Opinion: How to spot when a dealer is in trouble

Cedabond chairman Phil Martin urged the industry to be responsible about sharing facts and figures in possible insolvency cases.

With some high profile distributors finding themselves in financial strife, manufacturers and suppliers need to be more vigilant than ever before. Therefore we asked Phil Martin, chairman of buying consortium Cedabond to detail his knowledge of the warning signs to look out for:

In our experience if a company is experiencing a short-term issue it will keep us advised of its situation so that we can help them; it’s one of the many benefits of Cedabond membership.

If they go to ground it’s normally bad news. Fortunately, thanks to the rigorous checks that we carry out before allowing a dealer to join Cedabond, and our ongoing monitoring, this situation happens very rarely. Indeed, it’s worth pointing out at this stage that none of the high-profile dealers to go to the wall in the last 2 years were Cedabond members.

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Credit checks are a given, of course, but they don’t always tell the whole story.

For example, on more than one occasion we have seen a company’s credit limit take a sudden dive simply because it has appointed a new director or board member, or it’s been a day or two late filing a VAT or corporation tax return. In instances like these the limit normally returns to normal within 48 hours.

And there are some circumstances that no credit agency can legislate for – we have seen situations where a business with an exemplary credit history has simply ceased trading because the owners decided they have had enough.

One final word of advice. Whilst communication and the sharing of facts and figures across the industry is to be welcomed and is undoubtedly helpful to all concerned, please act responsibly. Speculation and rumour do nothing to help anybody and could put jobs and even entire businesses at risk.

Deal or no deal

Catering Insight has conducted industry research into how to tell the difference between a distributor who is suffering from a short term cash flow issue and one that might be about to cease trading.

We have come up with a few key tell-tale signs that could be cause for concern, as follows:

• If a dealer suddenly wants to start placing orders with a supplier that it hasn’t done business with previously, then it might be because its existing supplier has refused to supply them – perhaps it hasn’t paid its bill or it has reached its agreed credit limit.

• Something else that might be significant is a substantial injection of cash from a third party. With interest rates at a record low in the current economic climate it’s very cheap to borrow money, but in some cases this is an indication that a business is not trading profitably enough to cover its day-to-day running costs and pay its bills to suppliers.

• Suppliers may want to be nervous if they hear a dealer say “we are waiting for a payment from a customer”, as this could mean there is not enough cash elsewhere in the business to cover the bills, which should be a concern to any supplier.

• The dealer’s level of communication could also be another key indicator. If a company is in trouble it tends to stop communicating – phone calls aren’t returned and emails go unanswered.

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2 Comments

  1. David Burnett said:

    Whilst most of what is said in this article is good sense, I would take issue with your second-to-last bullet point, Clare. Quite often a small to medium sized distributor will be fortunate enough to have a ‘good run’ of high-value projects coming through, either ordered direct via ‘cast-iron’ known clients or via a construction company under contract. This inevitably puts cashflow under pressure and credit terms will occasionally (necessarily) be exceeded, whether it is credit limit or payment period. To say that “…..not (having) enough cash elsewhere in the business…..” to finance such situations is a cause for concern shouldn’t be the default. It would be nice to think we all had this float of cash sitting in our bank accounts. Sadly rarely, if ever, the case. When they happen, these are temporary imbalances caused by the phasing of amassing goods inwards /delivery /installation period and practical completion before final invoicing can take place. Open and transparent communication is key in these situations but suppliers need (and most give) some flexibility to make allowance for this normal process. As you say, supplier vigilance is good but creating unnecessary alarm in the supply chain and across our industry sector as a whole is something we could all do without – it’s a hard enough job as it is!

  2. Johnny Rep said:

    Whilst this article makes a lot of valid points
    I for one am growing tired of these fluff pieces clearly ignoring the obvious problems. Let’s break it down… If the distributors were open and honest with their suppliers many of whom jump through more hoops than a circus performer to keep them happy and had open dialogue regarding keeping the account up to date with payment of invoices then this mess could & would be avoided. Instead as suppliers you’re left with cloak & dagger antics keeping you on a “need to know” basis and 9/10 you only find out the problems when a delivery hasn’t gone out the door and your threatened with removal of future business if you don’t move heaven and earth to do so. Recently though the antics have actual been criminal in the purest sense where suppliers & end users have all been used and abused by distributors who bite off more than they can chew then go pop take us for millions are then hoovered up by parasitic firms for peanuts and come back with a gun to the head of everyone they’ve just done over demanding identical terms. Until the respect between distributors and suppliers are seriously improved it will be more of the same sadly.

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