Can a loss be a win? Oh yes it can.

There is a tendency to dwell on events that may or may not have shaped the way in which I approached Credit Management or more specifically, what I like to call the enlarged role of Credit. What I refer to I guess are pivotal moments that some of us encounter that set the furrow and lead to enormous satisfaction and joy; I speak of real value add and client relationships.

One such moment for me came in 1992. I had just joined a vibrant Distribution business and was tasked with managing Credit and Risk while on the outer rims of a heavy recessionary period that started in 1990/1991.

I was asked to consider a 50K line to a small system builder business based in Berkshire who had operated under a strained 10K credit line and was obliged to continuously pay in order to receive further supply.

The business was a partnership operating from what appeared to be premises above a motor cycle dealership. It had indeed incorporated the initials of the store below but had no direct association with it.

I vividly recall climbing an external staircase to the first floor to find three or four people inside a fairly confined space, one being the principal owner while the others managed product build. It was so cramped I had to sit up close with nothing to lean on, occasionally shifting position to allow the system builder room to work in or collect product from the warehouse (a far corner of the room).

Not the best environment to conduct a client interview and more difficult given the owners reluctance to share any financial trading figures with me. I had of course already done some research on him and his business but was greatly taken by his attitude, candour and determined approach to business. At one point, having said he checked on the quality and rating of all suppliers, he pulled open the bottom drawer of his desk and brought out detailed business reports on our company and many of our competitors. He also accurately in my view, summed up our position and standing but urged me at the same time to judge him correctly.

I spent some two hours talking to him on a number of issues, his plans, aspirations, family, what got him involved in the first place and what was it that excited him about his business and how he saw us as players in his evolvement and growth. I admit, he impressed me greatly and that “gut feel” Credit people get came into play and I elected to support the request for an increased line to 50K. I also took the view that as partnership with his wife, personal liability showed his commitment and that we in turn had to offer something in return.

That first meeting was the beginning of a great trading and business relationship and indeed friendship that lasted almost nine years.

Within a year, his credit line had increased to 100K and he relented enough to supply me with regular management information and trading data. His payment behaviour remained excellent and there were plans of a move to bigger premises close by; something incidentally he chose to share with me unprompted, asking if this move would cause me any issues or concern.

He added excitedly, “Eddie, at the same time, I’m going to become a Plc, will this make a difference to my credit line or the way you look at us”? I could sense his pride and puffed out chest while he said this and secretly shared his obvious excitement. I replied that given the required issued share capital and his commitment to sharing of information, it was very much business as usual.

Conveniently, his new premises were close to where my car was serviced twice a year and I made a point of popping in to see him on each occasion.

As his business grew, it became apparent he did have some weakness and one was an inability to “let go” or allow others to manage his growing business activity. He also spent too much time looking at what one or two major competitors were doing and this invariably meant his focus was not always fully aligned. I recall telling him this on several occasions. He, of course, nodded his head ruefully saying, “You’re right and I will deal with this, I promise”.

In those early years, he was eager to seek my views on his business and his management style and was generally receptive to advice given, either critical or constructive. One instance I recall was when I told him one of his major competitors in the North of England had opened a trade desk and this had proved successful, had he considered this I enquired? His reply was along the lines of “No, I really don’t fancy having all sorts of people walking in off the street asking me to look at other people’s equipment or problems”. Some six months later on my next visit, I noticed his reception area had been revamped with a 15 foot trade desk, three employees and some marketing literature. It was obvious also that it was busy. As I climbed the stairs behind him I commented on his apparent change of heart. “It’s great” he said, “I’m helping them out and they are buying my product and support instead”

On another occasion, I had a bit of a dig that given his revenue had grown to above 12m, he should think of appointing a quality accountant to help him manage that side of the business. He had continued to rely on general accounts people, external accountants and his own control. He rang me quite excited shortly after saying he had finally recruited a finance director with experience. He was confused however by my lack of enthusiasm once he detailed who he had selected. I explained my concern was his background of one familiar with forecasts and budgets of businesses with turnover of over 220m. “You’re a small OEM” I said, “A radically smaller business and one that has to keep things tightly controlled. You may struggle to keep his interest or control his aspirations”

He lasted less than three months. “You were right” he said, “He was not on the same planet as us, was not suitable and I’m looking for another”.

The credit line we applied bounced up and down between £200,000 to 700,000 and trade remained brisk and profitable. Indeed in the period 1992-1996, gross margin was in the region of 11%, a quite reasonable percentage for supply of component product.

In June 1997, I was working late in the office when I received a call. It was the owner and he was concerned. He was due to visit his bank manager with his most recent year end results that would show a small and first ever operating loss of around 50k on sales of around 15.5m and while we had discussed this well before and considered actions required, he wanted me to run through his proposed Directors statement to accompany the financial results.

I asked him to fax this across immediately and he did. It stretched to almost three and a half pages and was incredibly detailed in outlining specific events that contributed to the loss. I picked up the phone and called him back. “Are you sure you want to say all this? I said, “There is really no need to be so detailed and precise and you may give completely the wrong impression”.

We re-worked the statement to just one page and he appeared happy with it (I certainly felt better). His meeting with his bank manager went well and there were no repercussions.

The business turned in a profit the following year on slightly lower sales and similar profit in 1999 on increased sales of almost 19m. The failure of one major competitor had contributed to this surge but at a cost. Gross margin declined and direct costs had risen higher than they should. Stiffer competition and the need to compromise on price began to impact and I was obliged to control exposure tighter toward the end of 1998 and throughout 1999 and visits became more frequent in the latter part of that year.

In fairness he responded extremely well and worked very closely with us in efforts to correct growing cash flow pressures. We in the meanwhile continued to offer support where we could although we had noticed our own margin return on trade with them had declined to around 8% since 1996.

Their tangible net worth had never been high, a common feature for this type of business in the IT sector but had steadily declined from 120k in 1996 to around 39k in 1999. More ominously however, cash had become much tighter toward Q4 1999 and continued into Q1 2000.

We had with client’s agreement reduced overall exposures to a level of around 120k by March 2000 and the pressure at this point had become intense. He had been obliged to lay off people at the beginning of the year to cut cost but this had little impact. The effect of a recessionary period between 1998 and 2000 later labelled “dot.com bubble” had perhaps proved too big an obstacle and the nature of his off the page business model was now being fast overtaken by others. He and I both knew the writing was on the wall.

Our final meeting in June 2000 was a sad one. Our debt had reduced to 80K and I met him and his financial advisor late in the evening after he had been obliged to lay off all staff. He looked visibly thinner than the last time we met and also appeared physically drained.

His opening retort was “Eddie, I’m really sorry we lost you money but thanks for all the support you’ve given us over the years”. I immediately replied “No need to apologize, we’ve done great business for many years and you worked with us to reduce exposure over the last year. Our relationship has been extremely fruitful and profitable”.

I went on to add that he should not take personal blame for business failure and the only failing perhaps was a reluctance to see his business model and activity was being outpaced by change. This change had however been singularly rapid and the lack of quality management around him had not helped either.

He ended the meeting by asking me if I would support him with a credit line should he set up again immediately. My unequivocal response was “Most certainly, but only if you are not the same business you were”.

He smiled and I knew he would not set up again. This had been a pivotal time for him and he felt incredibly sad to lay off people that to him were almost a family.

Some two years later and totally out of the blue, I received an email – it was him, asking me if I would be so kind as to provide a personal reference as he had been short-listed for a role of Managing Director. I assured him I would.

For some 11 years in total, our sector was enriched by his inclusion. Another very positive factor for me was the 290K of gross profit generated in the 6 months preceding failure while we nudged the credit line downward together. Given trade well in excess of 13m over the years with excellent payment and DSO in the low thirties, (for those purists) along with great overall gross profit return, the final loss of 80K was less significant. Our nine year relationship was most definitely not a loss but a massive win.

This summary of events could be more inclusive but highlights what to me encapsulate the changing nature and face of Credit or how perhaps it should be applied. I held the relationship with this client from day one and was fortunate to work with a salesman who equally was exceptional and understanding. Not enough of us get close enough to customers and sales to manage risk or indeed support and grow business and such relationships can be absolutely crucial. They offer a wonderful opportunity to impact on client’s direction and progress and create a foundation that amply supports future correction or disaster recovery.

Wherever possible, I have emulated this approach and found it incredibly rewarding. It’s great to have a client in difficulty talk to you first before banks and also seek your advice on a range of channel and business issues. I have led informal moratoria ensuring business survival and onward sale, business re-financing and have even been directly involved in putting buyers and sellers together. None of these roles are seen on Job specifications or CV’s for people in Credit management but perhaps it’s time they were. Few organisations recognise that Credit touches all parts of business and its real function extends beyond mere debt collection and risk management.