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May 1, 2009 BCMA - It’s All About You! Welcome to the latest issue of BCMA News! 3. Why the Cash Flow Statement Is King When you're analyzing a customer's financial strengths and obligations, don't stop short of their lease or rent arrangements. Today, especially for those occupying property bought at the height of the commercial real estate boom, lease and rent contracts can put an unexpected drag on occupants' trade payment abilities. While it's unlikely that a foreclosing lender would oust a tenant who is current on his rent, that can and has happened. That's why real estate experts advise tenants whose operations would be disrupted by an involuntary move to routinely get non-disturbance agreements from their landlords' mortgage lenders. These agreements require that the lender must recognize the tenant's existing lease if it took over the building. The lease issue can be most acute for retailers, especially distressed retailers-who depend heavily on store leases. The 2005 Bankruptcy Code amendments allow retailers a maximum of 210 days after filing to determine which stores they're going to stay in and which they're going to exit. But BDO's Bill Renhart notes that it's not really 210 days.
Maximizing Inventory Value Prior to this change in the Code, the lease requirement was very liberal. It stated 60 days but could be, and usually was, extended indefinitely by the court. Some of the bigger retail bankruptcies lasted two years or more because retailers would claim they needed to get through a holiday season to know what their right locations and merchandise were. "Now, unless a company files perfectly, and it includes a holiday season, which they typically don't, it's virtually impossible to do that," says Renhart. Landlords, who have a very strong lobby, argued successfully that it's unfair to have bankrupt retailers in their properties. Despite fears to the contrary, the U.S. economy is consistently outperforming all other major economies, according to a study by the Center for Economic Performance at the London School of Economics. And our major advantage, the Center found, is the "translation of investment in information technology into productivity gains." The study also found that what's happening on the macro level is happening on the micro level as well. Companies adopting superior information technology are outperforming competitors that don't. What the study doesn't mention is that these productivity gains are not automatic. Not all information technology investments work out as hoped, and those that don't can become major drags on companies' performance. This is an area where astute credit management has no rival. Know your industry. Know what works and what doesn't. Know the information processing systems and techniques of the best (and the worst) performers. All of these give you and your company an outsized advantage in assessing potential financial performance and credit risk. One constant issue is the "advice" of information technology "experts", who are sometimes more intent on pushing what they have to sell than in identifying and meeting clients' needs. Fred Marlatt speaks of Potash Corp's experience with SAP. "We knew what they wanted to do wouldn't work for us," he says. "We wouldn't do it, but they left still insisting they were right." A major Potash Corp customer did go with the system SAP recommended. It wasn't right for them either, and now they have productivity problems rather than gains. Diana Stoffel, director of credit at Georgia-Pacific Corporation, is a big believer in the predictive powers of cash flow analysis. Stoffel explains, “I was in credit management before the Cash Flow Statement became a requirement of Generally Accepted Accounting Principles. And I remember the old days when working capital, current and quick ratios, and the debt to equity ratio all meant something terribly important! At first, when cash flow came along, I thought, 'This must be some kind of magic. What's it all about? But when I realized that it was simply telling me where a company gets its money and what it does with it. The balance sheet took a back seat that day.” According to Stoffel, “The balance sheet is only a snap shot of a day in time. It's good for trending. The thing that I find very amusing is that there are people that are still tethered to the current ratio and working capital. I can actually show you real-life examples of where a company's current ratio went from 1-1 to 3-1 and everyone thought they were more liquid and strong, but it had an absolutely opposite effect on cash flow. In this particular case, the customer wanted to grow their business, so they extended terms. As a result, their receivable number got a lot bigger, which was then reflected in the current ratio. But this had a negative effect on cash flow. “The operating cash flow is REALLY the absolute, honest-to-goodness, triple decker actual cash that is earned or lost in the course of a period. It's really bona fide cash. A lot of people will look at profitability, but that isn't cash. That profit can have sales in it that haven't been collected yet! “I've said to customers, 'If you don't feel comfortable sharing your entire financial statement with me, just give me your cash flow statement.' With that, I can make an intelligent decision. People will say 'Oh my god! What if they have negative equity! But positive equity isn't cash. It might be tied up financing assets!” Up to 95 percent of the addresses in the typical company's vendor file fail to conform to postal service addressing guidelines, according to a United States Postal Service (USPS) study. The fact that just 2.5 percent of vendor checks have to be reissued, according to an IOMA benchmarking study, is a tribute to the excellent processes that the USPS has put in place. But there are steps you can take to better assure that checks sent to you get to you. The USPS defines a Complete Address to be an address that includes all of the necessary elements to obtain an exact match with the USPS ZIP+4 and City State files. Despite what a customer's system may allow, a USPS Complete Address consists of two lines: a Delivery Address Line and a Last Line. A foreign address has a third line that contains only the name of the country. A Complete Address should never include any special characters or punctuation other than a hyphen within a ZIP+4, a slash or hyphen in a street address, or a # as part of a secondary address. Billing and accounts receivable should make sure that all of your customers have your conforming address in their payables files. The fact that some checks are reaching you with non-conforming addresses now doesn't mean they always will. To learn more about subscribing to Credit Today, check out our web site at http://www.credittoday.com/ Benchmarking Results on International Credit Reports, Part I Benchmarking International Credit Reporting, Part III Credit Card Survey- Respondents Offer Up Advice on Web-based Credit Card Interfaces |
