How to avoid misery and pitfalls of delayed cash

This year, in just three months, one large late payment combined with a bunch of other smaller late payments, to slash my weight.

We neared business failure after a decade of profitability — on payments promised as “a week” away for nearly three months. At the end, when the largest payment finally arrived, we were at the last door in keeping our lights on.

Yet it was an experience that has brought home just how challenged business in Kenya now is, in a climate of late payment that has deteriorated to the point of being an international extreme. Late payment here is now systemically and endemically worse than it is almost anywhere else in the world.

So how do we all survive and thrive in such waters?

My first insight is personal. For entrepreneurs and business owners need to take care of their own stress levels through this journey. It may be humorous afterwards to parade my loss of 5kgs, but economy-wide the pressure on businesses being wrought by payments that are delayed, delayed, and delayed, is so fraught that heart attacks, strokes, and even suicides are all possible consequences.

Indeed, one auctioneer, with his plot now overflowing with cars claimed by banks on defaults, cited late payments as both the main reason and particularly psychologically damaging, to the point his auction service was often now acting as counsellors to traumatised business people going down through not being paid for works and goods they had actually delivered.

The stress and helplessness cannot be underestimated in watching an entire business and life crash on those ever-receding payments, as owners then let down everyone around them, simply unable to pay their own bills. For this is the crossroads we have now reached in Kenya: for late payment is viral.

Every business afflicted by a late payment becomes, itself, a late payer, in a creeping economic disease that is now chronic and severe. Yet the first rescue recipe is to understand that it is better to be a smaller business with regular payments than a larger business that collapses on late payers.

So, spot them upfront. Any tendency to begin works without a contract, or an LPO, or without clear payment terms needs to be jettisoned. In our case, a nasty clause in the British contract of a company operating in Kenya was something we argued, but then signed, and it nearly took us out. The offending word: “normally”. They didn’t commit to payment in 30 days. They committed to payment “normally within 30 days”, without defining “normally”.

Almost anything can then be construed as abnormal, across their own losses, flu, holidays, lack of funds, bad will, claimed business uncertainties.

So, leave “normal’ alone. Get your documentation straight from the get go. Clear works, clear and fixed payment terms.

Then, ask around, most especially on new wonder contracts from big players – how did their accounts department treat others? Three bad reports of payment negligence, I call that a strike. They pay others late, they are going to pay you late. Do not touch.

For public companies, you can even check their track record in their full year accounts – look at trade payables under current liabilities on the Statement of Financial Position.
The accountants’ method is to take that figure and divide it by the full-year sales figure from the Income Statement.

Convert that proportion into days by multiplying it by 365.

It’s worth the sum. Some of our listed companies take an average of, say, 35 days to pay their suppliers. Others take over 120 days. You want to work for the 120-day payers, make sure you have four months of costs in the bank already!

READ: Companies face heavy penalties for delaying paying suppliers

Indeed, the fully safe way to take business in our illiquid economy is on pre-payment. If you move your business to prepayment, you will lose work. There will be clients who refuse. But you will also be alive and in business in 2019. So, for the toughest of the tough, just stop offering credit terms at all.

We have all of us seen our banking facilities evaporate. We used to have corporate overdrafts, it used to be possible to get business bank loans. We know we might as well whistle on that front now.

Even bridging finance from banks has largely dried up – the bank that gave credit on post-dated cheques, or those first banking moves into invoice factoring: all gone.

Between the interest rate cap, and how risky all we businesses have become in this cash-strapped business environment, the banks don’t want us.

But other financiers are emerging. Find one. Put in place a credit line before you take the work. And if you can’t, just do not take that job!

If you don’t do it, you won’t incur the costs of doing it. So be smaller, be cash-supported, and be safe.