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The Problem with Slow Paying Government Clients
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Monday, April 19, 2010
Topic:Cash
Management
Reference: Eckblad, Marshall. "When
States Can't Pay, Small Employers Face Cash Drought." The Wall Street
Journal, Small Business:
February 9,
2010. Http://online.wsj.com.
During the worst of the
financial meltdown,
those companies with a good base of government business have enjoyed a
safe harbor
from the storm of the commercial markets. Governments have continued to
consume
during the recession and have continued to pay their obligations on
time. Those
focused on government business in sectors like IT, military services,
and
transportation have done quite well during the downturn. However, with
the
federal deficit escalating and state treasuries in dire straits the safe
harbor
of government business is closing.
Monday, April 19, 2010
Topic: Cash Management
Reference: Eckblad, Marshall. "When
States Can't Pay, Small Employers Face Cash Drought." The Wall Street
Journal, Small Business: February 9,
2010. Http://online.wsj.com.
During the worst of the financial meltdown,
those companies with a good base of government business have enjoyed a safe harbor
from the storm of the commercial markets. Governments have continued to consume
during the recession and have continued to pay their obligations on time. Those
focused on government business in sectors like IT, military services, and
transportation have done quite well during the downturn. However, with the
federal deficit escalating and state treasuries in dire straits the safe harbor
of government business is closing. Governments are starting to cut back
drastically to close budget deficits and are even starting to mandate layoffs.
Governments are also starting to pay at a much slower rate, with receivables
now running well beyond 60-90 days. A real concern is that the private sector
has yet to recover and create new job, wage, and requirements growth. Without
private sector momentum, small firms may be facing a severe cash crunch in the
coming months. That means that more aggressive steps have to be taken in order
to manage your cash position. The referenced article supports that advice,
where the commentator suggests landing cash from banks and using factoring as
an alternative. "Factoring costs about 2% to 6% of the outstanding invoice
per month, according to the International Factoring Association. Because
factors lend against receivables, the borrowers credit typically isn't a
factor." However, as factors have to wait longer to get their money, the
rates go up. Also, banks don't lend to companies with bad credit. Part of the
current cash crunch is the result of not enough bank lending taking place and
not enough business being generated to change the momentum of the business
cycle. Slow paying government clients make this difficult situation worse.
"Government payment delays are "having a devastating effect on the
economy," said Illinois State Sen. Dan Kotowski (D-Chicago). Kotowski said
Illinois's ability to pay those bills could affect up to 200,000 jobs
throughout the state.” So what do you do if you are in this situation? I can
think of at least three quick things to help. Try to boost your line of credit
in advance of a noticeable delay in your receivables. If you wait too long
banks may shy away from lending you more cash. Try to build up customers in
other channels, whose cashflow concerns are less daunting. This is not that
easy in this market and also requires an early start. I'd also suggest trying
to arrange better terms with your non-payroll payables such as rent, business
services, and credit cards used for travel. These things can help take some of
the pressure off of your cashflow during a season of really slow paying
customers.
