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Cash from Customers

Posted on Oct 12, 2011 by Sandy Finlayson  |

The following link may go some way towards explaining why last week’s Economist ran a leading article on the Eurozone crisis under the heading “Be Afraid”www.bloomberg.com  If European Governments are now having to write IOUs to pay their creditors we really do have a problem.  It reminded me of a slightly surreal conversation with a client at the top of the dotcom boom.  Those of us who have been around long enough will remember the “new paradigm” when conventional wisdom went out the window and all that seemed to matter was the number of eye balls (to hit a website).  The conversation went something like this:-

Client – Sandy, do you know that you can get cash from customers?

Sandy – Nonsense, you are just trying to pull my leg!

Client – That’s not all.  If you give them what they want, they will give you more money!

Sandy – Nonsense, now you are really trying to wind me up.

Client – And I’ll tell you another thing.  They don’t want shares for the money!

While we conducted this conversation “tongue in cheek” it illustrated the euphoric madness of the times.  Nowadays I spend most of my time talking to people about their business models and financial strategy and become ever more aware of the importance of designing business models which optimise cashflow at the earliest possible date.  Much can be achieved with skilful contract negotiation, for example:-

  • · It is often possible to negotiate mobilisation payment and interim payments for contracts which have a significant up-front cost.  This is particularly important when contracting internationally when collection may be difficult;
  • · Customers may be willing to finance the development of new technology in exchange for some period of exclusivity and/or preferred payment terms for the developed product.  However, care should be taken not to enter into contracts which may provide a short-term cash-flow benefit but ultimately compromise the long-term capital value of the business;
  • · Suppliers may be willing to offer extended credit terms in order to secure a viable contract;
  • · Customers may be willing to supply materials in order to minimise the cost of financing a contract;
  • · In some cases escrow payments may be appropriate but the customer is not fully exposed until the contract is fulfilled;
  • · The contract may be broken into different “work parcels” so that the liability for payment of one work parcel is clear, even if there is a dispute over another element;
  • · Customers may be willing to offer preferred payment terms in exchange for creative ways of driving down costs.

These are just a few examples of the kind of commercial issue which might be raised during a commercial negotiation.   As access to Bank finance continues to be a major issue for many businesses, it is more important than ever that they are fully aware of the ways in which they can help to improve their cash-flow and make their businesses self-financing by improving their contract terms.

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