A dealer “looks back” at the 2017 Recession
As featured in Lumber Co-operator
“I’m Just Glad We Prepared. Others Didn’t, and They Didn’t Survive.”
It's March 2018, and looking back at the recent recession of 2017, I'm glad of two things:
1. I'm glad that the dip in the markets didn't reach the depths of the Great Recession we saw in 2009; nonetheless, 2017’s recession rattled the cage of many dealers we know, and put others out of business because they just weren’t ready, and…
2. I’m so relieved that we took the steps during the strong economic times to prepare. After all, if we’ve learned anything from three generations in the building materials business it’s that the party can’t go on forever. Like it or not, we are in a cyclical industry. You ride the wave up, and then hang on as you ride the wave back down.
Here’s what we did to prepare, survive, and position ourselves to take advantage of the next up cycle:
Accounts receivable: In 2016, two years ago, we decided to really focus on our accounts receivable. We instituted an unusual communication program to explain something crucial to our customers. First, we made clear that we would be better dealers if we had access to solid cash flow. If our customers wanted new product introduction, programs and training, flush inventories, proper staffing levels, and trucks and forklifts that were serviced properly and didn’t break down, then we needed high-performing A/R. We were very candid about the fact that we were just asking for something very reasonable, namely to be paid on time for what we sold.
Credit: We also took time in 2016 to implement policies to hold the line on giving credit to customers with delinquent balances, and we required that all customers clean up their outstanding balances. If customers were 45 or 60+ days out in the good times, we were fairly sure they wouldn’t be able to pay in any future downturn. Next, we converted our high-risk customers (60+ days out) to C.O.D., and we were really strict about the policy. Initially, there were some uncomfortable conversations, but we decided that our obligation was to the future survival of our business, and sometimes touchy conversations are necessary.
Customer concentration: After we put these new A/R policies in place, we took at look at our customer concentration. For each of our larger customers, we asked a basic question: Recognizing that no one customer should account for more than 10% of our business, were we overly dependent on any one or two big customers? If so, we had to balance that out by growing others into larger accounts or otherwise spreading our risk. While we were at it, we built a risk/volume quadrant and got a visual indication of what we had to do to drive customers toward (if not solidly into) the low-risk, high-volume, fast-pay area of the grid.
Credit management: We then set to work on our credit management. We recognized the obvious, that we were great at being building material dealers, but we were not as good with collections. We also realized that we did not want to be “bankers” to our customers, essentially loaning money to our customers in the form of dated receivables. Short of a culture change or expensive new staffing, we knew we needed a change. So, we partnered with a credit management company that funded our sales up front, brought our A/R to 100% current, and assumed our collection risk. It was the best pre-recession decision we could have made.
Banking: Two years ago, we also took deliberate steps to build a better relationship with our bank. Before the downturn hit, we went to our bank, showed them what we had done with A/R and credit management, and requested a boost to our credit line, which was granted. To prepare for that request, we really got our house in order. We brought in an advisor to inventory and categorize our collateral, which we also provided to the bank to show we could backstop our debts if necessary. It should come as no surprise that our banker admired what we did to prepare for the downturn. Accordingly, the bank was not hesitant to extend us credit, in part because we came to them before the downturn and asked how lending policies would change in a potential downturn.
Did all of our preparation work, even though lots of people thought we were being overcautious at the time? You bet. We sailed through the downturn, even as some of our regional competitors went out of business. Now, we are really well positioned to increase our business when the economy is roaring again.
About the Author
Scott is president and CEO of BlueTarp. He has spent the majority of his twenty year career in financial services helping businesses grow more rapidly through the effective use of credit.More Content by Scott Simpson