Fashion Finance: Good Customer, Pays Late
Editor’s note: Fashion Finance is a monthly column for California Apparel News in which common—and not-so-common—financial problems are discussed with industry experts. We welcome questions from readers. If you have a finance question, e-mail us at info@apparelnews.net and we will consult the experts. Please include your name and phone number in your query, although questions selected for publication will run anonymously.
Q: I am a designer in Southern California. We had a very successful launch of our new Spring line and orders were very strong. Recently we have experienced a collection problem with a very important customer that pays slow—very slow. However, when they do pay, they pay in full. The margin we make on this customer is very good. They have a strong retail position in the market; thus, we have benefited by raising the profile of our brand nationally. In addition, they continue to increase their orders with us.
How can I maintain a positive relationship with this customer and get them to pay us on time?
A: As tough as things seem, there are options. First, conduct a comprehensive due diligence review of your customer. There may be underlying reasons why they aren’t paying you according to terms. If they provided you with a credit application, refer to it and contact the references they provided. See if they are slow-pay with other vendors and if so, to what extent? If their payment history with the industry is within terms, then you know you are being treated differently. You need to engage in a candid conversation with them to re-establish their obligation to pay you according to terms.
Next, go to see them. There is nothing like an on-site visit to change the dynamic of slow-payment behaviors. Always give good customers the personal attention they deserve so they will stay good customers. When you are there, take a visual audit. Observe the attitude and demeanor of the employees. If the company’s offices are messy and disorganized, this is an indication that the financial affairs of the company are messy as well. Visit their retail locations and see what’s going on. Speak with the salespeople to get a sense of how they feel about the company and the current state of the market.
You’ve got to spend time at your customer’s offices and in their stores to really know what’s happening. If you don’t feel welcome and appreciated in their retail environment, then the customers who buy their clothes won’t either and they won’t come back to the store.
On the other hand, if you determine that the company is doing well, then you could be the victim of VPO—vendor payment optimization. Many retailers use VPO to take full advantage of cash management strategies by delaying payment to vendors. If you sense your customer is engaging in VPO behavior, you need to talk with them and clear the air quickly. VPO strategies are designed to react to vendors who follow up for payment and ignore those vendors who don’t follow up.
If you determine that your customers have become dysfunctional and their comparative and competitive advantages have diminished, it is time to re-examine your levels of credit risk exposure. An effective way to limit your loss is not to be exposed more than 10 percent of your customer’s tangible net worth. In the event of cash flow problems, 90 percent of their resources are available to fund payables. Limiting your exposure to no more than 10 percent of your customer’s tangible net worth (cash, accounts receivables, real estate, inventory) is an effective way to spread your risk-of-loss throughout your entire list of accounts receivable.
Another strategy would be to apply a small price increase to offset the cost of carrying their receivable. This may not be possible due to competitive conditions, but I recommend this as opposed to a finance charge or late charge. The reality is that most retailers won’t pay late charges, so why bother levying them? You will just create angst with a good customer.
No matter how hard it is to do, you may also need to consider pulling back your sales to a slow-pay customer. Recently, a lot of fashion manufacturers were hit hard with the Kmart bankruptcy. By trusting your instincts, being decisive and keeping lines of communication open, you will save yourself a lot of grief. So, as soon as you can, go see your slow-pay customer, observe what you see and say, “Let’s talk.”
Michael T. David Managing director Allied National Inc.(310) 255-8816 mdavid@andc.com
