Cash flow problems in retail land

The streetscape of many cities continues to change rapidly, people are far from always shopping in physical stores. The disappearance of large retail chains from the streetscape is accompanied by the rise of concept stores. The modern consumer wants the convenience of home shopping, post-payment and preferably free returns. All at the retailer's expense and risk.

Although the number of bankruptcies remains historically low in 2018, many retailers (and their suppliers) are still going out of business due to liquidity crunches and cash flow problems. In this blog, I highlight some of the causes for cash flow problems and elaborate on the situation when a supplier is declared bankrupt.

Cash flow and liquidity squeeze

Tense times, therefore, with many retailers' cash flow coming under pressure. Due to extended consumer exchange terms and retrospective payment, accounts receivable portfolios are growing significantly, which retailers need to pre-finance.

Good accounts receivable management is therefore essential. Factoring can also provide a solution for (temporary) liquidity shortages; the retailer sells its receivables from customers to a factoring company for a fee. The latter then takes charge of collection. The disadvantage is that the retailer never gets 100% of its receivables.

More often, however, the problem lies in differing payment terms for suppliers and customers. One outcome in that case might be for the retailer to force the supplier to demand the same payment terms from the retailer as the retailer is entitled to expect from its customers. Experience shows that suppliers (especially with smaller retailers) will not readily agree to this. Payment terms are often not even negotiated out but are often considered fixed, as part of the supplier's general terms of delivery. So my tip to retailers is: start the conversation about this!

Bankruptcy of supplier

At the other end of the spectrum, (local) manufacturing is also taking a hit. We still regularly see bankruptcies of suppliers in the retail sector.

What should you consider if a supplier is unexpectedly declared bankrupt?

Below I assume the situation that the bankrupt supplier still had to deliver and that the retailer still owes a debt to bankrupt supplier for old deliveries.

The retailer would like the orders to still be delivered. Sometimes this is possible - for example - if there was a lot of inventory of raw materials, semi-finished or finished goods at the bankrupt supplier.

In that case, the retailer can ask the trustee if it will honor the agreement, "honor" is what it is called and is found in Article 37 of the Bankruptcy Code. If the receiver honors the agreement, it must perform and so must the retailer (i.e., pay). This can be profitable in the face of a relaunch, for example, because such a contract has value.

In many cases, however, there is a so-called (framework) agreement between the supplier and the retailer, under which the retailer may order unlimited products, and it is still unclear whether the bankrupt company will be continued. If so, the trustee will not honor the agreement.

In that case, the retailer can (partially) dissolve the contract. Please note that this does not void the obligation to pay for the products already delivered.

With a large inventory, the receiver will often be willing to deliver parts of the inventory under a new agreement. Note that the receiver will no longer give any guarantee. In some cases the retailer can then negotiate a discount.

Settlement of damages

The debt to the bankrupt supplier is, however, offsettable against the damage the retailer suffers as a result of the bankruptcy trustee's failure to honor the debt (including the lost warranties!). It is up to the retailer to prove those damages.

In some cases, however, it is conceivable that the retailer no longer owes anything to the bankrupt supplier after settlement. You will then have to find a new supplier. If that new supplier is more expensive, those additional costs can also be filed as damages in the bankruptcy or set off against your debt to the supplier.

Have you encountered the bankruptcy of a supplier or are you noticing a liquidity squeeze due to changes in the market? I am happy to work with you to find a solution, in some cases it is even possible to sue a director for your damages.