So, dear reader, unless you have been away to some far off beach in a far off place where there is no TV or newspapers and have no idea what is going on in this world, you must be aware by now that, all is not right with the world economy. For those of you who have had the good fortune in the last few years to be living in booming economies or selling stone to them, you must be aware by now that the probability is very high of the future being not so, should we say, " buoyant", as bright as before. If your business has had the fortune that its principal problem is keeping up with the delivery dates, then you are already a very lucky man. But, let us face it, most likely, for most of the stone industry, more difficult times are ahead.
The lucky ones will have to remind themselves once again there are also other problems that can face a business apart from worrying about what to do with all that money one has made. For example, we are now soon about to return to those bad, almost forgotten, days when there are clients who actually do not pay for the stone that was supplied to them. Some of them will actually be companies who have been impeccable clients, always making the bank transfer on time, rarely complaining, and who are even close friends. And when it happens it will come as a shock. How to prepare oneself for the coming crisis? If you think it will not happen to your company because of the particular stone or market you work in, just pass these pages over and whistle away. But for the other 99% of mortals, here are some suggestions.
First and most important, the key to being prepared is being well informed. The more you know about your buyer, his business, his clients, his financial situation, the better it is for you. Never mind that you have never had problems in the past, we are talking about the future. One unpaid bill in an often low margin and highly competitive business can wipe out the profits of several months hard work, or even the whole year. The next time you are having dinner with your clients, do not just chat about other irrelevant matters, steer the conservation towards the business situation of the client. Try to find out the following:
- Is the market of your buyer experiencing a slowdown? Is he complaining of not getting enough orders recently or of building projects being postponed? If that is so, he too will buy less from you in the future.
- What kind of companies does he sell to? Is he selling to small construction companies that no one has heard about? Is your buyer selling to a promoter building new houses in a small village? Ask for the name of the promoter and even if that promoter is not your direct buyer, ask for bank and other references. After all, if the promoter is unable to sell his project, he may not pay his stone supplier, who, in turn, may not be able to pay you.
- What are the typical payment terms your buyer has, not the one between you and him? Never mind that your stone buyer pays you promptly in 90 days or less, but if he is now selling to his client at 210 or 240 days, then, be sure, there will be a risk for you. Is your buyer complaining that he is receiving money later than usual or he is being asked to accept longer payment terms from his buyer? That is a warning signal for you also not just for him.
- When was the last time you asked for bank references about your buyer? Two years ago, three years ago? No matter how well your buyer has behaved in these years, it is time to update the references again. Banks everywhere are becoming cautious once again and not giving credit as easily as before. References of only six months ago may not be valid in some markets, the economic situation has deteriorated very rapidly. Has your buyer complained he is lately having trouble with his banks in extending the credit lines? That should keep you on full alert too.
- Is you buyer who normally rarely complains about the quality of the material you supplied, beginning to complain more than usual? It could be your competition has been having seafood dinners with him, but it could also be a pointer to a tightening financial situation for the buyer. Either way you need to pay him a visit and investigate.
- Are you getting less orders recently from buyers in a particular market? Why is that- is it because your competition has been making greater efforts there or is it because that market has slowed down in general? Have their been reports in the newspapers of too much unsold housing or office space in that area, of projects being postponed or cancelled? If construction activity in that region has slowed down, the chances are demand for stone in that region will also decline. If you have been liberal in payment terms in that region, it may be time to become more strict now.
- Is your buyer trying to re-negotiate payment terms with you? By all means give him the extra facilities he needs if you are convinced it is only a temporary thing, but at least ask in as detailed a manner as possible, why does he need the extra time to pay you. If it is because he has just purchased new machinery, or something which typically leaves the company liquidity temporarily low, the matter may not be serious. But if he says the competition is getting tougher, margins lower, he is getting paid late and there is less demand, since none of these situations are likely to improve, be sure you will have payment problems again and again.
It is also an excellent time to sit with your accountant and go back to how your buyers used to pay five years go or even earlier. Review the financial history of all of them one by one. The remarkable thing in Spain, Portugal and USA to name some, has been that in recent years business has been so good that almost everyone, be he or she a good or bad businessman, has usually managed to pay their suppliers on time. In other words, even those buyers who have long had a poor history of payments, have behaved impeccably. The quality of credit has been difficult to measure when payment problems are rare. But now is the time to ask, how did your buyer behave when the times were not so good? Was he the "problem" guy?
A very important question to ask nowadays is whether your buyer manages his business well or not. If your buyer (even though he has given no problems in recent years) is that typical chaotic person who gives the impression of having no control or sense of organisation, he is also the type who will probably face problems soon.
Your buyer of stone will also have other suppliers of stone and other items. This is a good time to be in touch with those suppliers (not all will be your competition) and share information with them, checking the credit worthiness of companies.
Do not forget that even if today there is no sign of trouble in you business, if you or your buyers have been supplying stone today to construction companies at 7 or 8 months promissory notes, the problem of payment may arise only that many months hence. At the rate the world economy is worsening, no one can say anything as to how things will be then. It is also possible that the world economy improves soon and the clouds just go away, but as of today it seems most unlikely.
The toughest decision of all is to decide whether to sell or not to a client who has given no problem up to now but who might do so in the future. After all, with so much competition, as it is difficult to make a sale, and to walk away from one because of a hypothetical problem in the future may sound like a foolish approach to business. Risk is an integred part of business and one has to take them if one wants to keep the machines working and the company surviving. What we are trying to say here is that even though the risk exists and has existed always, what has changed in the last three months is the magnitude of risk. The overall level of risk, so hard to quantify, of not getting paid in the future, has gone up, not gone down. Being better informed will help to make a judgement on whether the risk one is taking with a client is acceptable or not. The buoyancy of the last few years in some countries has made many companies become careless in evaluating the risks of non-payment. Knowing more is better than being ignorant and just might save you some unpleasant shocks.
It is also possible that the economy continues to boom and the problem of collecting payment simply does not arise. In that case, feel free to call us fools and even get invited to a free beer. But if it all does get worse will you write us a check? ...
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