Eddie Pacey, credit management expert, explains why it is key to help prevent, and recover from, financial difficulties, using a real life case study
Is credit management just about finance? Or something more?
“Credit Management is not just about mundane finance responsibilities of cash, dispute resolution and risk mitigation. Certainly, in the world I occupied it extended its boundaries well beyond this into a service designed to create, expand, secure and support business opportunity and profit.
This meant getting out and about and meeting business owners and directors regularly as part of an ongoing business relationship or when a situation demanded it. This ensured a far more solid and entrenched relationship, one that was certainly more knowledgeable, flexible and workable when circumstances warranted support of any kind.”
What happens when a business is on the brink? A real case study
“This point is best demonstrated anecdotally from an actual case book, one of many experienced over the years I spent working in Distribution.
I was watching TV late one Saturday evening when I received a call from a known contact who worked at the time with a firm of insolvency practitioners in North London. Without giving me any names, he asked me to meet a Company Director in his offices on Sunday morning with a view to helping him out. He was aware I had worked a number of prior special arrangements which avoided formal insolvency processes and felt there was a chance with this one too.
I met with the Director; someone I knew extremely well as I had been meeting with him and fellow directors at regular intervals for some years and more frequently in recent times as financial performance had been a concern and our credit support was at risk and reducing. This was a good-sized Company in the South West, which had already gone through one management buyout.”
Cash flow was the problem. Could this business work its way out of difficulties without needing a formal insolvency procedure?
“Essentially, the problem was cash flow. They did not have sufficient cash to pay their principal suppliers at month end (us included) but felt given time to re-finance and get a grip of costs, they would be able to work their way out of the current difficulty. I had no real problem understanding this as so often in meetings with directors (the last held just one month earlier) I had referred to spiralling costs, particularly in consulting fees paid, when revenue generated by this group had shown significant decline over some months.”
What role does financial insight play in the road to recovery?
“As is always the case, knowledge is key and getting the right number of fellow Suppliers on board to work an informal but managed support programme is crucial to success, so I agreed to approach just three other principal suppliers. It helped to know the underlying business was actually profitable and sound, salary costs had simply been allowed to drift off course and a downturn in business and limited financing arrangements created a squeeze that could kill the business off.”
How did a training session foreshadow a rescue plan?
“Events were in some way timed brilliantly as in delivering a training programme to fellow credit managers some five months earlier using precisely this company’s financial statements (without giving an indication of the name or location), I had shown how this business had slipped on controls and costs but was nonetheless nicely profitable. Stripping out costs, re-arranging finances and moving loan commitments made this a good business to acquire.”
What did the turnaround programme involve?
“Thankfully, chosen principal Suppliers agreed to co-operate given information held and of course debt levels, whilst ongoing support needed in supply proved equally persuasive.
For almost a year, the Company furnished interim monthly management accounts and cash flow statements at agreed monthly meetings at a riverside hotel located in Surrey. The turnaround deal involved the Company cutting costs, re-arranging short- and long-term debt commitments and provision of accurate and timely financial information and cash flow forecasts that would be monitored for accuracy as support moved along.
Chosen Supplier partners accepted slower payment of existing debt and payment on agreed fresh terms for new supplies. The arrangement worked extremely well without impacting insured credit lines or allowing the deferred debt to age significantly beyond 90+days and with some two months to conclusion, the company was acquired by private equity partners who asked that we continue the support until the agreed closure.”
What was the outcome? Did the business survive?
“The investor had clearly seen the underlying value of this business much as I had before and promptly set about the process of turnaround and onward sale, something they achieved some 18 months later.
We could all have said no of course but that would have been like shooting ourselves in the foot. The support programme over time did not simply prevent bad debt, it gave rise to significant onward sales volumes and profit and an even stronger bonded relationship thereafter.”
Why early action and collaboration matter
“This is a real tangible value-add that Credit Management can provide, given empowerment, experience, the correct approach and timing.
The message to Businesses is really quite simple – should you be facing difficulty, with insolvency looming, the sooner you speak to people that could help the better. Ensure your relationship with principal suppliers is one firmly rooted in understanding, co-operation and collaboration. For a supplier the message is equally strong; a client correctly supported results in business continuity.
(*Eddie Pacey is a long time friend and Associate of Antony Batty & Company and has over 35 years of experience in Credit Management and helping businesses avoid insolvency)
