Monday, 15 September 2008

Lessons from the XL crash

The big news on Friday was the collapse of the UK's third largest travel firm XL. The bigger news today is the collapse of Lehman Brothers, which has far bigger implications. Both offer lessons for businesses in difficult economic times.

Reports on Friday indicated that XL's problems quickly escalated after the newspapers reported early signs of financial problems. As a result their suppliers cut credit terms, insisting on cash payment for fuel and other essentials - turning the drama into a crisis. Did the suppliers drive XL into bankruptcy, triggering the scenario they feared?

Cashflow during a recession is a particularly nasty game of pass the parcel, with no one being able to afford to be left with the debt and not the cash. On the other hand, no one wants to force customers out of business.

The emphasis has to be on controlling cash, and insuring that payment terms are not extended by stuggling customers who just pass the problems down the supply chain. You also do not want to force your suppliers out of business by paying them late, and depriving yourself of potentially key materials.

The best practice is to audit the supply chain, looking for signs of potential weakness in suppliers and developing alternatives - either other suppliers, or in extreme cases taking over the supplier in order to ensure continuity of supply. There will also be opportunities for leverage cashflow for price reductions - discounts for early payment may be more attractive to suppliers than in times of easier access to finance.

Threats of recession can become self-fulfilling prophecies, as companies hunker down at cut back on both sales and production, and stretch payment to suppliers - triggering a general slow down across the whole economy. They can also be great opportunities - if no one else is advertising, then your message will stand out. Struggling competitors may not be selling hard, and customers will want to buy from suppliers that can demonstrate a strong position. Competitors may also be up for sale, and premises may be more affordable then recently.

Of course it is essential to have adequate cashflow in order to take advantage of the situation, so again - it is necessary to review both customers and suppliers on a regular basis, and to develop a range of alternative action plans to avoid becoming a victim of these times.