ACCOUNTANT’S NEW ROLE: CREDIT JUDGE
Byline: Jennifer L. Brady
NEW YORK — As retailers continue to fall victim to Chapter 11, apparel manufacturers increasingly are asking their accountants one crucial question: to ship or not to ship? “There are a fair number of weaker retailers out in the marketplace,” said Nathan Lubow, managing partner at Mahoney Cohen Rashba & Pokart. “I don’t recall a year that clients have had so much bad debt out there than this past year.”
Lubow expects retail bankruptcies to intensify problems at the manufacturing level.
“It is my belief that we will see the insolvency bug hit manufacturers, importers and converters on a more steady basis,” said Lubow.
Accountants, in addition to providing the usual financial guidance, now find they have to help their clients spot troubled chains and decide whether they should ship.
Auditors are advising clients not to rely on rumors and encouraging them to be selective in shipping to retailers. They noted clients are finding fewer and fewer chains that are credit-worthy; the problem is where to draw the line. In some cases, there is no choice. Even if a customer is shaky, suppliers may find they must ship to stay in business, the accountants said. The accountants suggested getting as much current credit information as possible on a retailer before shipping and setting specific credit limits. They said suppliers should check with factors to find out if they are extending credit to particular customers, and on what terms. Another option would be to obtain credit insurance, if possible, to share the risk.
While many apparel firms are becoming more diligent in lowering risks, there is often little time to prepare. “A manufacturer can get all credit information available, find that a retailer is paying and there appears to be no problem shipping. Then, for whatever reason, the next day they file Chapter 11,” said James Miglino, partner at Konigsberg Wolf & Co.
Miglino said retailers are filing for Chapter 11 “for a whole lot of different reasons than in the past.” Instead of entering bankruptcy protection simply because of financial problems, Miglino said, retailers are filing to get out of leases, to leverage joint venture partners or as a result of lawsuits. Besides interrupting the flow of merchandise shipments, retail bankruptcies are causing serious cash flow problems for manufacturers, according to Harriet Greenberg, partner at Friedman Alpren & Green.
“They have lost money on a bad debt, and this hurts their relationship with their banks,” Greenberg said. Also, if manufacturers have commitments for finished goods to fill orders and discover they must find an alternate buyer, typically the merchandise is sold at sacrifice prices, she added.
“Manufacturers need to take a harder look at who they are selling to and the extent of margin they will take,” Miglino noted. Miglino said more manufacturers are hiring factors to alleviate the impact of retail insolvencies.
“Most of our clients are basically considering credit insurance or factoring to provide some protection in case a client goes bad,” Miglino said.
The accountants agreed there is bank credit available for manufacturers, but it has become more costly. “The marketplace is much smaller in terms of getting financing,” Miglino noted. He said previously, firms could have leverage with two or three banks, “but now manufacturers don’t have as many alternatives.” Steven Soble, managing partner at Steven I. Soble & Co., said banks are not as anxious as they were to offer credit to apparel manufacturers. “Lenders are hesitant about getting involved with new accounts that are having problems.”
Soble said that while he had expected to see a turnaround for early spring, there have been no signs of increased activity. “It becomes a difficult choice for manufacturers as to whether or not they should downsize,” he said. “No one is looking to grow.” Miglino concurred. “We probably won’t see a turnaround, if there will be one, until early summer” Greenberg said consumer confidence needs to increase before a turnaround occurs. For many people, spending on apparel is not a top priority, she said.
— Fairchild News Service