E-Business Practices Blog

In additional to cartooning, I’m also a stay-at-home dad to my two young children. This means I read a lot of children’s books. In fact, I read so many that I can rattle off rather lengthy impromptu Seuss-like verse on almost any subject. (Fun at parties!)

Mother Goose is especially great for cartoon inspiration because it’s something that everyone gets right away. You just have to say “Hey diddle diddle,” and not only does everyone fill in the rest, but you get great images of superpowered bovine and anthropomorphic flatware to play with.

So often when I’m reading to the kids, I’m on the lookout for cartoon ideas. The above cartoon came from one Mother Goose marathon where, for whatever reason, “great fall” suggested the season instead of an action to me, and the above cartoon was born.

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About the Author: Mark Anderson’s cartoons appear in publications including The Wall Street Journal and Harvard Business Review. Anderson is the creator of the popular cartoon website, Andertoons.com, where he licenses his cartoons for presentations, newsletters and other projects. He blogs at Andertoons blog.

From Small Business Trends

Fall Business Forecast

Some businesses try to encourage early payments from customers by offering what are known as trade terms.  Typical trade terms might be 1/10/30.  Those terms mean that the buyer gets a 1% discount if paying within 10 days, and the balance is due in 30 days from the date of the invoice.

Sounds simple enough, right?

But I wanted to know if trade terms work in the real world, especially from the point of view of the company extending the trade terms.  So I asked John Mariotti, President and CEO of the Enterprise Group and formerly the CEO of Huffy Bicycles.  He’s had a lot of commerce experience, both as buyer and vendor.  Here’s what he had to say:

Question:  Why do vendors offer early payment discounts?

Mariotti: There are five reasons the vendor would be willing to offer a discount to encourage early payment:

• Companies want their money.  It sounds simplistic — but isn’t.  Getting paid early is important in business.
• They want their money ahead of other people.  The buyer may not have enough money to go around.
• The longer it takes, the greater the risk that something happens and you don’t ever get your money.  The earlier you get paid, the less risk.
• It helps you from the perspective of working capital.  The more money you have in hand, the less need to find working capital from other sources.
• It lowers your costs of borrowing and can even substitute for loans.  The more money you get in hand, the less you have to borrow. This is important in times when it’s hard to borrow money or interest rates are high.

Question:  Is there ever a downside to offering discounts for early payment?

Mariotti: Yes.  Consider:

(1) Discounts cost you money.  Again, it sounds obvious — but discounts add up. A 1% discount for monthly invoices amounts to 12% interest a year.  A 2% discount, as some companies offer, would amount to 24% interest.

(2) Look out for the “double whammy.”  If you are having trouble getting a buyer to agree to a price increase, you might attempt to negotiate by offsetting the increase with an early payment discount. But the customer may squeeze you over price AND expect the discount — and still pay you later.

Question:  Are there any other advantages to offering early payment discounts?

Mariotti: Sometimes those who plan to sell their companies will offer early payment discounts to help reduce their DSO (days sales outstanding) number.  This could make the company appear more attractive to acquirors.

Question:  Now for the big question:  do early payment discounts actually work?

Mariotti: In my experience, many customers take the discount and still pay later.

If that happens, you may not be able to do much about it.  You can call them and try to jog the payment.  Penalties usually don’t work. You can try to charge the customer back to recover the discount, but then it becomes a confrontational negotiation and usually the penalty gets negotiated away in the end.

I’ve had the best response by going back to the buyer and saying “That wasn’t the deal we made. We’d like you to honor the deal you made.”  Sometimes that has an impact.

If you must go back to enforce the terms, the way to do it is to call and talk to a human being.  The second best approach is an email to someone you’ve previously spoken with, requesting them to intercede on your behalf.

Question:  What would you advise a small business?  Should they ask for early payment trade terms?

Mariotti: First I’d assess the situation. What is the prevailing practice in your industry?  Are competitors offering discounts?  Do customers expect a discount or not?

If you discover that a discount is expected, then a modest discount of 1% makes sense in most industries.

Some customers normally pay late –- so by offering an early payment discount you also are raising the issue of the time value of money up front.   And that’s a valid issue.

If the prevailing terms in your industry are to pay in 30 to 45 days, be sure to build that into your plans. Sometimes you build it into a price negotiation. You say, “Instead of charging an 8% increase, I’ll knock that down to a 6% increase and also offer you a 1% discount if you pay early.”

And always document the terms, even if just in an email exchange. If there’s a change in personnel at the other company, that documentation will be needed.

Question:  Is a discount of 10 days realistic?

Mariotti: 10-day discounts are usually not going to happen, unless the buyer has electronic funds transfer capabilities. The practical aspects of cutting checks and mailing them makes a payment in 10 days unrealistic.  Consider 15 days instead.

Question:  What about the situation where a small business is selling to a large corporation? Would you offer a discount?

Mariotti: No.  If I were selling to WalMart, my pitch would be, “WalMart, you can borrow money cheaper than my company — why don’t we just agree on 15-day terms and I’ll reflect that in my pricing?  Otherwise, I have to borrow at a higher rate than you – and also reflect that in my pricing.”

Most large corporations are good for payment.  Don’t waste your cash discounts on the highly solvent companies, but rather on the companies you’re nervous about.

Question:  You’ve given a lot of advice.  What points would you like to close with?

Mariotti: I’d like to emphasize 3 points above all:

• It is always good to get your money sooner.
• In case of noncompliance, fall back on the ethics:  “That’s the deal we made.”
• Beware of the double whammy, which is where the customer takes the discount and you still don’t get paid any sooner.

Thank you, John Mariotti.

Editor’s note:  this article was originally published at the OPEN Forum.

From Small Business Trends

The Straight Skinny on When to Offer Early Payment Discounts

The early take on the FDIC’s proposed guidelines for buying failed banks is that they are much stricter than some had expected. In the few hours since they were released Thursday, billionaire Wilbur Ross has already called the guidelines “harsh and discriminatory.”

Here are three likely sticking points for the private-equity investors that the FDIC ultimately hopes will buy some of the failed banks the agency has seized:

1) The FDIC would require a bank bought by private-equity investors to maintain a 15% Tier One leverage ratio, a measure of a bank’s ability to withstand loan losses, for three years. That seems high considering that a newly constituted bank is required to keep a ratio of just 8%, according Chip MacDonald, a partner at Jones Day. The FDIC wants to ensure that a recapitalized bank has adequate capital in case it runs into problems, but private investors might find that the 15% ratio would cut too deeply into their expected returns.

2) A private-equity owner cannot sell a bank for at least three years after the purchase. By comparison, the holding period for the investment team that recently bought BankUnited was 18 months, said Jeff Berman, a partner in the M&A practice at Clifford Chance. Private investors are likely to chafe at this requirement because it would prevent them from “flipping” their stake in the bank were the market to recover before the three years were up.

3) A so-called Cross Guarantee requirement will be another likely source of tension, though banking lawyers say it isn’t entirely clear how the proposed rule will be applied. It appears that if a recapitalized bank should fail, a private investor would be required to backstop the losses at one bank with his investments in another bank (that is the cross in the cross guarantee). Bank-holding companies are required to provide cross guarantees between different banks owned by the holding company. Private-equity investors are likely to balk if the FDIC rule requires them to put up their individual stakes in one bank as a guarantee for another bank.

It is possible the FDIC is merely testing the waters and will dial back the guidelines somewhat after the public has had time to comment on the proposal. “We are trying to find the best way to have a balanced approach, and we look forward to comments that can help us accomplish that,” FDIC Chairman Sheila Bair said in a statement.

Her inbox is probably going to get very full in the next few weeks.

Wall Street is bouncing back thanks to growth in its bread-and-butter businesses such as fixed-income trading. And what does that mean? That lofty pay packages may be set for a comeback as well. As The Wall Street Journal reports:

Based on analysts’ earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm’s $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007, according to analyst estimates reviewed by The Wall Street Journal.

Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year, analysts predict. On a per-employee basis, payouts are expected to exceed last year’s average of $262,000.

This news is hardly a surprise. Citigroup and Bank of America have been signaling that they are planning to raise salaries to retain top talent, trying to skirt the backlash against large bonuses.

All this highlights that as business returns and competition for top talent ratchets up, the “new” Wall Street is returning to its old ways.

Click here for a closer look at the WSJ’s graphic comparing the compensation and benefits per employee at Goldman Sachs and Morgan Stanley since 2006.

The second quarter brought record revenue to Wall Street.

Equity underwriting surged. High-yield bond issuance jumped. Even the IPO market showed signs of life after months of being on life support. But the mergers-and-acquisitions advisory business? Not so much. And few deal makers are ready to say the cycle has bottomed out.

Here is a look at the first half of the year in M&A by the numbers ():

$144 billion
U.S. deal volume in the second quarter. Excluding 2008’s fourth quarter, the worst quarter since the third quarter of 2003.