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I have written in the past about communicating to employees and creditors in a liquidity-challenged situation. When it comes to communicating with customers under these same conditions, the stakes are even higher and the considerations are different.
In today's newsletter, I explain how to assess your particular situation and offer several guidelines for moving forward.
I appreciate your comments. Simply reply to this email to send them to me.
Founder and Principal
Goodrich & Associates
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Minimize the Negative Impact on Customers in Liquidity-Challenged Situations
I have written in the past about communicating to employees and creditors in a liquidity-challenged situation. In doing so, I recommended many clear-cut guidelines. Today's newsletter is about talking to customers when the same situation occurs. What's the difference? Well, for starters, the consequences of screwing up customer communications are greater. In addition, the recommended actions are far more fact and situation dependent than when communicating with employees or creditors. There are few clear guidelines. Handling communications in this situation is critical since, of course, with no customers there is no business. Even losing just a portion of your customer base can permanently impair the value of the enterprise, a value which is the foundation of any sort of debt restructuring that might take place. Some key things about the facts and situation that will drive how you should respond...- How important are you to each customer? Do you make something that is critical to that customer, such as a patent protected part? How big and profitable is the market your customer sells into? How easily can your product or service be replaced? Are there significant switching costs? Is your brand so strong that a retailer must carry it no matter what?
The answers to these questions may vary by customer / product / service permutation, but they are at the heart of determining how much pain each customer would feel should you shut your doors.
As one example, one of my clients in bankruptcy made private label douche, enema and cough drops. Delays in shipments weren't catastrophic to their customers, because most people bought brand name products in these categories anyway. And, the retailers had an alternative private label supplier. My client lost some of the business. (Fortunately, they won most of it back after they exited bankruptcy because there was only one competitor and its private label product wasn't truly brand equivalent.)
- How important is each customer to you? Is the customer marginally profitable, upside down, or more profitable than most? Does the customer provide purchasing volume or other economies of scale that you need? How easily can you cut costs if you lose the customer (a few layoffs and the revenue shortfall is a wash, or lots of idle time on expensive machinery that is hard to sell or is financed)? Do you have "take or pay" supply contracts that still must be honored?
When I worked with a metal recycling company in the Midwest, a large company with multiple aluminum mills was a big customer. My client had a contract with the company but the margins went upside down. Commodity prices were still booming and my client's primary source of scrap aluminum was from the RV industry (which was tanking). So there was less supply of scrap aluminum. With less supply and still booming demand for aluminum, aluminum scrap prices rose above my client's prices to the customer.
We stopped shipping, ending the losses and freeing up cash to purchase scrap metal that could be profitably resold. Because my client filed for bankruptcy, we were able to terminate the contract and the aluminum company just got cents on the dollar for their damage claims.
From a communications perspective, we just told the big company we weren't shipping because the margins were upside down. We didn't tell them about our liquidity issues and they knew nothing until they received notice of the bankruptcy.
- How serious is your liquidity problem? How long and how severely has it been affecting each customer? How bad is your situation? Is a quick fix possible with a combination of operational changes and readily available credit from a lender (most likely at a price), or must existing debt be restructured and/or new equity raised? Have a few shipments been delayed a few days, or have many shipments been delayed for longer periods of time?
All of this determines how long you will be liquidity-starved and to what extent your customers will be experiencing problems. The longer to recovery and the more they have suffered, the more your customers need to know. Sometimes suppliers are affected but not customers, until a breaking point is reached.
One customer of mine was in the trash business and was in deep trouble. Debt was 90% of sales. (Yes, sales.) But, their customers experienced no problems. Waste had been piling up, literally, at the company's facilities and winter had just ended, so the odors weren't overly ripe. There was not yet a reason to tell the customers anything because the company was still able to provide the high level of service it was known for. The customer base knew next to nothing about my client's financial problems. (My client's suppliers knew quite a bit, however.)
- How much does the customer already know? If you give them financials on a routine basis, they know quite a bit. Is there lots of public information available or trade gossip? The more customers know, the more transparent you need to be. If they knew before the problems arose that you were thinly capitalized, for example, customers are likely to be following you closely and will be looking for assurances that more capital is being raised.
The more the customer knows, the less time you have to procrastinate. Customer retention in some situations may depend on your showing them a viable turnaround or restructuring plan. Here communications must be far more candid and forthcoming than in most situations.
Some general guidelines for moving forward:- Maintain your integrity with customers. Even if you lose the customer, if they subsequently talk to other customers or suppliers, it is better that the now former customer says they left because you had financial issues, than that you couldn't be trusted. So don't lie.
That said, don't tell them more than is needed, given the situation. When they ask, telling customers everything that is publicly available in their marketplace helps. Volunteering information they might already know or are likely to soon find out can build credibility. It is always better if they hear the negative information from you rather than public sources.
- Consider asking your customers for help. Some large companies, notably Wal-Mart, will pay quickly and act as a lower cost factor. My clients just go online in these situations and ask to get paid, no special communication needed.
One of my clients was a supplier low down in the auto industry food chain; it worked with its customers for prompt payment. These customers were also experiencing liquidity problems and a larger supplier was paying them early so they could honor their contract with the Big 3. So every Friday, one of the Big 3 paid a primary supplier that supplied seats and trim, who then paid my customer who supplied the color-matched plastic resin that was needed.
When your customer really needs you, consider asking them for temporary financing help. Of course, the communication approach for such a customer will be different than what other customers are told.
- Carefully craft what you tell each customer. Each customer situation is likely to be different. It's important that your message is situation appropriate and well thought out.
- Prioritize customers by their importance to you. Use that prioritization to service and communicate with them accordingly. In the scrap metal company example, the customer was peeved my client broke the contract, but they didn't know about the financial situation until the bankruptcy filing.
- Get in front of your liquidity problems sooner rather than later. This limits how long customers will experience problems. As opposed to the "head in the sand" approach, you will sooner be in a positon to have a credible recovery plan that you just might need to share with key customers.
- Learn to accurately forecast cash flow. Until you can accomplish this, (see my 13-week cash flow article on the subject), you will continually surprise and disappoint your customers. If you make repayment commitments and then break them, you will quickly lose the customer's trust, something that may never be restorable even after the liquidity problem is solved.
Customer communication is never more critical than when a business finds itself in a liquidity-challenged situation. Handled well, many companies can weather the storm and emerge successful. Handled poorly, it can lead to the demise of the business itself.
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Heard on the Street
What is America's greatest economic challenge? It is more than low productivity, high taxes and out of control government. It is the result of these and other things that has led to slow economic growth. Read what John Cochrane, the Senior Fellow of the Hoover Institution at Stanford and former professor at the University of Chicago Booth School of Business, has to say about this in a recent Wall Street Journal article, here.
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About Us
Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.
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