Bankruptcies During a Recovery Period?
As some of our members know, there is a peculiar phenomenon that can happen during periods of economic recovery. Sometimes, even as the economy is improving, many companies will find themselves filing for bankruptcy. This concept can be a difficult one to understand, however industry expert Kerry Knudsen believes that the culprit is in receivables. Kerry is the editor of Supply Side, Wood Industry's monthly letter to suppliers inCanada's wood products industry, and this is what he has discovered.
During a recession, companies become as lean as possible. They lay off employees, sell off inventory, borrow, spread out payables and so on. At the same time, your own receivables are spread out 90 - 120 days or beyond. As the recovery starts to take hold and orders increase, managers find themselves with low inventory, few current receivables, short staffed, and new firm deadlines to meet new order commitment. The result all too often is that the customer will go and find a supplier that can fill their need. In short, you cannot sell what you cannot acquire, and you lack the personnel and ability to acquire the needed financial capital to grow your business. The ultimate result is the company will find itself in a position where it will need to file for bankruptcy - even with the prospect of new customers with profitable orders.
One way to avoid being in this situation is to keep a very watchful eye on your receivables. Many of our members have formed long term relationships with customers who have supported their businesses for years. It is hard to turn down those orders when that loyal customer is experiencing cash flow problems, especially when there are new customer orders that will pay according to your terms - payment that will keep your business operating. Don't allow yourself to get into situations where your spending as much (if not more) time trying to collect on old receivables as you are selling new orders. As the economy improves be careful and mind your receivables.
Readers seeking more information may contact Mr. Kerry Knudsen, publisher of the Wood Industry Supply side at email@example.com.
If you have any other questions please feel free to contact Philip Bibeau at WPMA 978-874-5445 for more information.