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View From The Other Side

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WRCC - Dealing with a Changing Debtor

WRCC - Dealing with a Changing Debtor

Published in: Economy & Finance, Technology

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  • 1. View from the Other Side Alfred Artis VP Finance The Sharper Image
  • 2. Agenda
    • Genesis of this topic
    • Change versus Decline
    • What it takes to know the difference
    • What the vendor knows that you don’t know
    • Questions Credit Managers should ask themselves
    • Questions Credit Managers should ask the customer
    • Actual Questions and Comments from Credit Professionals
  • 3. Why this Topic?
    • Experience as a Credit Professional who constantly ponders the role of the Credit Professional
    • Learnings from being a Banker
    • Current real-time experience
    • Perfect alignment with other topics in this Conference
    • Jodi allowed me to change topics!
  • 4. Change versus Decline
    • Change: Decisions and actions made and taken by management that yield financial results different from prior periods
    • Examples: Selling strategy, product mix, staffing, IT platform, executive changes, M&A, payment policies
    • Note: Change is not a guarantee of success or failure. It is the impetus to review the situation, not make a final decision.
  • 5. Change versus Decline
    • Irreversible Decline: Negative revenue, profit, or liquidity that was caused by change or inaction and that cannot be reversed due to lack of liquidity
    • Example: Revenue decline due to loss of customer base, margin decline due to competition, failed acquisition, overspending on wrong inventory or capital assets
  • 6. Change versus Decline
    • Reversible Decline: Negative results that left the company with enough cash or financing to continue operations for another fiscal year
    • Note: This is Alfred’s definition (patent pending)
    • The key for the credit professional is to assess change versus decline accurately…
  • 7. What Credit Professionals Need to Know—a Debtor’s view
    • The origin of the change in results from prior period, even if the results are good
    • Whether Management knows if the company is undergoing change or a decline (I can’t stress this enough!)
    • Management’s plan
    • Real-time balance sheet information
    • plus…
  • 8. What Credit Professionals Need to Know—a Debtor’s view
    • The debtor’s access to capital—in real, verifiable dollars and not hopes and dreams; no cash and no access means no reversal
    • How long the debtor can last—not a simple cash burn test, but cash burn plus access as defined above
    • Note: I personally guarantee that you will always make the wrong decision if you do not consider the above bullets. Why?
  • 9. What the Customer Knows that You don’t Know
    • The set-in of change long before you do
    • Conditions under which change becomes irreversible decline—this is the key to all risk analysis
    • Its realistic access to capital
    • Its own payment priorities—you will be surprised at how high up the priority chain a vendor can be
  • 10. What the Customer Knows that You don’t Know
    • How he or she assesses your behavior and collections patterns: supportive or harmful
    • Whether your questions are germane to the situation
    • Whether he or she intends to do business with you in the future—this can be driven by behavior and collections patterns
    • The complete list of supportive and harmful vendors
    • So what is the Credit Professional to do? Ask a bunch of questions first…
  • 11. Questions Credit Professionals Should Ask Themselves
    • Am I here to avoid risk or manage risk?
    • Do I even want to know whether my customer is undergoing change or decline? Refreshingly, some creditors don’t want to know, and they are still supportive.
    • Am I willing to take the time to try to understand the situation?
    • and…
  • 12. Questions Credit Professionals Should Ask Themselves
    • Do I want this company to want to do business with me in the future if their situation is undergoing change and not decline?
    • Do I have an exit strategy?
    • What information do I need in order to make my decision? Note: If all the information you need is on a message board, then please proceed to the “Cash In Advance as a Credit Tool” session.
    • But where do I go to get the information?
  • 13. Questions Credit Managers Should Ask the Customer
    • May we enter into a Confidentiality Agreement? This opens up a world of information to you, but don’t ask for it if you have already made up your mind. All questions that follow can only truly be answered under confidentiality.
    • Why shouldn’t I be concerned about the information in front of me?
    • What is your Plan B?
    • plus…
  • 14. Questions Credit Managers Should Ask the Customer
    • What is your current liquidity situation?
    • Are you in compliance with your debt agreement?
    • What is your current A/P aging profile?
    • Am I an important vendor to you?
    • Is there anything you want to propose?
  • 15. Actual Credit comments and questions
    • I placed you on credit hold because I heard you are filing bankruptcy in three weeks.
    • Yes, I agree that you have never paid late and that you presently owe us nothing, but you could go out of business.
    • My credit insurer won’t let me extend credit to you.
    • Wait, there’s more…
  • 16. Actual Credit comments and questions
    • I will give you a credit line if you wire me the payment when the order is ready to ship.
    • I will extend you credit if you issue me a standby letter of credit.
    • I called to talk to you, but my mind is already made up.
    • And more…but that make sense…
  • 17. Actual Credit comments and questions
    • I believe the risk situation has changed, so I want to see if you can stretch out your orders.
    • Can we review your inventory levels before we release more orders?
    • This recent press release concerns me. Can someone help me understand how this is going to affect your company?
    • plus…
  • 18. Actual Credit comments and questions
    • How about if we keep terms on all existing orders, but go cash-in-advance on new orders?
    • I believe I understand your situation, but our risk appetite is not there, so we respectfully ask for some type of credit support.
    • If you can bring your account current now, then it will show me that you have liquidity and we can keep the terms.
    • Do you have a payment plan that you want to propose?
    • And the #1 best question/answer-to-its-own-question combo of all time…
  • 19. Actual Credit comments and questions
    • Am I going to get paid? If you are telling me that we are going to get paid, then I don’t have a problem.
  • 20. Conclusion
    • A change in results does not mean irreversible decline. Knowing the difference is what distinguishes the credit professional from the stereotype of a non-thinking, negative-attitude employee who does not support the growth goals of the company.
    • Credit professionals who ask the right questions of themselves and of the customer always get good results.
    • Two-way communication is the key if creditors honestly want to work with vendors undergoing change. Go under NDA!
    • Now, let’s talk…

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