There is a tendency to dwell on events that may or may not shape the way in which one approaches credit management, particularly pivotal moments that some encounter which set the furrow and lead to enormous satisfaction and joy.
In 1992, I was asked to consider a £50,000 line to a small system builder business based in Slough that operated under a strained £10,000 credit line and was obliged to continuously pay in order to receive further supply.
The business was a partnership operating from premises above a motor cycle dealership. It had indeed incorporated the initials of the store below but had no direct association with it.
I vividly recall climbing an external staircase to the first floor to find four people inside a fairly confined space, one being the owner while the others were busy in system build and packing. It was so cramped I had to sit up close with nothing to lean on, occasionally shifting position to allow the system builders room to work in or collect product from the warehouse (in this case, the far corner of the room).
Not the best environment to conduct a client interview and more difficult given a reluctance to share any financial trading figures with me.
I had of course already done my research on the owner and his business but was impressed with his attitude, candour and determined approach. At one point, having said he checked on the quality and rating of all suppliers, he pulled open the bottom drawer of his desk and brought out detailed business reports on our company and many of our competitors. He also accurately summed up our position and standing but urged me at the same time to judge him positively.
I spent some two hours talking to him on a number of issues: his plans, aspirations, family, what got him involved in the first place, and what was it that excited him about his business and how he saw us as players in his evolution and growth. That "gut feel" came into play and I granted the increased line to £50,000. I took a view that in partnership with his wife, personal liability showed his commitment and that we in turn had to offer something in return for his business to date.
That first meeting was the beginning of a wonderful trading relationship and friendship that lasted nine years.
Within a year, his credit line had increased to £100,000 and he relented enough to supply me with regular management information and trading data. His payment behaviour remained excellent and there were plans of a move to bigger premises close by, asking if this move would cause me any issues or concern. He added, excitedly and with some pride that he was going to become a ‘Plc' and would this make a difference to his credit line or the way we viewed risk. I replied that given the required issued and paid up share capital and his commitment to sharing of information, it was very much business as usual.
Conveniently, his new premises were close to where my car was serviced twice a year and I made a point of popping in to see him on each occasion.
As business grew, it became apparent he had a weakness: the inability to "let go" and allow others to help him manage his growing business. He also spent too much time looking at what one or two major competitors were doing and this invariably meant his focus was not always fully aligned. I recall telling him this on occasion and he invariably nodded his head ruefully, agreeing and promising to change.
In those early years, he was eager to seek views on his business and direction and was always receptive to advice, either critical or constructive.
On one occasion I advised him that one un-named major competitor in the north of England had opened a trade desk which had proved successful; had he considered this, I enquired? He replied negatively saying he had no desire to have all sorts of people walking in off the street asking him to look at other people's equipment or problems. Some six months later on my next visit, I noticed his reception area had been revamped with a 15-foot trade desk, three employees and some marketing literature. It was obvious also that it was busy. As I climbed the stairs behind him I commented on his apparent change of heart. "It's great" he said, "I'm helping them out and they are buying my product and support instead".
On another, I had a dig that given his revenue had grown above £12m, he should think of appointing a more senior finance position. Historical reliance had been general accounts people, external accountants and his own hands on approach. He rang me shortly after saying he had recruited a finance director with experience. He was confused, however, by my lack of enthusiasm once he told me who it was. I explained my concern was the FD's background in distribution, familiar with forecasts and budgets of businesses with turnover of over £220m; his was a radically smaller OEM business and one that has to keep things tightly controlled. You may struggle to keep his interest or control his aspirations I said. The FD lasted less than three months.
The credit line we applied bounced up and down between £200,000 and £700,000 and trade remained brisk and profitable. Indeed, over a sustained seven-year period, gross margin was consistently high for supply of component product.
In 1997, I was working late in the office when I received a call. It was the owner and he was concerned. He was due to visit his bank manager the following morning with his most recent year-end results that would show a small and first ever operating loss of around £50,000 on sales of around £15.5m. While we had discussed this already and considered actions required, he wanted me to run through his proposed directors' statement to accompany the financial results.
I asked him to fax this across immediately. It stretched to almost three pages and was incredibly detailed in outlining specific events that contributed to the loss. I called him back suggesting he was being far too detailed and could well give the wrong impression.
Much to my relief, we re-worked the statement to just one page. His meeting with the bank manager went well and there were no repercussions.
The business was back into profit the following year on slightly lower sales - and similar profit a year later but on increased sales of almost £19m. The failure of one major competitor had contributed to this surge, but at a cost. Gross margin declined and direct costs had risen higher than necessary. Stiffer competition and the need to compromise on price began to impact and I was obliged to tighten exposure throughout 1999. Business and financial ratios declined and visits became more frequent.
The owner responded extremely well and worked hard with us to improve his cash flow difficulty. He was obliged to lay off people at the beginning of the year to cut cost but this provided only temporary respite. A recessionary period between 1998 and 2000 was damaging and the nature of his off-the-page business model was now fast overtaken by others. Similar and larger businesses had failed in this period.
Our final meeting was a sad one. Our debt had reduced to £60,000 and I met the owner and his financial advisor late in the evening after he had been obliged to lay off all staff. He looked visibly thinner than the last time we met and appeared physically drained.
His opening retort was to apologise for losing us money, thanking us for the support over the years. I reassured him that there was no need to apologise as we had done great business over many years that had been extremely fruitful and profitable.
At the close of our meeting he asked if I would support him with a credit line should he set up again. Most certainly I replied, but not if he planned a similar business.
He smiled and I guess we both knew he wouldn't. This had been a pivotal moment for him, emotionally drained having laid people off that he considered as ‘family'.
Unexpectedly, two years later, I received an email - it was the owner, asking if I would provide a personal reference as he had been short-listed for a role of managing director.
For nine years, our sector was enriched by his inclusion. The final loss of £60,000 was but a tiny fraction of profit generated over that trading period. Ours was most definitely not a loss but a massive win.
This relationship highlights the broadened scope of credit and how perhaps it should be applied. I was additionally fortunate to work with a salesman who was exceptional and understanding. Not enough of us get close enough to customers and sales to manage risk or indeed support and grow business. It offers a wonderful opportunity to impact on clients' direction and progress and create a foundation that amply supports future correction, disaster recovery or business continuity.
Wherever possible, I emulated this approach and found it incredibly rewarding. It's a great feeling to have a client in difficulty talk to you first before banks and also seek advice on a range of channel and business issues. I led informal moratoria ensuring business survival and onward sale, business re-financing and was directly involved in putting buyers and sellers together. None of these functions are seen on job specifications or CVs for people in credit but perhaps it's time they were. Few organisations recognise that credit touches all parts of business and its real function extends beyond mere debt collection and risk management.
Eddie Pacey is director of EP Credit Management & Consultancy
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