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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.
