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From globalization to fluctuations in the Canadian dollar, the Canadian manufacturing sector faces a number of challenges. To further complicate matters, there’s the credit crunch, continued fall out from the U.S. housing crisis, volatile commodity prices and brain drain from early retirements. While Albertans have been somewhat sheltered from the strains, we’re starting to feel the effects that less prosperous provinces have been contending with for some time.
What can we do to mitigate the risks we face as Alberta Food Processors? One area we need to keep in check, is the financial condition of our clients and suppliers and how their financial status may impact our business.
In the agri-food processing industry, many businesses rely on a few key clients and suppliers. If you’re one of those businesses, any financial problems experienced by a key client or supplier could become your problem.
To protect your business, consider exploring the following measures:
Working With Your Clients
Establish a credit policy.
Your policy should outline circumstances under which you will grant credit; how to assess the amount of credit granted; any discounts offered for early payment; and/or penalties for late payment and when to initiate a collection plan. Periodically, review the terms of your credit policy and revise the policy when necessary. Don’t be afraid to take a more conservative approach if the economy is experiencing a rough patch.
Establish a collection plan according to applicable credit laws.
Your system should flag aging receivables that will trigger your collection plan. Your plan may include: sending a reminder notice; having a conversation with your client to set up a final deadline for payment; and/or as a last resort, retaining the services of a collection agency. Be willing to consider a repayment plan but be firm and respectful.
Ensure your client completes a credit application form and periodically update your customer profiles.
Your credit application process should include reference checks and a credit check. Perform periodic credit checks. Remember, just because your customer has good credit today, does not mean that they will have good credit next year.
Conduct a personal property search of the business.
These searches are available at any Alberta registry office for a small fee. The searches will reveal your clients’ secured creditors, any registered writs and the seizure of any goods.
Regularly monitor your customer accounts and watch for red flags.
Take notice when a client makes only partial payments; significantly alters their ordering or payment pattern; frequently advises that “the cheque is in the mail” or avoids communication with you.
Follow-up immediately on overdue accounts.
Do not wait until an account is more than 90 days past due to initiate the collection process. Do not continue to extend further credit on past due accounts, but rather consider COD deliveries until such time as the account is current.
A simple financial calculation (accounts receivable / (total revenue / 365 days)) provides the average collection period (number of days) for accounts receivable. This calculation can help you assess the effectiveness of your credit granting and collection activities.
Keep your ear to the ground.
If you hear a rumour about a client’s financial difficulty, take heed. Although the story you heard may not be entirely accurate, there is usually some merit to most rumours.
Working with Your Suppliers
Do your research.
Ask your suppliers to provide you with financial information including a credit history and with your suppliers’ consent, verify the information through independent sources. Talk to others in the industry and know the reputation of your suppliers.
In addition, you may want to consider conducting a personal property search of the business which is also available at any registry office for a small fee. These searches will indicate the supplier’s secured creditors, any registered writs and the seizure of any goods.
Periodically visit your suppliers’ place of business.
Is equipment sitting idle in the yard? Is there a severe shortage of inventory on site? Is there a noticeable excess of inventory on site? Answering “yes” to any of these questions could indicate that the supplier is experiencing difficulty with its operations.
Limit pre-payments on your account.
At most, a 10% pre-payment would be a reasonable maximum advance payment.
Consider renegotiating supplier contracts.
The dramatic rise in input costs (as much as 20%) over the past few years was likely not contemplated at the time the original contract was negotiated. Your refusal to be flexible and negotiate may drive that supplier out of business. Remember, flexibility today may mean continued business tomorrow.
Know Your Rights
Suppliers are afforded special rights under the Bankruptcy and Insolvency Act. If a client files for bankruptcy, make sure that you know your legal rights to repossess your goods and to make a claim for unpaid amounts.
Remember, the key to managing client and supplier risk is to be proactive – early intervention is the most cost-effective, risk-management tool. There are many ways to resolve issues or restructure a business and get it back on the road to success. Monitor your business on a continual basis and when you find a problem, acknowledge it and seek professional advice. Taking action early could mean averting a problem before it becomes a serious issue.
About the authors
Lori Schmaltz, CGA is the Alberta Regional Leader of MNP’s Agri-Food Niche and an AFPA board member and Katherine Bujold, CIRP is a Trustee in Bankruptcy and Vice-President with the MNP’s Corporate Recovery Team in Calgary. If you would like more information, please contact Lori or Katherine at 1.877.500.0792 or [email protected]
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