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How to Identify a Potential Bankruptcy

 

As Congress continues to find ways to assist businesses and individuals, stimulus and Payment Protection Program money has been spent, leaving those businesses and individuals no better off as COVID-19 continues to wreak havoc. Common sense and logic point toward major issues arising in the coming weeks and months as the potential for unpaid bills piles up. When invoices go unpaid, it starts a downstream trend no business or person wants to see. Many businesses have already been impacted, e.g., Neiman Marcus, J. Crew, Intelsat. Many more businesses are also on the verge of bankruptcy and will most likely file soon.

In the April Credit Managers’ Index from NACM, fillings for bankruptcies worsened but remained in expansion territory. “This is a situation that will worsen in time as more companies find themselves in trouble,” said NACM Economist Chris Kuehl Ph.D. Total bankruptcy filings declined 46% in April compared to April 2019, according to the American Bankruptcy Institute. However, total commercial Chapter 11 filings increased 26% year over year. It’s only a matter of time before the unpaid invoices are too much to handle leaving creditors holding the bag.

“The economy we’re experiencing and will be experiencing in the coming year will be very difficult,” said John Salek, president, Revenue Management Associates LLC, in NACM’s recent webinar “Predicting Customer Bankruptcies Fast and Accurately in the Coming Depression.” He added, “There will be more bankruptcies among your customer base than in the past. The biggest challenge will be achieving a breakeven sales value while controlling who you sell to.”

Most companies sell to a range of customers, and credit departments have standards that will have to change with the times. It’s important to work with customers to accommodate them. It’s also vital to update risk assessments on all customers. Credit information, even from early March, is too old and not relevant anymore.

There are a number of ways to identify a potential bankruptcy, and from different avenues. Key factors can be identified by the sales, service and collections teams, and from credit investigations. Salek developed a top 10 list to help identify potential bankruptcy candidates.

The Top 10 List

Adverse news events

Bounced NSF payments

Bond default, forbearance and/or price deterioration

Financial deterioration documented through financials

Delinquent payments

Extended payment term/higher credit limit requests

Broken promises

Significant increase in invoice disputes

No contact

Failure to supply financials.

The top benefit of improved bankruptcy prediction is the survival of your company, noted Salek. It’s important to maximize the cash flow from orders filled with existing inventory, retained services and staff while optimizing the cash inflow from orders filled with newly purchased inventory.

Most companies will have lower revenue and lower cash inflow during this time. “It is imperative that customers pay at least most of what is owed in the short to medium term,” Salek said. Identifying high-risk customers and forecasting cash flow scenarios is also important.

The second of Salek’s two truths, the first being that there will be an increase in bankruptcies, is that credit professionals will have to sell on credit to uncreditworthy customers to make their breakeven sales volume. “This goes against everything we have been taught and practiced,” Salek said. There’s a big question that credit departments must ask themselves. Why are they receiving requests from new customers? One potential reason is their current supplier cut them off for nonpayment, so it’s important to watch the department’s exposure to make sure payments are made on a timely basis.

-Michael Miller, managing editor

Payments During COVID-19

 

We live in strange times. A viral pandemic has swept the globe. The Pentagon has released video of UFOs. The world’s largest hornet species has invaded the U.S. What sounds like a poorly written Stephen King novel has become reality. Yet despite the chaos, many credit professionals are successfully keeping themselves grounded by maintaining some state of normalcy in their daily operations. The most consistent routine among most credit professionals is their payment process, beginning with credit approval through payment collection.

According to NACM’s April Coronavirus survey, nearly 25% of respondents said none of their customers requested extended terms, while nearly 75% said none of their customers requested credit line increases. Furthermore, in NACM’s March survey, fewer credit professionals said they approved customer requests for credit line extensions during COVID-19 than before the outbreak. For several credit professionals, the payment process is business as usual.

At Corey Construction in Houston, Texas, Credit and Collections Analyst Kate Hooper said her department begins with net 30-day terms for all new customers, unless upper management requests terms be shortened or extended. With most customers set at net 30 days, the department can easily stay within the state’s lien rights guidelines. Late payments for any non-new production invoices are addressed by a sales person/project manager, who will contact the customer via phone, text or email to request reason for late payment.

“We perform weekly aging reports on all past dues and send out demand letters/intent letters and liens accordingly,” Hooper said. “However, we do not send demands/intents/liens to our new production customers, but we do send weekly past due emails with their invoices attached.”

Once they lien a customer, the department places that customer on hold for any new work in the system as to not create a bigger aging issue. Hooper said they also hand over any liened customers to their legal counsel to pursue via demand letter from their law firm, civil suit or what they may feel is necessary for Corey Construction to get payment.

Hooper said the company hasn’t slowed down since COVID-19, but has made special exceptions for customers to pay via credit cards and waive the 3% fee.

“I believe it is very important for our credit department to maintain some normalcy, especially because there is no extension of the Texas lien rights amid this epidemic,” she said. “In order to uphold our rights, we still must send out demand letters, intent letters and liens to the county clerk’s office in the timeframe allotted to stay within the rights of the law. It is also important that we stay on top of our aging reports to remind our customers payment is still due and to contact us for special circumstances.”

Operations must continue at Company Wrench, Ltd. as well, said Finance and Credit Manager Kris Stephenson, CBA, CCRA. Despite a slowdown in applications to establish new open accounts, he said, there has been an increase in applications for the purchase of capital assets. Company Wrench sets terms similarly to Corey Construction, typically at net 30 days; however, terms may be extended to net 45 or 60 days depending on the customer’s trade credit history.

To stay on top of late payments, Stephenson said calls are made starting at 60 days to confirm receipt of the invoices, ferret out problems and push for payment. The pandemic has presented challenges to the credit department, but business is manageable.

“We have maintained our credit staff and added two individuals to help assist with follow-up and soft collections,” Stephenson said. “Besides those items, we have maintained a ‘business-as-usual’ attitude as we operate a necessary business and serve infrastructure, utilities and transportation segments. If we do not maintain a sense of normalcy, then our business model and bottom line will suffer.”

—Andrew Michaels, editorial associate