View from the Other SideView from the Other Side

Alfred ArtisAlfred Artis

VP FinanceVP Finance

The Sharper ImageThe Sharper Image

AgendaAgenda

• Genesis of this topicGenesis of this topic• Change versus DeclineChange versus Decline• What it takes to know the differenceWhat it takes to know the difference• What the vendor knows that you don’t knowWhat the vendor knows that you don’t know• Questions Credit Managers should ask Questions Credit Managers should ask

themselvesthemselves• Questions Credit Managers should ask the Questions Credit Managers should ask the

customercustomer• Actual Questions and Comments from Actual Questions and Comments from

Credit ProfessionalsCredit Professionals

Why this Topic?Why this Topic?

• Experience as a Credit Professional Experience as a Credit Professional who constantly ponders the role of who constantly ponders the role of the Credit Professionalthe Credit Professional

• Learnings from being a BankerLearnings from being a Banker• Current real-time experienceCurrent real-time experience• Perfect alignment with other topics in Perfect alignment with other topics in

this Conferencethis Conference• Jodi allowed me to change topics!Jodi allowed me to change topics!

Change versus DeclineChange versus Decline

• Change: Decisions and actions made and Change: Decisions and actions made and taken by management that yield financial taken by management that yield financial results different from prior periodsresults different from prior periods

• Examples: Selling strategy, product mix, Examples: Selling strategy, product mix, staffing, IT platform, executive changes, staffing, IT platform, executive changes, M&A, payment policiesM&A, payment policies

Note: Change is not a guarantee of success Note: Change is not a guarantee of success or failure. It is the impetus to review the or failure. It is the impetus to review the situation, not make a final decision.situation, not make a final decision.

Change versus DeclineChange versus Decline

• Irreversible Decline: Negative revenue, Irreversible Decline: Negative revenue, profit, or liquidity that was caused by profit, or liquidity that was caused by change or inaction and that cannot be change or inaction and that cannot be reversed due to lack of liquidityreversed due to lack of liquidity

• Example: Revenue decline due to loss of Example: Revenue decline due to loss of customer base, margin decline due to customer base, margin decline due to competition, failed acquisition, competition, failed acquisition, overspending on wrong inventory or overspending on wrong inventory or capital assetscapital assets

Change versus DeclineChange versus Decline

• Reversible Decline: Negative results Reversible Decline: Negative results that left the company with enough that left the company with enough cash or financing to continue cash or financing to continue operations for another fiscal yearoperations for another fiscal year

• Note: This is Alfred’s definition (patent pending)Note: This is Alfred’s definition (patent pending)

• The key for the credit professional is The key for the credit professional is to assess change versus decline to assess change versus decline accurately…accurately…

What Credit Professionals Need What Credit Professionals Need to Know—a Debtor’s viewto Know—a Debtor’s view

• The origin of the The origin of the change in resultschange in results from prior period, even if the results from prior period, even if the results are goodare good

• Whether Management knows if the Whether Management knows if the company is undergoing change or a company is undergoing change or a decline decline (I can’t stress this enough!)(I can’t stress this enough!)

• Management’s planManagement’s plan• Real-time balance sheet informationReal-time balance sheet informationplus…plus…

What Credit Professionals Need What Credit Professionals Need to Know—a Debtor’s viewto Know—a Debtor’s view

• The debtor’s access to capital—in real, The debtor’s access to capital—in real, verifiable dollars and not hopes and dreams; verifiable dollars and not hopes and dreams; no cash and no access means no reversalno cash and no access means no reversal

• How long the debtor can last—not a simple How long the debtor can last—not a simple cash burn test, but cash burn plus access as cash burn test, but cash burn plus access as defined abovedefined above

Note: I personally guarantee that you will Note: I personally guarantee that you will always make the wrong decision if you do always make the wrong decision if you do not consider the above bullets. Why?not consider the above bullets. Why?

What the Customer Knows that What the Customer Knows that You don’t KnowYou don’t Know

• The set-in of change long before you The set-in of change long before you dodo

• Conditions under which change Conditions under which change becomes irreversible decline—this is becomes irreversible decline—this is the key to all risk analysisthe key to all risk analysis

• Its realistic access to capital Its realistic access to capital • Its own payment priorities—you will be Its own payment priorities—you will be

surprised at how high up the priority surprised at how high up the priority chain a vendor can bechain a vendor can be

What the Customer Knows that What the Customer Knows that You don’t KnowYou don’t Know• How he or she assesses your behavior and How he or she assesses your behavior and

collections patterns: supportive or harmfulcollections patterns: supportive or harmful• Whether your questions are germane to the Whether your questions are germane to the

situationsituation• Whether he or she intends to do business with Whether he or she intends to do business with

you in the future—this can be driven by behavior you in the future—this can be driven by behavior and collections patternsand collections patterns

• The complete list of supportive and harmful The complete list of supportive and harmful vendorsvendors

So what is the Credit Professional to do? Ask a So what is the Credit Professional to do? Ask a bunch of questions first…bunch of questions first…

Questions Credit Professionals Questions Credit Professionals Should Ask ThemselvesShould Ask Themselves

• Am I here to avoid risk or manage risk?Am I here to avoid risk or manage risk?

• Do I even want to know whether my Do I even want to know whether my customer is undergoing change or decline? customer is undergoing change or decline? Refreshingly, some creditors don’t want to Refreshingly, some creditors don’t want to know, and they are still supportive.know, and they are still supportive.

• Am I willing to take the time to try to Am I willing to take the time to try to understand the situation?understand the situation?

and…and…

Questions Credit Professionals Questions Credit Professionals Should Ask ThemselvesShould Ask Themselves

• Do I want this company to want to do business Do I want this company to want to do business with me in the future if their situation is with me in the future if their situation is undergoing change and not decline?undergoing change and not decline?

• Do I have an exit strategy?Do I have an exit strategy?• What information do I need in order to make What information do I need in order to make

my decision? my decision? Note: If all the information you need is on a Note: If all the information you need is on a message board, then please proceed to the “Cash In Advance as a message board, then please proceed to the “Cash In Advance as a Credit Tool” session.Credit Tool” session.

But where do I go to get the information?But where do I go to get the information?

Questions Credit Managers Questions Credit Managers Should Ask the CustomerShould Ask the Customer• May we enter into a Confidentiality Agreement? May we enter into a Confidentiality Agreement?

This opens up a world of information to you, but This opens up a world of information to you, but don’t ask for it if you have already made up your don’t ask for it if you have already made up your mind. All questions that follow can only truly be mind. All questions that follow can only truly be answered under confidentiality.answered under confidentiality.

• Why shouldn’t I be concerned about the Why shouldn’t I be concerned about the information in front of me?information in front of me?

• What is your Plan B?What is your Plan B?plus…plus…

Questions Credit Managers Questions Credit Managers Should Ask the CustomerShould Ask the Customer

• What is your current liquidity situation?What is your current liquidity situation?

• Are you in compliance with your debt Are you in compliance with your debt agreement?agreement?

• What is your current A/P aging profile?What is your current A/P aging profile?

• Am I an important vendor to you?Am I an important vendor to you?

• Is there anything you want to propose?Is there anything you want to propose?

Actual Credit comments and Actual Credit comments and questionsquestions

• I placed you on credit hold because I heard I placed you on credit hold because I heard you are filing bankruptcy in three weeks.you are filing bankruptcy in three weeks.

• Yes, I agree that you have never paid late Yes, I agree that you have never paid late and that you presently owe us nothing, but and that you presently owe us nothing, but you could go out of business.you could go out of business.

• My credit insurer won’t let me extend My credit insurer won’t let me extend credit to you.credit to you.

Wait, there’s more…Wait, there’s more…

Actual Credit comments and Actual Credit comments and questionsquestions

• I will give you a credit line if you wire I will give you a credit line if you wire me the payment when the order is me the payment when the order is ready to ship.ready to ship.

• I will extend you credit if you issue I will extend you credit if you issue me a standby letter of credit.me a standby letter of credit.

• I called to talk to you, but my mind is I called to talk to you, but my mind is already made up.already made up.

• And more…but that make sense…And more…but that make sense…

Actual Credit comments and Actual Credit comments and questionsquestions

• I believe the risk situation has changed, so I believe the risk situation has changed, so I want to see if you can stretch out your I want to see if you can stretch out your orders.orders.

• Can we review your inventory levels Can we review your inventory levels before we release more orders?before we release more orders?

• This recent press release concerns me. This recent press release concerns me. Can someone help me understand how Can someone help me understand how this is going to affect your company?this is going to affect your company?

• plus…plus…

Actual Credit comments and Actual Credit comments and questionsquestions• How about if we keep terms on all existing orders, How about if we keep terms on all existing orders,

but go cash-in-advance on new orders?but go cash-in-advance on new orders?• I believe I understand your situation, but our risk I believe I understand your situation, but our risk

appetite is not there, so we respectfully ask for appetite is not there, so we respectfully ask for some type of credit support.some type of credit support.

• If you can bring your account current now, then it If you can bring your account current now, then it will show me that you have liquidity and we can will show me that you have liquidity and we can keep the terms.keep the terms.

• Do you have a payment plan that you want to Do you have a payment plan that you want to propose?propose?

• And the #1 best question/answer-to-its-own-And the #1 best question/answer-to-its-own-question combo of all time…question combo of all time…

Actual Credit comments and Actual Credit comments and questionsquestions

• Am I going to get paid? If you are Am I going to get paid? If you are telling me that we are going to get telling me that we are going to get paid, then I don’t have a problem.paid, then I don’t have a problem.

ConclusionConclusion• A change in results does not mean A change in results does not mean

irreversible decline. Knowing the difference irreversible decline. Knowing the difference is what distinguishes the credit professional is what distinguishes the credit professional from the stereotype of a non-thinking, from the stereotype of a non-thinking, negative-attitude employee who does not negative-attitude employee who does not support the growth goals of the company.support the growth goals of the company.

• Credit professionals who ask the right Credit professionals who ask the right questions of themselves and of the customer questions of themselves and of the customer always get good results.always get good results.

• Two-way communication is the key if Two-way communication is the key if creditors honestly want to work with vendors creditors honestly want to work with vendors undergoing change. Go under NDA!undergoing change. Go under NDA!

Now, let’s talk… Now, let’s talk…