CHAPTER 2 Hallmarks of a Financially Distressed Supplier

• Jurisdiction: United States

CHAPTER 2 Hallmarks of a Financially Distressed Supplier

A. Identifying Troubled Suppliers

To preserve and protect their own financial well-being, vendors and customers need to recognize the early warning signs of a troubled supplier and take effective prophylactic action to minimize losses and supply-chain disruptions. These early warning signs include the following:

• bounced checks
• increasing delay between invoice and payment
• broken commitments to pay past-due balance
• federal or state tax liens recently filed against customer
• frozen bank accounts
• checks issued on a closed account
• employee reductions
• upper management turnover
• reduced communication or failure to return calls or inquiries
• the business being marketed for sale
• the customer being sued by other trade creditors
• a sudden increase in purchases and consumption of services, possibly indicating an inventory buildup prior to a bankruptcy filing
• initiation of a new relationship with you, with accompanying negative commentary about prior service providers, accompanied by skimpy financial reports or delayed credit application
• rumors in the industry about problems or operational issues
• industry distress that is likely to impact company
• sudden interest in cleaning up documentation, or requests for account status or payoff
• information (possibly indicative of preparation for bankruptcy filing).

B. Early Action Strategies for Vendors

1. Analysis and Monitoring of Supplier's Financial Condition

Any supplier to a company that provides critical products or services and faces difficulty could interfere with the customer's supply chain and production. This is particularly true if the supplier is the single-source provider of the supply to the customer and the part or service is not available in the open market. Early detection is critical to provide the customer with the most options for addressing production-threatening supplier situations. The first step is to understand that being "troubled" can mean more than just financial unsoundness; it can also mean managerial weakness.

2. Analysis of Cash Flow and Pricing Policy

Cash constantly moves in and out of a supplier. There are two types of cash-flow documents that should be monitored on a monthly basis to determine a supplier's financial heath. The first document is the "Cash Flow Forecast," which is the estimate of a supplier's cash income and expenditures over a period of time. The second type of cash flow document is a "Cash Flow Statement," which records the actual income and expenditures at the end of the forecasted period. The closer the forecasted figures match the actual figures in the statement, the more insight may be gained by a customer into the supplier's financial status.

3. Role of Turnaround Consultants and Accountants

Nearly all successful turnarounds involve bringing in new leadership, often an interim executive recruited for a key role such as...