One of the nice things about my day-to-day activities is lending an open ear to my clients and staff.
Recently, I was talking with the credit manager of a new client who was placing some claims with our office. One of the claims, a sizable amount, was against one of their long-time customers, a highly respected privately owned company in the manufacturing sector. As a long-term customer who made up a significant part of their business, our client had over the past few years been working directly with the customer’s sons, who were taking over from their father.
As we talked, the credit manager of over 20 years felt terrible about the claim they had against their long-time customer. After all, with so many profitable years of business together, no one would have imagined that a gradual change in the regime would have some day resulted in the account becoming seriously past due.
Although there were obvious warning signs that things were not going as they should, it appeared that this client was not able to grapple with the situation on an emotional basis. Some of the warning signs included:
- a very large expansion of the debtor’s manufacturing plant was undertaken but not completed
- the customer’s sons were driving around in luxury sports cars and taking lots of trips, while their father was known for his frugality
- through the grapevine, some of the long-term employees who helped build the business, were let go
- the old ways went out and the new “consultants” were brought in who were not experienced in the industry
- miscommunication regarding orders placed was arising on a more frequent basis
- the tenor of the business style was changing from one of “we are a team together” to “we are the customer and you are our supplier”
- the father was very rarely reachable
In essence, it appeared that the sons were mismanaging the business and not adhering to the formula for success that made the company a great one in the first place. But the real shock to the credit manager was when he finally decided to run a credit report on this long-term customer after so many years of never questioning their credit worthiness.
Upon reading through the report, the credit manager was completely blindsided to see there was a law suit filed against his customer claiming millions of dollars in damages related to intellectual property infringement. Whether the suit was with merit or not, it had been filed two years ago at a time which would have given the credit manager a significant heads up that the new regime was heading into trouble. As he said over and over on the phone, I can’t believe I put my head so far into the sand on this.
Although each of us have 20/20 hindsight, it should go without saying that every major customer, especially the ones that occupy the greatest part of a company’s sales, should be watched regularly. Not only by taking out periodic credit reports but trying to remove any “emotional blinders” that will impact an objective and sound credit decision.
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