Notes for an Entrepreneur - Collecting your dues Part 2

Aakash Rungta wrote in his comment to the first post on Collecting that it is very difficult not to give a line of credit to customers and to pay the bank on time.

I have admitted in the post that it is indeed difficult to collect on time. But there are measures an entrepreneur can take to ensure survival. My own algorithm is to not do business with owner run companies, where the Lala-ji needs to sign your cheque. In these companies, usually SMEs, the owner has a direct benefit in not paying you on time or not paying you fully. We have often heard stories in this country about the price being re-negotiated after the job was done. The amount not paid to you is a direct addition to the bottom line of the person who signs the cheque.

I decided a long long time ago to work only with large professionally managed companies where the accounts department clerk who prepares the cheque and the manager who signs it has no personal benefit in delaying your payments. My personal experience in working with MNCs has been superb. Payments come in on time without the need to follow up on them.

With this rule, one can steer clear of needing a credit line from a bank. In the interest of transparency, I need to mention here that there have been clients who have not paid me on time, and in one case, not paid me at all. But then, in these cases I had broken my own second rule: I was doing business with companies with very poor gross margins. It did not help that the promoter of one of these client companies was a flamboyant playboy who has been selling the family silver to finance his lifestyle.

It is quite straight forward then, steer clear of doing business with client companies that have poor margins or poor cash-flows and if you have to work with owner run companies - work only after you have been paid.