Manufacturers rely on retail customers to buy their wares and then sell them in stores. What happens when a major customer declares bankruptcy? Planning ahead can mitigate problems beyond having to find a new stream of steady revenue. There are several steps your company can take to protect itself against these types of losses.
What the Law Says
When retail customers declare bankruptcy, manufacturers may have to remit certain invoices as a way to cover debt owed to creditors. Any payments your company receives from the company within 90 days of the bankruptcy filing must be returned to the customer to satisfy debts, per federal bankruptcy laws. This is called a preferential claim, and it happens when companies have preferred customers. The easy way around this is to simply not have any preferred customers to deal with when it comes to ordinary business. Planning ahead means treating every customer equally.
Ordinary Course of Business
Bankruptcy courts examine preferential treatment after creditors claim such a designation. During the bankruptcy process, creditors have access to the books of the company undergoing the reorganization or liquidation. If there were payments made to your manufacturing company that were larger when compared to others, a court may see your company as a preferred customer.
Planning ahead solves this problem by taking a look at the ordinary course of business. Establish consistent patterns of payments over the entire course of dealing with a customer. A sudden rash of larger payments may signal a red flag since the company undergoing bankruptcy has nothing to lose by paying more money for items three months before filing.
You need to do more than prevent larger payments from companies. You need to treat each customer equally so it doesn't seem you prefer one over another. Planning ahead with a written policy and strategy keeps your books looking the same with every customer. As a bankruptcy court examines your books, it may see if anything is out of place.
Data Analysis
Analyze day sales outstanding, or DSO, data. This monthly metric determines how long a company takes to collect revenue after a sale. Any deviation from a rolling, 12-month DSO average, combined with other bad financial signs, raises a red flag that you may have preferential treatment during a bankruptcy filing. Planning ahead for this possibility means automating this data point and alerting the correct staff to any problems. Keep the DSO as close to normal as possible for each customer, and don't lengthen the time you take payments.
Read the News
Reading the news can help you gauge what a customer is doing. For example, Sears' CEO Eddie Lampert made questionable decisions by trying to focus on the company's online arm rather than shoring up stores. Physical stores were the retailer's strength, but by the time Lampert realized his mistake, it was too late and Sears began shuttering hundreds of stores. If your company reads about anything weird happening with a customer, either in the news or via a press release, you should pay attention.
Planning ahead can leave you in a better financial position when customers declare bankruptcy. You don't need to invest in a lot of fancy tools to do this, so just maintain vigilance by staying in the know regarding your customers' actions and big data.
Photo courtesy of Stuart Miles at FreeDigitalPhotos.net
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