Thursday, January 7, 2016

Drilling Dry Holes

2015 was a very difficult year for many Canadian businesses, especially if you supply to the mining or oil and gas sectors.

For PCR, 2015 saw a record number of CCAA filings with proposals and receiverships.

Unfortunately Canada is still a resource-based economy.  All commodities are being hit hard and as of the writing of this article, China's economy is showing signs of major weakness, which impacts everything like exports of raw material as well as imports of manufactured goods.  When this happens, Canada's economy will continue to be hit hard.

Be Prepared For a Bumpy 2016

Experienced credit professionals should now be reviewing all customer credit limits as well as looking for extraordinarily large orders from existing customers.  If the larger order can't be explained away as seasonal, the customer may be attempting to get as much inventory on hand as possible so when they do go into bankruptcy, there is sufficient "assets" on hand to pay back the bank - leaving you with a massive write-off.

We recommend vigilance when approving credit customers or releasing larger than normal orders.  Dust of the Credit Policy manual and ensure all staff are familiar with its contents.  A well documented credit policy, when adhered to, can prevent a lot of pain in 2016.

Don't Make a Bad Situation Worse

When reviewing your aged trial balance reports, don't be tempted to wait too long to act on those customers that exhibit any of the 12 Danger Signals.  If your first reaction is to call your lawyer to sue, we recommend conducting preliminary due-diligence to ensure that your lawsuit will, in fact, get the receivable paid.  Don't sue blindly and turn a bad debt into a larger one with the added costs of legal action.  Professional commercial collection agencies have the tools available to conduct a thorough investigation on your behalf.  An initial investment of a couple of hundred dollars may save you thousands in the long run by "not drilling a dry hole".

About the author:  Brad Lohner is President & CEO of the PCR Group of Companies, which consists of a Canadian and an American commercial debt recovery firm, a lien filing service, as well as a credit consulting division.