through the entire deck.

He could then tell what the exact sequence of cards was from memory. This is not easy. Try it! After a few cards most people can’t do it. Or, the same guy could walk down a street and later tell you every detail of the street.

Well, the guy considered himself destined for greatness because of his mental prowess. He thought he’d be a great leader or scientist or something. He never amounted to much. He wound up spending his whole life working for a circus showing off his memory.

It turns out that brilliance in thought has more to do with what you leave out rather than what you retain. People with tremendous recall sometimes lack the ability to abstract ideas, to generalize. The Russian guy simply never understood that most every detail of the street he walked down was irrelevant to his life. The order of the cards isn't worth remembering. Most of us learn early on that most things are insignificant to our personal lives and can be ignored. We learn not to pay attention.

We do pay attention to what effects us emotionally. This is why experience in business is so crucial. You can read a dozen articles about the best business practices of just-in-time inventory management or about the need to aggressively collect your delinquent accounts receivable. But until you wind up with much excess inventory in your warehouse or some substantial bad debts, you probably won't really pay attention. Each recession offers business owners the opportunity to learn through suffering.

Let's consider accounts receivable. Most businesses extend credit to their customers. They provide products and services to companies or individuals. And, they expect to get paid sometime after delivering the goods. But, unfortunately, some customers don't pay.

The most important aspect of accounts receivable is to follow a set routine. Bill customers as soon as possible after delivering your service or product. And, follow up promptly on delinquent accounts. Studies have shown that the longer you wait to collect a delinquent account, the less likely you are to collect the account ever. You probably don't want to continue to ship product to a customer who isn't paying you.

Once in a while, you'll read a story about a company which carried another company in its time of difficulty and continued to provide services and products despite not being paid. This is always given as an example of "nice guys finish first."

The usual ending of this story is that the struggling company survived and remained a loyal customer of the company which stood by it. All past debts are paid. Unfortunately, you won't read about the dozens of similar companies which adopted the same generous attitude and had to write-off massive bad debts. You won't hear about the generous companies which themselves were driven into bankruptcy because their customers had no intention of paying them.

Just as you have a set routine in billing and collection, it's also important to adopt some general guidelines to help your company decide which customers will receive sales on credit. You must decide what information will be demanded before you extend credit. If you sell to companies and your product or service is expensive, you might want to run a credit check on the potential buyer using Dunn and Bradstreet or another reputable credit reporting company.

What are the signs that a debt is unlikely to be paid? First, be wary whenever a debtor agrees to pay, but then misses the payment deadline. The old "The check's in the mail" is a poor attempt to buy a week or two of time. Then, when the check doesn't arrive, it will usually be attributed to having been "lost in the mail." Of course, the USPS delivers billions of pieces of mail and loses very few.

Of course, the debtor feels really confused that your check hasn't arrived. But, he wishes to make good. He'll get out another check next Monday. He'd get it out today, but the Chief Financial Officer is out until Monday, and he's the only person capable of signing checks. Oh, oh!

Eventually, the debtor runs out of ideas explaining why you haven't been paid or realizes you've exceeded your tolerance for listening to them. While the USPS might have lost one check, what is the probability they've lost two of your checks? Repeated delays and broken promises to pay mean that the debtor is intentionally avoiding payment. Often, at this point, you won't be able to reach the debtor at all. He's on vacation with the Chief Financial Officer now.

When communication breaks down with a company which owes your business money, you really have no choice but to hand the account over to a collection agency. Collection attorneys are best of all, because they sue. However, unless the overdue account is worth several thousands of dollars, a good collection attorney won't find it worth her time. Expect to pay at least 30% of what is recovered.

In the case of .coms, you're probably not the only one not being paid. They probably owe a bundle of money to many people. In this case, a bankruptcy may be their only option. In the event of bankruptcy, you must try to collect via the bankruptcy courts. You can't pursue independent paths of collection against the company.

If a company owes many creditors much money, you can petition for involuntary bankruptcy for the company. The goal here is to prevent people close to the checkbooks from siphoning off what little capital remains within the company for their own use before the company closes its doors permanently. This is a serious option and should not be undertaken lightly.

Surprisingly enough, in rare cases, you may find that some of the money siphoned off went to you, the creditor! Suppose you changed your terms of business with a company which then enters bankruptcy. You would only ship your products upon prepayment until the delinquent account situation, which you let slide for too long, was rectified.

To continue operations, the company does prepay you. The bankruptcy courts might rule that payments to you before the bankruptcy were "preferential payments." They will request that you repay the money so that it can be paid to other creditors! This is another reason to adhere to rigid collection schedules. That way all payments made to you are in the normal course of your business.

Inventory is like accounts receivable in that, even though it is carried as an asset, its value is always subject to rapid devaluation. Knowledgeable investors always examine a company's inventory and accounts receivable. If either is increasing much more rapidly than sales, investors fear the inventory isn't selling and will need to be written-off or accounts receivable aren't collectable and will eventually be written-off.

If it wouldn't be for recessions and shakeouts, many companies wouldn't have adequate inventory management and collection policies. Business owners wouldn't remember the need to keep inventories lean or to aggressively collect accounts receivable.