View From The Other Side


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WRCC - Dealing with a Changing Debtor

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View From The Other Side

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