So this business friend of mine was telling me about a company he knew very well that had filed for Chapter 11 Bankruptcy Protection. One interesting point to make is that this company looked great on paper: $250 million in revenue in 2012 and approximately $160.5 million in assets. The company was part of a large foreign entity that was also operating profitably.
Imagine the shock of everyone involved when the company filed for Chapter 11. The company's financial situation seemed okay and on paper didn't set off any alarms. So what happened?
One of the company's clients was involved in a business dispute that went to court. The client won the case but still, the whole ordeal financially crippled them and spurred a default of the company's credit. That lead to bankruptcy protection and an attempt to sell off their U.S. operations. As you can imagine the client was unable to pay their customers, one of which was that $250 million company. And without payment from that client, who represented a large percentage of their revenue, that $250 million company was suddenly facing bankruptcy protection too.
For company owners, this story highlights the risk of the potential domino effect on you if something major happens to your clients and your clients' clients. (I talked about this in the provocative but clean post, "Who Are Your Clients Sleeping With?") This is partially because accounts receivable risk is sometimes concentrated in a smaller number of customers all throughout the supply chain, thus leaving companies more vulnerable to loss from a business disruption one step removed from them in the overall chain.
As you put your company goals in place for 2014, strongly consider where your financial weak points are, and keep the domino effect principle top of mind. Are you exposing your company to your clients financial troubles? How about your clients' clients? How sound are they financially? We are all dominoes in the business world. And it only takes one domino to start a chain reaction of catastrophic financial loss.
Want to know how your clients--and how their clients--are doing financially? Let us help! We can help you assess financial risk and help protect your company's accounts receivables against potentially troublesome dominoes. Contact us for more info.