Every business poses a financial risk during the recession fear of 2023. However, it’s a common misconception that businesses will make fewer sales in a recession because of economic uncertainty. The truth is, that the market is just as competitive as before! The key is to plan and prepare for such crucial times, and recession into a successful sales opportunity.
Join industry veterans Jeff Perlstein, Robert Shultz, and Pam Krank for this insightful panel discussion with Highako.
Michelle, Highako: It's a common misconception that businesses will see lower sales during recessions. But how do you capitalize on an economic downturn and still maintain your competitive edge in sales?
Jeff, what are your thoughts on that?
Jeff Perlstein: I do. The most important thing is communication.
Let’s take an example. If I'm not communicating to my supply chain team about what I'm seeing in a particular market, then they won’t be able to use that knowledge and say, ”This large company is experiencing these problems during the recession!" "Well, that is going to affect my mid-sized customer, right?”
So what I do is share an EWI: Early Warning Indicator. I keep sharing this with them all the time. And they use it! They call me and say, “I see what's happening to this customer!" "What should I do next?"
That's a success right there! We communicated.
Michelle Herman, Highako: Good point! Pam, what do you think?
Pam Krank: I think we have to be flexible in terms of what we think risk really is."
In our company, we take the risk of default, which is a straight-up percentage for us. And the risk of slow pay. You also have to look at what the tolerance level is going to be for the company. If we're going into a recession, and you have free credit, which a lot of US manufacturers do, then we don't service charge past dues.
Instead, what you could do in order to get the deal done and be comfortable with the risk is split orders.
For example. You want us to ship 100,000 units this month. But we are comfortable with only 35,000 units. And when that customer pays for it, we'll ship the next 35,000 within the next 30 days. While this limits our financial risk, we still move forward with the deal. We do a lot of unlimited credits with prompt notifications in our construction businesses. So we're not so concerned about how much credit we have as long as we know where the product is going, and that we're following the lien instructions to make sure that we are secure.
New accounts, low-risk clients, and low-margin businesses are also moving to standby letters of credit. We have not used them in years to set up new customers. So if they don't get paid, they can cash that in with a customer's name. And they're much more comfortable doing this. Because they know they're going to get paid. But of course, the standby also allows the customer to establish credit with us by paying us on time.
We're seeing this old trick pulled out of the hat so that they can start doing business with new customers without worrying that these businesses, who are fairly new, can still buy on credit from them. So, I've been surprised at how many standbys we've been negotiating recently! And some of our clients are even paying for the beads. So really, suppliers are paying the fees for the customers to get them started. We have not used standby this heavily for about 10 years. So, we go through these cycles over and over again, when companies get into very heavy debt.
So I do think that we have to be aware of those financial risks, and they need to bubble up. That's why we have our credit committees so that these issues bubble to the top and we can all have discussions about them.
As Jeff said, he knew these things were brewing. He's been telling and sending out the warning signals. And that's our job in credit! To warn about these possible things happening. Then we could get into, “How are we going to mitigate that risk?”
So we're seeing a lot of security. We're doing the standbys; we're tying up some assets for clients. Whereas if they get behind, and they want to sign a note, we're assigning it to mortgages. We now have some very inventive ways of getting paid and being secured. And we're turning to a lot of that security right now that we have not used for a while.
Michelle Herman, Highako: That's amazing. We were talking on one of the other sessions, that if you've been in credit for 20-30-40 years, then you've seen all these recessions, the boom and the bust multiple times! I remember, the first Black Monday, it was like in the late 80s. Having seen these cycles over and over again, experienced creditors say, "Okay, we know what to do." "We've already been here, done that.”
But for some of the folks who are new, this is their first recession! This is their first foray into this. It's scary. And I know, Bob, I know, you have a lot of thoughts on this. And I'd love to just get your perspective on this question here.
Robert Shultz: I think Pam, and Jeff have really hit the high points.
The key is to have arrows in your quiver, to have different things on the shelf that you can do to securitize, whatever. The other thing I would add, and this is gonna sound like heresy to every credit person listening, but 100% risk, adverse risk is okay! Because what happens is, you take risks with a portfolio of customers that aren't deal breakers for you, they're not. If any one of them goes under, it's not a disruptive event to your company's operation.
So in the past, you set up a reserve, and you took chances with companies. And what you'll find is that most of the companies you do that with are going to be sustainable. Occasionally you would write one off, and you just watch them very closely. But that's another way in terms of helping salespeople through this is, “Guess what? We're going to take some risks, and we’re prepared for them. "If it materializes, I've got some securitization options, and we're going to work with you as best we can!”
But every once in a while, things can go bad. But. You've built some credibility with them. You've shown them that you're trying to help. But this one is a non-starter, and here's why.
So that's how I view this.
Michelle Herman, Highako: I am just gonna say from a sales standpoint.
I've been in sales for a lot of my career. And I think the credit department can often underestimate the ego and the self-esteem of a salesperson who has brought in these deals. And it's one thing to snag a big deal or sign up a big customer. But when you start to understand that, maybe you just got this big deal, but this customer is one of your least profitable customers, it's like, a stab in the heart to the sales rep to realize, ”What! "I'm closing these deals, and they're not even profitable!” And I think there's no salesperson that isn't impacted by that because it's almost like their reputation is at stake!
And I think that is one area you could share more information about. Which customers are more profitable? It’s a good opportunity to pull the salespeople in and really show them. And I think that's a pretty easy thing for a salesperson to get on board with.
Robert Shultz: I hope that the other two folks agree with me, but I've always followed the mantra.
High profit, more risk. Low profit, less risk.
Jeff Perlstein: Yes. That's right.
Pam Krank: Yeah, absolutely;
This is part 6 of a 6-part series: A SWAT Team Approach to Manage Financial Risk.Watch the entire series below.
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