Managing trade in turbulent times
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What shall we do as managers when we must operate in unstable times when the reassurance we desire is absent and the uncertainty of today promises an unpredictable tomorrow?"
Corporate management is living through the Chinese curse of 'may you live in interesting times' as they contemplate their exposure both directly and indirectly to the almost unprecedented turbulence in the global markets.
For the past few years the priority in most businesses was sales growth. Control on cash flow was a low priority. The value of trade credit was low, a habit rather than a need or a strategy. From the trade credit industry perspective the basics of trade credit and good cash control were ignored and the pain of business failure forgotten. Credit management is once again seen as a critical function. But what extra disciplines should credit managers apply in these turbulent times and how can the trade credit industry help in this response?
Many managers need to be much better at understanding their business drivers; the link of turnover to profits and then on to cash flow. The buoyant last few years has led to shallow business plans, backed up with little to show for in terms of strategy. Lenders in the past have been willing to rely on property values and pay less attention to the quality of the management and the business plan. This will reverse with an increased demand for clear business plans, from both suppliers and their debtors, in a time of increased uncertainty.
The banks are dealing with a significantly larger number of businesses that are under stress. A business under stress needs two things - time and money, but unfortunately banks have neither at present. Unilateral extension of payment terms is inevitable and is now happening.
Credit insurers are expecting significantly increased claims - and are cautious in providing cover in many sectors. Unilateral action by any creditor can cause a business to fail; the group recognized that suppliers, credit insurers or lenders can trigger a failure if they lose their nerve, thus leading to an increase in "industry watching". It is worth adding that one result of recent securitization and structured finance products is that the holders of large corporate debt are much more diverse, leading to difficulty in getting all creditors to agree restructuring plans.
We are moving from traditional collection issues into the much more complicated world of recovery and restructuring. Collection tactics work well when based on the assumption that the debtor won't pay but can. Now the credit manager faces a stark decision that may in the short term increase exposure or write off the relationship for good. Thus the focus is on the credit approval process more than the debt collection stage; it is already too late by then.
How businesses use the industry - lenders, insurers, credit reference agencies and recovery professionals - to help them with their credit strategy needs a clear understanding of what drives the service provider. The issue of trust in these times is a fundamental one. Few rely on "gentleman's agreement" at this time; and there is an inevitable growth in emotionally considering all industry professionals as "sharks"! A common sense approach is to realise that these businesses are there to make a profit too and most have long term reputations to protect.
The banks in particular have had a reputation of a firefighting response; they will be targeted to reduce exposure. The messages from the top will be simple - going out on a limb could be a career limiting move. However, because banks have themselves much weaker balance sheets, aggressive write downs of corporate debt appear to be avoided, giving, for now, a slightly longer opportunity for restructuring.
A strong message from the forum is that businesses will be funded and supported much more readily if there is a willingness to be open and with a clear plan. For credit managers, the more information they can obtain that supports a continuing trading relationship, the more willing the industry will be to continue support.
The standard signs of business stress don't change; and credit managers are familiar with most of them. Traditional indicators such as payment data, while clearly indicative of trouble if it deteriorates, often does not always show up before failure. Filed statutory accounts are virtually useless as a stand alone source of current financial performance. The best was a combination of payment data, balance sheet data and operational measures (e.g. footfall in a retail buyer) and any other softer market intelligence available.
Historical financial information certainly does not give a current picture, but understanding trends, especially in the balance sheet, gives a picture of how healthy a buyer is and how able they are to withstand a sustained downturn. Combining this with management accounts if you can get them, often gives a clearer indication of how long you would be comfortable trading on credit, allowing a review and monitoring process.
In the "softer" market intelligence field the more you understand your customers' drivers - footfall, commodity prices, new house builds (ouch!), pints of beer sold, rent review timings, the more you can anticipate trends. The more subtle warnings of restructurings can be a change of director or registered address. Often identifying these warning signs early allows you to be part of any rescheduling activities rather than be shut out. In addition, with a stretched credit management resource it makes sense to involve account owners in your organisation to help monitor these softer elements.
In addition, the wide range of excellent information products in the market can complement this intelligence base.
Maximize support from the trade credit industry. There is already evidence to show that credit departments are not immune from the need to cut costs. Indeed many departments and credit controllers are not well equipped to demonstrate the value they bring in the current climate. Reduced budgets mean fewer resources, a lower quality information provider or avoidance of insurance. This in turn could result in worse bad debt with a consequent cash shortfall or an avoidance of marginal sales opportunities.
Maximize support from the trade credit industry. There is already evidence to show that credit departments are not immune from the need to cut costs. Indeed many departments and credit controllers are not well equipped to demonstrate the value they bring in the current climate. Reduced budgets mean fewer resources, a lower quality information provider or avoidance of insurance. This in turn could result in worse bad debt with a consequent cash shortfall or an avoidance of marginal sales opportunities.
There is need for service providers to improve client relationships and demonstrate value or suffer the consequences in an increasingly cost conscious environment.
Credit is designed to ensure that customers can convert their purchases into cash. For the supplier, it enables a sale that would not have happened otherwise. Consequently, especially in these riskier times, it is worth keeping marginal sales and gross margins as the focus of the opportunity, and then weighs up the costs of internal resources and service providers against that. Of course invoice finance, credit insurance, advice and quality credit information costs money, but marginal profit will nearly always outweigh that. The credit manager is not alone and the trade credit industry is ready to help.
12 Feb 2009 19:51
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