It's not commonly known in the channel, but credit management in distribution is not just about the mundane finance responsibilities of cash, dispute resolution and bad debt 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 meeting reseller owners and directors regularly as part of an ongoing business relationship, or just when the situation demanded it. It ensured a far more solid and entrenched relationship; one that was certainly more knowledgeable, flexible and workable when circumstances warranted support of any kind.
This is best demonstrated anecdotally from an actual casebook, one of many experienced over the years in distribution.
I was watching TV late on a Saturday evening when I received a call from a contact who worked with a firm of insolvency practitioners in North London. Without giving me any names, he asked me to meet a reseller director in his offices on Sunday morning with a view to helping him. 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 the director, someone I knew extremely well as I had been meeting with him and fellow directors regularly 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 reseller in the South West which had already gone through one management buyout.
Essentially, the problem was cash. They did not have sufficient cash to pay their principal suppliers at month end (us included) but felt that given time to refinance and get a grip of costs, they would be able to work their way out of the current difficulty. I had no 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.
Knowledge is key and getting the right number of fellow distributors 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 off the business.
Events were timed brilliantly as, in delivering a training programme to fellow credit managers five months earlier using this company's financial statements (without giving an indication of the name or location), I had shown how the business had slipped on controls and costs but was nonetheless nicely profitable. Stripping out costs, rearranging finances and moving loan commitments made it a good business to acquire.
Thankfully, chosen principal suppliers agreed to co-operate given information held, and of course debt levels and ongoing support needed in supply, proved equally persuasive.
For almost a year, the company furnished interim monthly management accounts and cashflow statements at monthly meetings. The deal involved the company cutting costs, rearranging short and long-term debt commitments, and provision of accurate and timely financial information and cashflow forecasts that would be monitored for accuracy as support moved along. Chosen distributor partners accepted slower payment of existing debt and payment on agreed fresh terms for new supplies. The arrangement worked extremely well without affecting insured credit lines or allowing the deferred debt to age significantly beyond 90-plus 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.
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 it achieved 18 months later.
We could all have said no, 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.
This is a tangible value-add that distribution can provide, given the correct approach and timing.
The message to resellers is simple: should you face difficulty, the sooner you speak to people who could help, the better. Ensure your relationship with principal suppliers is one firmly rooted in understanding, co-operation and collaboration. For a distributor, the message is equally strong: a correctly supported client results in business continuity.
Eddie Pacey is director of EP Credit Management & Consultancy
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