Showing posts with label credit risk. Show all posts
Showing posts with label credit risk. Show all posts

Friday 15 August 2014

Is your customer worth a 90-day wait?

Although you could exercise your ‘walk-away’ rights, we all know that a customer representing 10%+ of your business is not easily replaced, especially in a flat-line environment…

The issue is whether you need to reduce the payment period to reduce exposure, i.e. the risk of a customer going bust, impact on cash-flow of an extended credit pipeline, or simply on principle i.e. a deeply-felt determination not to shoulder the working capital responsibilities of even your best customer..

If the issue is one of company principle, then the Board must be prepared to take the pain of de-listing, with the NAM simply becoming the messenger who hopefully survives the ‘walk-away’ trip…

Ordinary mortals need to focus on the cost of risk-reduction and minimising cash-flow impact…

The ‘on-time payment’ blind alley
Incidentally, forget the regulation/legislation re ‘on-time payment’. As you know, this simply states that the customer ‘must’ pay within the period agreed, be that 30, 45 or even 90 days. ‘On-time payment’ is not about paying within a defensible time-frame i.e. say 10 days for a daily-delivered product that is sold within 5 days of receipt…

In other words, if a supplier is not paid on transfer of value, i.e. when the goods are sold to consumers, then, by definition, the supplier is providing extra value in the form of interest-free credit, and this should be factored into the supplier-customer equation…

What to do about it?
Whilst you may not be successful in negotiating a reduction in payment terms, it may be possible to approach the problem in a different way i.e. via compensating concessions.

How to do it?
Having calculated the cost of financing the current credit period (NamCalc), say 65 days, vs. the cost of the ideal reduced period, say 30 days, then the 35 day difference will be the amount the supplier needs to recover from the relationship via a combination of additional low-cost, high value concessions from the buyer...

These could include ‘last-minute’ extra facings to fill unexpected gaps, temporary exclusivity, and ‘free’ use of space for in-store theatre-promos ( the mults have increasing issues with redundant space).

In order to be able to agree a fair exchange of a combination of these concessions for credit period, it is important for the NAM to be able to calculate or at least estimate the incremental sales that can result from the each initiative, never forgetting that every move creates a precedent…

The key idea is having the courage to put credit period in the middle of the table, quantify it from each party’s point-of-view, and explore different options with the buyer that may go some way towards re-balancing joint value..

Simply regarding credit-period as a fixed norm not only misses a negotiable trick, but also represents increasing risk in the current climate… 

Friday 19 April 2013

The Savvy Approach to Late Payments, Invoice-Haircuts and other power abuse..

A cross party Parliamentary inquiry into late payment will take place next week. The meeting, which will be chaired by Labour MP Debbie Abrahams, will examine just how serious the problem has become for SMEs, but will also look at other issues around poor payment practices, including so called ‘invoice haircutting’.

By way of background, NAMs may not be aware that the legislation is slowly catching up with reality in these matters, in that last month government regulations were updated to define 'late payments' (60+ days)  and impose interest  (Base +8% i.e. 8.5%). However, as always, these developments miss the basic point that unless the Government adopts the get-tough approach taken in other jurisdictions such as France, the measures will fail.

(To really protect SMEs you need to create a non-negotiable time limit for the payment of commercial debts. This is what happens in France, where failure to comply with the Commercial Code can result in criminal prosecution and heavy fines. An excellent article by Ben Gardner, a commercial law expert at Pinsent Masons develops this point in some detail)

The Savvy Consumer Approach
Given the fact that the savvy consumer may be beginning to appreciate that late payments, invoice hair-cuts and other power abuse like off-shore tax avoidance may be part-hindrances in their search for demonstrable value for money, it can only be hoped that any 'naming and shaming' will help to focus consumer pressure on companies that use trading partners' funds to supplement their cashflow and bottom-line.

The Savvy Supplier Approach
Without evidence, the law cannot act. However, whilst we are all aware of the commercial risk in whistle-blowing on a customer, the savvy supplier has to find 'safe' ways of making power-abuse known, hopefully  adding to the anecdotal 'evidence' that may heighten sensitivity to the issue for all parties and stakeholders..
Furthermore, repeated generic references to the increasing cost -and risk- of financing free supply-chain credit and its impact on retail prices may help when suppliers are communicating via mainstream and informal media.

The Savvy Retailer Approach
However, the real opportunity lies available for those retailers that, having run the numbers on the value of 90 days free credit, appreciate the commercial advantage of voluntarily reducing their payment period to a more equitable level, first...

What is 'fair payment'?
The current legislation, here and in France, refers to 60 days as being an appropriate period of credit.
However, whilst 60 days may be appropriate in 'normal'  B2B relationships, we believe that the payment period should be related to the supply-usage cycle. In other words, as many fast-selling SKUs are delivered daily, and food-based retailers hold an overall average of just over two weeks stocks, we would submit that 15 days credit (net) in the case of such supplier-retailer commercial relationships would be more appropriate.

Incidentally, for those NAMs that have a gap in store-visits near the Houses of Parliament next week, the all party inquiry into late payment takes place next Tuesday, April 23, at the Houses of Parliament’s Grimmond Room, Portcullis House, between 2 and 5pm.....

Tuesday 16 April 2013

Creditors pay £1bn for retail failures, enough said?

Creditors, such as suppliers and landlords, are likely to have lost more than £1bn from the retail sector's 20 biggest insolvencies since the start of last year, according to the credit information specialist Company Watch, just published in The Independent.

This figure obviously represents just the tip of the iceberg, in that many smaller retail business, often below the radar of suppliers have also gone bust over the same period, with the evidence available in the level of  boarded-up high street outlets.

But are we using the correct KPI?

Incremental sales as a measure of Threat or Opportunity
As we all operate sales-based business-models, our only access to wealth generation is via the net profit on sales made to third parties. This means that when we count the cost to us and the value to our business  partners, it is best to calculate the incremental sales of the sum given or received.

Thus the above loss of £1bn would translate into incremental sales of £10bn, assuming all suppliers had a net profit margin of 10%...a mean achievement for many, in the current climate.

Application to the role of the NAM
Apart from being responsible for the early warning when a customer is in difficulties (demands for more credit, cash–based incentive, lack of compliance….) the NAM is also the one who has to generate the incremental sales via other customers when the liquidator intervenes. (Can you imagine anyone else generating extra sales?)

A reflex-calc for NAMs?
For this reason it is vital that NAMs calculate their company net profit margin and factor in the resulting incremental sales requirement when ANY money is invested in a customer, whether via free credit, settlement discount, trade funding or deductions.

In other words if your company makes a net margin of 5%, you need incremental sales of £20k for every £1,000 invested in a customer… (£1,000/5) x 100, which needs to be  a reflex-calculation for every pound spent…

Incidentally, on the Opportunity side, your retail customer with a net margin of 2.5% needs to appreciate that every £1,000 you invest in their business represents incremental sales of £40k…more valuable than they think, in these uncertain times?

(For this reason we have added an automatic incremental-sales-multiplier for supplier and retailer to many of NamCalc’s 32 tools

Monday 15 April 2013

'Settlement fees' for early payment

Given that some retailers are offering suppliers earlier payment for a discount, it might be helpful to run the numbers and explore the financial impact on a supplier.
-  sales of £1.5m per annum to the retailer
-  current payment period                                 75 days, net
-  Discount for 21 days settlement                    5%

Customer now pays in 75 days
We want him to pay in 21 days
i.e. a  54-day reduction in payment period

Customer now pays 4.87 times per year i.e. 365/75          

We want him to pay 17.38 times per year i.e. 365/21              
Amount he owes us when paying in 75 days
= £1.5m/4.87 = £308,000
Amount he owes us when paying in 21 days
= £1.5m/17.38 = £86,306

 Cashflow saving = £308,000 -£86,306
    = £221,694
Settlement discount for 21 day payment
                                                                 = 5%   i.e.              (5% of £1.5m = £75k)
Cost of the 5% settlement            =  33.8%                (£75,000/221,694) x 100  
i.e. the supplier is paying 33.8% 'interest' on the cashflow saving

Monday 18 March 2013

Settlement discount - how to negotiate earlier payment

Given the news that HMV and Blockbuster 'owed £490m' to creditors when they collapsed after Christmas, it is important that suppliers attempt to reduce credit periods in unprecedented times. Calculating and explaining the financial benefits of an appropriate discount for earlier payment therefore becomes a required skill in the NAM role…

S:   Given our need for reduced exposure, coupled with your constant requests for lower cost prices, we may be able to help each other out…
B:   Agreed, but I don’t see the exposure on your side? We are one of your biggest customers…
S:   So was HMV in the home entertainments category, yet they went bust ‘overnight’ leaving suppliers to find incremental sales of £4.9bn to cover losses of £490m!
B:   ??
S:   Another time…let’s focus on our trade partnership. As you know our annual sales to you are £14m, and you pay us in 45 days net.
B:   Those are our standard arrangements for all suppliers
S:   Let’s just focus on you and I…. Given the global financial turmoil, our company would feel more comfortable with 25days credit, a reduction of 20 days, and we are prepared to pay to reduce that risk…
B:   How much?
S:   Great you find it interesting… Let me work you through the calculation…
B:   Convince me…
S:   At the moment you pay us 365/45 times a year, i.e. 8 times a year, meaning you owe us £1,7m at any time… (i.e. £14m/8 = £1.7m)
B:   So?
S:   We want you to pay us 365/25 times a year, i.e. 14.6 times a year, meaning you owe us £0.96m at any time…(i.e. £14m/14.6 = £0.96m), a reduction of 20 days
B:   We would need a big discount for 20 days…
S:   I thought the same, until I worked up the numbers.  Let me show you…
B:   I have another meeting in five minutes..
S:   Won’t take that long. At 45 days you owe us £1.7m, and at 25 days the amount you owe is £0.96m, a difference of £0.74m
B:   Like I said, I’m busy…
S:   Say the cost of borrowing is 9% interest per year, so the cost of borrowing £0.74m for a year is £0.067m
B:   Where is this heading?
S:   I am trying to show you how little you need off invoice to beat 9% interest on your money…
B:   OK, another minute…
S:   That £0.067m represents 0.5% of our annual sales to you i.e. £0.067/ £14.0m x 100 = 0.5%
B:   ??
S:   In other words, 0.5% off invoice is equivalent to an interest rate of 9% per annum on your money!
Buyer:             Run that by me again?
SuperNAM:    No problem, and I’ll leave you a couple of slides to talk it through with your finance guys…

Adventures of SuperNAM (17)

Wednesday 16 January 2013

The Prompt Payment Joke....

Given the problem of companies’ increasing use of extended free credit as a source of free finance in these credit-starved times, the government is attempting to tackle the wrong problem, all in the name of protecting the little guy…Ha!, Ha!, Ha!

Even a cursory glance at the Prompt Payment Code will reveal that it focuses on paying within an agreed time. In other words, depending upon the credit period agreement into which a trading partner has been forced, be it on delivery, or within 5, 30, 60, 90, or even 180 days, a company can comply with the Code by paying by the specified date…

The humour starts with the consumer’s cash payment to a retailer. Then, despite zero-defect daily delivery of some SKUs, the retailer feels compelled to demand up to 90 days to bridge the cashflow gap between delivery of goods and payment by the shopper… (Ha? Ha?) 

When challenged to explain the joke, the retailer refers to market ‘norms’, without pointing out that these ‘norms’ have been creeping out from 30 days to the current 45 days in recent years, in readiness for a move to 90, as soon as sufficient retailers have helped to establish this new ‘norm’…

Suppliers who complain are told that there is 'obviously no compulsion' to agree the terms, they are free to sell their goods elsewhere at whatever terms they can agree, ignoring the fact that a customer taking 15 -30% of one’s output does not allow for alternative access to the consumer…  (Ha? Ha?).

But the really ‘funny’ bit is the process whereby larger members of the supply chain simply pass the credit burden back along that chain, “reflecting market norms”, until the point of least resistance is reached, the little guy who re-mortgages to the hilt, or cracks under the strain… (Ha! bloody Ha!)

However, and the biggest laugh of all, in spite of this upfront cash advantage, even the big retailers are suffering sales and margin-wise with some retailers having come to depend on the free-credit norm to such an extent that unplanned falls in consumer demand have caused these cash businesses to succumb to the inevitable….
Their carcases litter the high street…  (your turn!)

Time for everyone to quit the joking, and sort out the real problem?
(For starters, how about passing on the joke, this one needs to go viral…?)

Tuesday 30 October 2012

Late payments improving – Action for NAMs

The latest Late Payment Index from Experian®, the global information services company, reveals that UK businesses paid their bills nearly 1.3 days earlier in Q3 2012, compared to the same period last year.  In July to September this year, firms paid their overdue invoices 24.88 days after agreed terms, compared to 26.17 days during the previous year (Q3 2011).

Food retailers showed the most significant improvement, paying their invoices 29.15 days after agreed terms, compared to 34.21 days in the same period last year.

Still a way to go...
Whilst suppliers will obviously be grateful for this average 5-day improvement by retailers, your finance department will remind you that invoices are being paid 29.15 days later than agreed. Think about it, you are delivering some SKUs daily, the retailer is holding average stocks of 2 weeks, and is getting cash from the shopper...

In other words it is vital, especially in this ‘post-recession’ era, to keep up the pressure for on-time payment.

  • Quantify the cost of financing agreed credit days
  • Calculate the cost-benefit of paying settlement discount
  • Calculate the cost of the additional late days (checking that you have had your fair share of the five day average improvement in days sales outstanding, from all customers!)
  • Calculate the total cost of financing the credit you give your customer, and work out the equivalent in incremental sales required to cover the cost
    (i.e. if you make 8% net on your customer’s business, you need incremental sales of £12,500 sales to cover each £1,000 you give the customer )
Now join the queue outside the buyer’s office….(why not optimise the queuing time by checking out NamCalc?)

Thursday 25 October 2012

New Supply Chain Finance Scheme - every little helps, but..

News that a group of 38 major UK companies, including Tesco, GlaxoSmithKline, Marks & Spencer, Diageo, Rolls Royce, BAE Systems, Centrica, and Vodafone, have signed up to the Government’s new supply chain finance scheme aimed at helping improve the flow of working capital for small businesses by piggy-backing on the customer's credit rating is a great step forward, but suppliers to retailers are still under pressure from financing trade credit.....

  • Great initiative in that small/medium suppliers can benefit from the credit rating of larger customers
  • But they still have to finance the credit, albeit perhaps not at penal interest rates
  • The real issue is retailers taking 45 days+ to pay for goods that are often daily-delivered, with shoppers paying in cash…
  • See Cost of credit calculation on Kamcity
  1. Work out the actual cost of giving credit to the customer
  2. Calculate the incremental sales required to cover cost of free credit i.e. say your net margin is 5%, then every £1,000 it costs to give free credit means you need incremental sales of £20,000 to cover the cost
  3. Substitute your figures in the above calculation and book an appointment with the buyer...

Monday 22 October 2012

Sainsbury's changes to non-foods payment terms...the bottom-line impact

According to The Telegraph, Sainsbury’s have extended its standard payment terms to 75 days for all non-food suppliers. In some cases, this will mean suppliers waiting more than twice as long for payment. In the unlikely event that a supplier decides to withhold supplies, or even attempts to negotiate a compromise, it is vital that such decisions be fact-based.

This means calculating the cost of the change in terms along the following lines: (check through the method with your finance people, and substitute your own figures)

- Supplier has a net margin of 7.5% and sells £5m per annum to the retailer, payment in 40 days, net
- Cost of borrowing is 8%

Cost to supplier of giving 40 days credit:
- Number of times per annum the supplier is paid, on 40 days        = 365/40
                                                                                                    = 9 times, approx.
- Average amount owed by retailer                                               = £5m/9
                                                                                                    = £556k i.e. a permanent loan to the retailer, interest-free
      -    Cost of borrowing to give 40 days free credit                     = £556k/100 x 8
                                                                                                     = £44.5k

Cost to supplier of payment extension to 75 days: i.e. 35 days extra
- Number of times per annum the supplier is paid, on 75 days        = 365/75
                                                                                                    = 4.9 times, approx.
- Average amount owed by retailer                                               = £5m/4.9
                                                                                                    = £1,020k i.e. a permanent loan to retailer, interest-free
- Cost of borrowing to give 75 days free credit                              = £1,020k/100 x 8
                                                                                                    = £81.6k
- Therefore cost of additional 35 days                                           = £81.6k - £44.5k
                                                                                                    = £37.1k

For the supplier, this is the equivalent of incremental sales of £494.7k (i.e. £37.1k / 7.5 x 100, a 9.9% increase in sales).

In other words, to maintain the status quo in a fair-share relationship, the supplier needs a concession from the retailer of £37.1k, or will suffer a drop in net margin on the retailer’s business from 7.5% to 6.8% (i.e. £5m/100 x 7.5 = £375k - £37.1k = £337.9k/£5m x 100 = 6.8%)

Why not run the numbers on your business, using your figures in the above calculation, to explore the impact on your bottom line, and re-assess your negotiation  strategies…?

Friday 5 October 2012

Premier Foods - the split-up options

Following Premier Foods appointment of a new COO with a brief to help see the grocery and bread businesses managed as two distinct divisions in recognition of the different “opportunities and challenges” facing each business, it might be useful for NAMs to explore the options and possible actions available to the company. This could add insight on how the company will manage the trade and also help you anticipate the impact on competing brands.

Essentially, the company needs to increase its perceived value in the market and thus raise its share price. This will not only give it more autonomy but will also make it easier to sell all or part of the operation at the appropriate time..

The emphasis will therefore be on improving its Return On Capital Employed (ROCE), a driver of the share price.

Step 1
The first step has to be a split of bread and groceries, given that they are totally different business models.
  • Bread is a fast moving, high rotation (daily), high wastage (10+%), short shelf life (days/weeks) and narrow margin business, especially supply-side, whereas
  • Grocery is slower moving, low rotation (2 monthly), lower wastage (2+%), long shelf life (1-2 years), more generous margins supplier and retailer
Bread: Premier need to strip out cost, sell-off non-core parts, simplify and explore possibilities of sharing the distribution burden

Grocery: Here they need to continue emphasis on a limited number of power-brands and sell off anything non-core

Step 2
The company will then be in a position to apply the ROCE principles to what remains on the two businesses.
ROCE = Return on Sales  x Sales/Capital Employed  i.e. improve the margin and speed up the rotation of capital (factories + stocks, debtors and cash)

Companies are either in a narrow margin, fast rotation business, or they are in a higher margin, slower rotation business. This is why splitting the bread and grocery businesses is a long overdue no-brainer….

Step 3
First they need to focus on improving Net Margin by
  • Increasing their selling prices and sales (more advertising on fewer power-brands, up-skilling the negotiators)
  • Reducing the levels of discount and promotional expenditure ( did I suggest it was going to be easy?)
  • Reducing the levels of sales and distribution costs (hence hiving off the bread business, and need for special vigilance on trade funding and compliance)
  • Driving volume, especially bread but also grocery power-brands ( move to more responsive social media )
  • Changing the product mix to focus more on higher margin items, (consumers permitting…)
  • Minimise ‘specials’ in terms of tailor-made deals/trade arrangements of any kind, (they just cost more…)
Step 4
Then comes increasing the Rotation of their Capital by
  • Driving the volume of sales as high as possible, using existing or lower levels of Fixed Assets (factories, plant), + Current Assets (stocks, debtors and cash)
  • Getting paid faster via settlement discounts, ‘delisting’ any financially unstable customers
  • Improving sales forecasts i.e. if they forecast 100% and achieve 95%, then 5% of sales become ‘passengers’ with their costs shifting onto the 95% that are sold, thereby hitting the bottom line
  • Generally, improving their ability to convert business cost into revenue…
These moves will drive the overall ROCE, increase the share price, and make each or both of the companies easier to sell, if necessary.

If all of this seems a bit theoretical, why not watch this space over the next six months? You will then be looking at historical moves, whereas some of the above points may help you anticipate and take appropriate action NOW, when it really matters…

Thursday 2 August 2012

Tesco's credit rating – what it means for you?

Yesterday’s warning by Standard & Poor that ongoing pressure from intensifying competition, weak consumer spending and lower profits could trigger a downgrade to its risk profile and credit rating should not be seen as another nail in the Tesco coffin.

Tesco's previous ratings
In fact, regular readers will know that Tesco have been here before (Moody’s in April 2012, and May 2009). It also helps to bear in mind that the credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Yesterday’s announcement referred to a long term (i.e. after a year) rating, making it more expensive to borrow, but no issues in the short term.

Why the rating matters to you
However, the mention of  ‘lower profits’ as a cause, means that Tesco is effectively prevented from drawing heavily on current profitability to fund its £1bn revitalising initiative, or indeed any ‘nuclear pricing’ options (see KamBlog).

What Tesco needs to do
Apart from a need to make "targeted" disposals, cutting back capital expenditure and/or shareholder pay-outs as possible options, the ratings threat means that Tesco will be forced to place more emphasis on internal savings….
As you know, for a retailer these can include a combination of cost-price reductions, optimising of credit terms/settlement discount trade-offs, increased trade funding, strict application of deductions and improved service levels…

This means it is perhaps time to re-evaluate your position on each of these elements of your Tesco trading relationship, as a basis for determining your fair share of any help Tesco may require in funding its strategy.

Deriving your bespoke rating of the customer:
Finally, a ratings agency score can be a fairly blunt instrument from a NAM’s point of view. Better for you to derive a bespoke rating via a combination of analysis of the customer’s ROCE, Net Margin, Stockturn and Gearing, overlaid against your terms, trade-funding and service level, in order to establish and demonstrate your fair share of any remedial action…

Not doing so can represent more risk than you need, in the current climate.

Thursday 14 June 2012

Going into Administration, what then?

Given yesterday’s news of Peters Bakery collapse into administration, together with today’s report in DIY Week that Allders of Croydon are ‘facing administration’ it might be useful for NAMs & KAMs to explore the possible consequences and implications of such moves.

As a legal concept, administration is a procedure under UK insolvency laws. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – an alternative to liquidation – means a company in administration is operated by the administrator (as interim chief executive) on behalf of the creditors as a going concern while options are sought short of liquidation. These options include recapitalising the business, selling the business to new owners, or demerging it into elements that can be sold and closing the remainder.

Options for Peters Bakery
In the case of Peters Bakery, it might be assumed that the owners have already explored the options of recapitalising and/or selling off the business, leaving the option of demerging into elements that can be sold, i.e. the bakery and the shops (The mobile sales operation might remain with the bakery as the better option).

The bakery
The bakery with its relatively new plant and its supply arrangements with major retailers could be attractive as a buy-out by management or takeover by  another bakery where increased scale/synergies might add appeal, and some negotiation muscle ref the multiples.

The shops
Meanwhile, the 54 shops with their regional brand equity could also present viable options in terms of either management buyout or acquisition by another retailer. Given the parallels with Greggs shops in terms of positioning, possible acquisition might be worth adding as an agenda item  at the next meeting of the Greggs team…

Which options do you feel are best for Peters Bakery?

Monday 2 April 2012

Use of Fixed Charge Cover to spot a customer going bust?

Given the financial turmoil of the past three years resulting in further retail casualties such as Game Group, and a number of others on the brink, it is obvious that the ‘usual ratios’ such as ROCE, Net Margin, Stockturn and Gearing may be insufficient in terms of providing early warnings of trouble for suppliers.
What makes a retailer vulnerable?
A recent article in flags up the fact that if a retailer leases rather than owns its shops, it is faced with regular fixed charges for rent that must be paid, irrespective of the level of sales and profits. Moreover, if a retailer also has fairly high gearing, the interest payments represent an additional fixed cost on the business.
These Fixed Charges are ‘Lease costs’ and ‘Interest on borrowing’ and need to be compared with the ‘available Operating Profit’ i.e. the Operating profit less Fixed charges.   (these can be found on the P&L ('Interest paid' and 'Operating Profit') and early in the Notes to the Accounts ('Lease expense'), after the Balance Sheet
(NB when you find the figures, check them with your finance colleagues). 
In other words, the Fixed Charge Cover (FCC) indicates the ability of a company to pay its Fixed Charges, irrespective of sales and profit performance. Failure to pay can result in liquidation.
The following analysis compares the ‘big four’ multiples in order to illustrate the calculation in practice.
Given that these are the most financially healthy retailers in the UK, other retailers could be vulnerable..
Some of the differences are interesting in that, for instance Morrisons, because it owns most of its shops, and has relatively little borrowing, combined with a good net margin, means that with an FCC of 13.3, Fixed Charge Payments are no burden to the company. However, in the case of Tesco and Sainsburys at 2.9 and 2.2 respectively, FCC is obviously more of an issue.....
Application to other retailers?
However, the real value of the ratio is in its application to most medium and smaller retailers that are running short of cash and are finding that Fixed Charge Payments are pushing them to the edge….
As in all cases of pending liquidation, those creditors that are first to spot the danger, can have the advantage of withdrawing their credit before the liquidator is appointed.
Ignoring the Fixed Charge Cover indicator?
If you still feel that all such matters are the responsibility of the Finance Department, remind yourself that if a customer goes bust owing you £150k, and your pre-tax net profit is 5%, you will need incremental sales of £3m to recover…
In which case, perhaps the application of Fixed Charge Cover analysis to your customers’ latest Annual Reports will help…?

Wednesday 14 March 2012

If a customer delays payment... Time for the six honest serving men?

In the current climate, it is probably more a question of ‘when’, rather than ‘if’, but for the moment let us stick with the main question.
Either way, payment delays cost you money and increase your risk-exposure.
Although credit control is someone else’s job, you are the one with total responsibility without authority.
And besides, would you really want a finance colleague trying to get incremental sales from a customer, in order to recover lost profit?
The key issue is ‘why’ the delay?
Essentially, the customer is either in trouble, short of working capital or someone else is shouting louder (a rival supplier offering more Settlement Discount?).
‘Who’ is driving them?
If the ‘who’ happens to be the bank, a quick check of their recent annual report (remember ‘what’ you downloaded from Companies House within minutes of publication four months ago but is still on your ‘must-read' list?) in the Balance Sheet ‘where’ in the outside borrowing section you will find creditors i.e those excluding the guys ‘who’ give them credit free of charge, trade creditors, like you…
This will help you calculate their gearing, and if significantly greater than 30% of Shareholders Funds, it is time to reach for the button…
While checking the Annual Report, the P&L will also reveal the Net Margin for two years, and if less than 2% and heading South, any upward correction is going to be at your expense…
‘How’ it happens?
This will come via ‘deductions’, possibly a delay in payment because of faults/shortages in delivery, with each invoice presenting a new opportunity…
‘How’ you deal with rolling invoice queries can be an opportunity for you to shine in in-house financial circles.
‘What’ to do about it?
How about dividing your annual sales to the customer by twelve, and negotiate with their buyer/finance department that they pay a fixed ‘twelft’ each month by standing-order for eleven months, leaving the final month’s invoice for all the queries?
The end-game..
If the customer is simply reflecting a supplier’s bad invoicing discipline, then the above approach combined with more accuracy on your part, will probably work.
However, if the buyer is simply using excuses, any excuses, to delay payment, this will tell you ‘when’ it is time to give the six honest serving men a rest and ring the lawyers…

P.S. According to Kipling, the 'men' rest from nine-to-five, and never skip meals...  Perhaps 24/7 NAMs/ KAMs need other tools for office-hours?

Thursday 1 March 2012

Making Settlement Discount Work

With the major multiples collectively owing UK suppliers approx. £10bn at any time and paying on average in 43 days, this free credit represents both cost and risk. With banks unwilling to lend, retailers can be a source of finance. As cash-machines that happen to sell groceries, retailers can even be willing to pay on delivery, if the price is right

Wednesday 29 February 2012

Money-saving tips from America … road-tested by penny-pinching UK consumers

Ranging from eating beans rather than meat to filling up the car early in the morning when the air is cool, and the gas is dense, the Guardian Team give twenty tips a reality-check by running the numbers and evaluating any real saving…
Impact on the consumer
Whilst not all money-saving tips will yield real savings, in practice the act of re-evaluating all expenditure coupled with comparison-shopping is bound to heighten consumer appreciation of value-for-money and cause them to reduce/postpone their ‘excessive’ purchases.
How the Buyer will react
In the same way, buyers being consumers are likely to apply the same disciplines in the day-job. Whilst it is tempting for suppliers to react via defensive mode, realistically pro-active NAMs can benefit by being able to calculate and demonstrate the financial impact of their support package on the retailer’s P&L.
Calculating the cost and value of their free trade credit can be a useful first step….  

Tuesday 14 April 2009

Credit insurance and the role of independent retailers

Whilst the withdrawal of trade credit insurance cover for independent retailers has several implications in terms of increased customer concentration, changes in supplier-customer power-balance and supplier risk, the real issue for suppliers has to be the fundamental role of the independent retailer within their overall marketing and trade marketing strategies.
Essentially, in many categories such as electronics, toys, books and wines, the independent specialist provides a means for the consumer to get to know the product, 'press the buttons' and seek in-use advice, in ways not available elsewhere. The specialist (enthusiast/champion, how few of these are available?) often provides this service in the full knowledge that the 'shopper' will later source the product at a lower price elsewhere, often online.
Suppliers can feel that, as their brands benefit from the sale anyway, then little harm is done by the gradual shut-down of the independent specialist channel. This obviously ignores the fact that without the 'education' provided by a well-supported specialist, the consumer is more liable to choose an alternative brand.
Whilst the supplier may want to treat all retailers equally in proportion to their volume, and cannot afford to support inefficiency, there may be a case for acknowledgeing the 'educational' role of the specialist by developing a special support budget to cover additional attention by the specialist salesforce (business education of the retailer in terms of product knowledge, display, and especially retail-finance) The negative impact on the customer P&L could be neutralised by factoring in the eventual consumer purchase via other channels (i.e. calculate a % of multiples/online sales, net it off their P&L and add to the Specialist P&L) Incidentally, the additional risk of uninsured credit could be reflected as an additional cost on the customer P&L, in the short term, in the hope that continuous provision of advice on business finance will cause both parties to reduce financial exposure via shorter credit periods, for those specialists that can take the advice and remain standing….

Friday 20 March 2009

Credit insurance fury reaches boiling point

News that the financial crisis is causing retailers to demand government intervention to curb the powers (or even replace) credit insurers, is perhaps missing the point. And besides, at the current rate of bail-outs and taking controlling shares in business, we shall all be (un)civil servants by the year end…
As you know, trade credit insurance is purchased by businesses to insure their accounts receivable from loss due to the insolvency of the debtors. Incidentally, most retailers are insolvent, in that their Quick Assets represent about 10% of their Current Liabilities instead of 1:1 like 'normal' businesses. The monthly premium is calculated as a percentage of sales of that month or as a percentage of all outstanding receivables. In other words, credit insurers are calculating and spreading risk, and charging for the service (being what they do…)
There may be some issue with the scale of their charges (so Government should perhaps act to increase the number of providers, three major players, at last count (!), and drive down rates) but as businesses, they are entitled to make a call on when to withdraw insurance when they feel the premium to cover a given retailer-risk would be 'unsellable' to suppliers…
As usual, when it comes to the Crunch, NAMs & KAMs are on their own….
Why not work out the cost of credit for your dubious customers, and then do a risk analysis, (impact on your business & chance of them going bust) to decide your next move…before it is decided for you…?
Or perhaps watch our 'going bust' video while you wait !
Have a Good Weekend, regardless!