Evaluate customers and suppliers.(management)

HAVE YOU BECOME YOUR CUSTOMERS' banker? How about your suppliers'?

As companies face the most challenging business and credit environment seen in many years, they may see their business partners as sources of low-cost, easily accessible credit. Your best customers--the ones that you have carefully nurtured over many years in order to build your sales base--may be taking advantage of the relationship to supplement their own cash needs.

Management must begin to take a hard look at receivables. Most companies continue to focus on the top and bottom lines of the income statement to run their businesses, but it's time to focus instead on the receivable aging report, cash flow statement and bank balance. Companies should review these on a daily basis to detect customers who fall behind on their invoices in time to react.

It's also time to re-evaluate credit terms with customers and negotiate the shortest reasonable terms. Many companies will extend their payables incrementally, a few days at a time, without consulting with their suppliers. While this is an effective way to improve their cash flow, it may have the opposite effect on your company's bank balance. It may also screen more serious cash flow problems that will ultimately result in costly write-offs.

Careful review and continuous monitoring of the creditworthiness of each new and existing customer is critical before extending credit. This will better ensure full repayment in accordance with stated terms. Careful monitoring of the customer accounts receivable aging and requesting regular financial information from your largest customers will help your company identify and evaluate credit risk in time to address potential problems.

The buyers of your company's products and services may not understand the financial position of their employers. Most companies withhold this information from their employees as well as their customers and suppliers. Always consider the risk of doing business with a company that is short of cash and overextended at the bank. If your company's largest customer were to file for bankruptcy tomorrow, what would happen to your business?

Look at your largest customers first and then those who historically have been slow to pay. These customers represent the highest level of risk to your company's success. It's critical to understand the credit profile of any customer that could severely impact your business if it runs into trouble. As an unsecured creditor in a bankruptcy, your company will likely collect a fraction of your receivable and only at the conclusion of a lengthy legal proceeding.

Most companies will take this opportunity to manage their supply chains more closely. Some suppliers may attempt to ship products early and collect in the shortest possible time in an effort to manage their working capital. This may be a time to bargain with suppliers for the most favorable credit terms that are as long as possible. Conversely, to the extent excess cash is available, other companies may negotiate for early payment discounts because most suppliers will be hungry for cash. It may also be time to evaluate the supplier base. Financial position and ability to weather the current credit crisis and economic downturn may be more important determining factors than price and delivery.

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Don't assume that customers or suppliers are financially healthy. Management must do much more than operate the business by monitoring key performance indicators, revenue and expense. Look for red flags of distress. Many companies demand financial information on a regular basis. After all, bankers do this routinely.

Paul Engle is a senior manager with Grant Thornton's Management Advisory Services. Engle, who holds an M.B.A. in finance, has more than 25 years of experience in management, operations, product development, sales and marketing, strategic planning and business process improvement consulting.

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