This year has seen some elevated focus on Australia's business community by the media and the public at large in relation to corporate collapses. In 2015 we have had the failure of Homeart, Hooters, Koko Black and My Baby Warehouse and 2016 has seen Laura Ashley succumb to external administration as well as the Dick Smith saga continue to play out. This combined with the ATO has been instrumental in the heightened activity in external appointments since March 2015, it's timely to look at the early warning signs that are available to creditors and lenders and learn from those who have prevented financial disaster by doing so.
Take Dick Smith for example which is currently subject to a Senate Inquiry, ASIC investigation and a focused attention from the Australian media that we haven't witnessed for some time. Two major suppliers, Apple and Samsung, appear to have utilised advanced information systems to detect trouble within Dick Smith before Receivers were appointed.
Put simply, though there are some key indicators that whilst on the face of it would ordinarily attract suppliers and lenders the lesson from the Dick Smith case is that they had dire consequences for some. Some of these are:
Organisational structural changes within a short period of time
Dick Smith went from being owned by Woolworths to being purchased by private equity operators Anchorage, to having a new management team, to being floated. All of these changes took place within 2 years. Change can be good for organisations, particularly when in a competitive market and the retail industry appears to become stable. To the normal supplier and distributor, these types of changes usually provide an opportunity for growth in revenue and certainly are attractive to jump into.
Staff members employed by Dick Smith were unsure of what was going on for some time and the consumers were only interested in the great deals that may have been enticed purchasing gift vouchers for loved ones at Christmas. Suppliers and key stakeholders needed to look at the changes going on and perhaps a maintaining of the PPSR could have assisted.
Massive Growth in Sales
It is reported that Dick Smith went through a massive phase of sales growth after Woolworths sold it to Anchorage. Again, suppliers and distributors would ordinarily be immensely attracted to this and not be blamed for it. However, there were a number of distributors to Dick Smith and unless their insurer pays, there will be a further fall out as well.
Sales growth should be interrogated and understood as to its origination be it an opening of new stores, expansion of line items, variations in the Australian dollar or more focused marketing campaigns as three examples. In the case of Dick Smith, there are media reports that accredit the marginal sales growth to heavy discounting put in place to drive sales targets, however ultimately left suppliers and distributors holding the bag for debts of over $250 million.
Changes in Payment Arrangements With the significant growth in sales, the temptation was certainly there for suppliers and distributors of Dick Smith to extend payment terms. Lucky for two suppliers, they refused and in fact, insisted on the residual debt being paid back in full and COD status being initiated. As a result, when Dick Smith did fall over, they were protected. There is a risk that may prejudice suppliers to 'preference payments' once a Liquidator is appointed and is afforded specific powers under the Corporations Act, however, that's another topic for a future article. That said, it is understood that the restrictions on the credit provided to Dick Smith were made long before the first public signs of trouble were surfacing in early November 2015.
The key point here is that if payment term relief is requested, it's often because of other factors that aren't disclosed to suppliers, distributors and lenders. More detailed analysis, investigation and interrogation are required to protect any potential exposure. Responding to such requests with a reciprocal request for increased security, bonds, bank guarantees and the like are often a great tool to test the validity of the initial request and further, ensure your exposure is registered appropriately on the PPSR. That is, if the payment term relief is of a genuine nature, there would be no resistance to providing more protective measures for the creditor.
There is merit in having good information flow, credit reporting systems, regular credit file reviews and taking a stand against debtors from time to time to ensure that the market understands that a creditor isn't a soft touch. However, such protective practices need to be married with the sales side of the organisation. We often see creditors suffer the consequences when the sales side of the organisation get dazzled by the flashing lights of growth in sales and the change evolving within the customer's organisation.
There is nothing wrong either with strengthening the utilisation of the Personal Property Securities Act. Ensuring that transactions involving the provision of inventory, equipment, plant, vehicles and other supplied goods are recorded on the Personal Property Securities Register ("PPSR") is more than a valid notion but it's more important to ensure that the recording on the PPSR is accurate and within the correct categories rather than to use a 'hit and miss' approach. The investment inadequate recording systems and annual review models often prevent disasters and are just as important as to reviewing trade credit insurance policies.
There is a lot of talk about the economy coming off the rise we are currently enjoying and using some of the profits being generated now to boost protection regimes is not a fanciful idea.
Veritas Advisory provides confidential advice to:
- lenders on their security and likely exposure;
- retailers, suppliers, distributors who want to grow their business;
- directors who could be exposed due to personal guarantees;
- retailers who have stretched their ability to meet obligations with existing turnover; and
- representatives of employees that routinely become the real sufferers of collapses.
We are expecting a long list of collapses in 2016 and hopefully by considering some of these observations, we will be able to contribute to the prevention of some.
*Adam Lysle is Senior Manager at Veritas Advisory.