Casual With Receivables, You May Land Up As A Casualty

Some companies' Achilles' heels are their accounts receivables, poor credit control or weak
administration of credit policy. These weaknesses can smoulder the companies of  their vital
lifeline - cash flow causing them to asphyxiate.

In the construction industry, it is common for many contractors to run into problems with the
receivables. Although the accounting practices allow for recognition of the profits from the
receivables before the money is collected as the progressive payment is due, these receivables
do not constitute cash flow. When the construction industry encountered doldrums a few years
ago, many small contractors folded up even though they had substantial amounts of receivables.
The problem arose out of non-payments by the main contractors, owners and developers.

In Singapore, the construction industry is going through a bad patch. Projects are often clinched
at a loss and quite often the receivables are not collectible. Also, in some contracts,the last
retention amount or progressive payment is not collectible as the owner will give excuses for non-
payments due to disputes. It ends up with protracted litigations which further drain the cash flow
of these contractors. The Singapore government is trying to improve the situation by enforcing
laws that government agencies and owners must promptly pay up the dues and not delay or drag
payments unnecessarily.

In China, the national triangular debt problem is prevalent. It is basically a problem of bad
receivables. Some 30% of the loans of China¡¯s four major banks are not being serviced by
borrowers. In addition, many so-called profitable companies have high receivables but most of
the money cannot be collected as the customers default on payments. The government had tried
to address this problem by transferring the bad loans to a special asset company for recovery.
The government had announced additional measures in April 2004 to cool down the overheated
economy.

The drivers of China's phenomenal economic growth have altered somewhat over the past twenty
years. In the initial years of the 1980s, the emphasis was on the reforms of the township and
state-owned enterprises (SOEs) reform to facilitate their adaptations to the market changes.
Towards the late 1980s, the central government alleviated the economic burden of the SOEs by
allowing them to tap the capital market for funds. These were done through share and bond
issues to workers. However, in the early 1990s, Vice Premier Zhu Ronji adopted the
macroeconomic control policies to curb the high inflation in China.  Such tight monetary policy
caused the further deterioration in the financial situation of the SOEs, particularly those which
had borrowed heavily from other SOEs or state-owned banks. Consequently, this worsened the
triangular debt problem, prompting the urgent need to reorganise the banking system in 1995.

During this period, the Beijing administration gave quotas to provinces to allow SOEs to go public.
To alleviate the pressures of minimising local unemployment and to fulfil the technical
requirement of three years of profits, the provincial governors were prompted to give the quota to
those inefficient SOEs which were in dire need of money instead of efficient SOEs. This is the
equivalence of throwing good money to chase after bad money. The flotation of shares of these
SOEs become a "bubble" problem which can explode at any time. Receivables were the
fundamental problem for the Chinese stateowned banks and the SOEs. The government should
have bitten the bullet, closed down these inefficient operations. However, they were allowed
to continue to operate for fear of creating unemployment and other social and political problems.
Thus the healthy companies were also dragged into the "triangular debt", the casualty of being
too casual with their receivables.

Oftentimes, debtors who are unable to pay may give the ruse that it is a principle over some
disagreements that cause them not to pay and not the money issue. However, you can be sure
that in most cases, the reason for not paying is always the money and not the principle. And
the principle for you to note is to collect the money first.

Therefore, making a sale is not enough. The seller has to make sure that the money can be
collected. You cannot pay your staff with receivables, you can only pay your staff with cash.