How Doing 20th Century Business in the 21st Century can Destroy your Enterprise.
Once upon a time, it made sense for a company to deliver goods or perform services on loan. After all, payments were made by check, usually mailed, then received via mail, taken to the accounting office, matched to an invoice, placed into a bag of checks, driven to a bank, deposited, then took a week for the check to clear before the canceled check was then sent back to the business who wrote the check (with proof of deposit). When this was the only option for doing business, it made perfect sense to let the invoice amount accumulate, then pay one time per month. It saved everyone a lot of busy work in terms of paying bills and getting paid.
Here we are in 2019, and I still run into the ancient-minded business people who call for an expensive service, usually thousands of dollars worth of service, and then are appalled when I ask for payment at the time of commencement. In this day and age, utilizing net arrangements are tantamount to using a typewriter and mailing your message to your customers.
Here are just a few examples of how net arrangements have seriously impacted my business and the business of my colleagues over the years.
For many years, I was doing business with a government contractor – a military supplier. We guarded their secure locations twenty-four-hours a day in several locations around the world with armed security guards. We agreed to a Net 30 arrangement, which meant that we had to wait 30 days to send an invoice, then wait 30 days to get paid. In this case, we were always 60 days out of pocket – to the tune of $292,000. For several years, they paid every 30 days, which meant I was still carrying $146,000 of their debt at all times. Then, without notice in 2015, they sold their business and decided not to pay any of their vendors [who] were holding more than $1 million dollars in net arrangement debt. None of us ever recovered a dime.
This scenario has played out in front of me with many of my security consulting clients experiencing the same type of loss. Another business model that still uses this type of net arrangement are logistical companies and supply warehouses. I’ve seen companies fronting millions of dollars of merchandise for convenience stores, delis and even branded supermarkets, who at some point, close their doors, never to return and never to pay that money held by the creditor.
In these examples, one business becomes the creditor, assuming all of the risk and remaining in debt for the term of the business relationship, which usually ends with the creditor holding the bag and the debtor escaping the relationship with their pockets full of cash.
With online banking, credit cards, electronic funds transfers, and payment technology via mobile applications, the mere mention of a net arrangement should represent a red flag in 2019.
Contact the Author
Michael Evans
Chief Executive Officer
USPA International
