Credit crunch

Friday, November 30, 2007

YARMOUTH, Maine - For years, many manufacturers were pretty lax about who they offered credit to, but those days, if not gone, are rapidly disappearing, say industry watchers.
"In the long run, manufacturers will have to be more selective about the customers they extend favorable trade terms to," and industry consultant Wallace Weeks. "They need to find companies that are reducing their operating costs as a percentage of revenue. That is who they need to place their bets on."
The rationale is pretty simple: In today's environment of declining reimbursement, providers who don't reduce their operating costs and improve cash collections (it's no longer enough to simply focus on generating revenue and gaining market share) are more than likely destined to run into financial trouble, say industry watchers. If manufacturers don't want to end up with a boat-load of bad debt, it behooves them to avoid these providers like the plague.
"Some of the providers out there clearly understand this and are doing a very good job of it," said Bill Corcoran, vice president of financial services for Invacare, the industry's largest creditor. "Others are behaving as if it is still 1991. You have to be aggressive about managing all aspects of your business, not just purchasing. Providers have to be extremely focused on cash flow and process management, which includes everything they do from intake to putting money in the bank."
Thus far, manufacturers report, the number of providers defaulting on loans or taking longer to pay their bills has not increased dramatically. This is the case despite increased regulatory pressure and reimbursement cuts across many different product lines over the past few years. But as competitive bidding spreads to additional communities next year and beyond, Weeks said, he expects more providers to suffer a "degradation in profitability," leading to "challenges" for manufacturers that don't carefully screen providers before extending them credit.
Over the past year or two, a number of manufacturers have asked Weeks to help them identify the characteristics of a financially sound provider. These include reducing operating cost as a percentage of revenue; maintaining or increasing its gross profit margin; and a steady to improving DSO, Weeks said.
Jim Phillips, senior vice president and general manager of VGM Financial Services, another large industry creditor, had a few more thoughts on this issue. Before setting up a line of credit for a provider, VGM reviews the company's financial documents and tries "to have an intelligent conversation about their plans."
If a company has no plans to become accredited or is not concerned about competitive bidding, "that would be a pretty good signal that you don't want to put your money into that situation," Phillips said.