Apparel suppliers must do due diligence on ailing brands
As we all know, the past 12 months have seen many apparel retailers go bust, leaving a trail of financial destruction in their wake. Often, their creditors are owed millions, and by far the most significant creditors in most cases reside in the ready-made garment sector.
This is a serious global issue which we, as suppliers, need to address as a matter of urgency.
My question is, are suppliers learning from the mistakes of the past? The reason I ask is that, in many cases, retailers which have gone bust were in fact an accident waiting to happen. In some cases, this is the second or even third time this has happened. With this in mind, witnessing suppliers queueing up to do business with the newly created company can often feel like a slow-motion car crash. Likewise, watching suppliers gladly leaving themselves open to debt worth hundreds of thousands of dollars owed by struggling retailers, can feel like an accident waiting to happen.
The underlying issue I am driving at here is one of due diligence. Are we as suppliers doing enough research on our potential customers? Could some of the situations we have seen of late, when suppliers have been left out of pocket to the tune of hundreds of thousands of dollars, have been avoided with better due diligence?
I think certainly, in some instances, this is the case. What do I mean by due diligence? I mean knowing your customer and understanding their financial situation. To put this in simple terms, you would not lend money to a friend if you knew that friend had serious financial problems, which meant he or she was unlikely to ever be able to pay you back. And yet as suppliers, we regularly extend credit to customers that many in the industry know to be lame ducks. It's a strange, unfathomable state of affairs.
Due diligence comes in many shapes and forms. There are degrees of due diligence and an element of common sense is required when deciding who to do business with. If you were about to acquire a business, for example, you would want a full top to bottom financial/accounting appraisal of the company and would likely bring in a third party to carry this out.
When choosing who to do business with, the due diligence process is less onerous, but can certainly make a difference.
Step one, I would suggest, is to develop a broad picture of the company you are looking to work with—especially how big the company is, and what is its market cap (if this is publicly listed).
Larger companies, as a rule, tend to have more stable revenue streams and less volatility. The smaller one goes, the more fluctuations one is likely to see in terms of revenues and earnings.
Relating to this is the broad issue of financials. Look at metrics such as revenues, profits and margin trends. Look at net income trends for the past two years and you should gain a general picture of the direction things are going in. Major downward fluctuations are a serious red flag.
If you wanted to go a little deeper, you could review profit margins to see if they are generally rising, falling, or remaining the same. It is possible to find specific information regarding profit margins by going directly to the company's website and searching their investor relations section for their quarterly and annual financial statements. Suppliers need to use this information to their advantage.
Going a step further, it might be worth comparing a company's margins with those of two or three competitors. This benchmarking process is important to get a better feel about how stable a business is.
I don't want to get too bogged down in balance sheets and accounting issues here. If one is looking to work with a business partner, however, a cursory examination of their accounts is helpful. Review their consolidated balance sheet to see the overall level of assets and liabilities, paying special attention to cash levels—this is the ability to pay short-term liabilities and could impact whether you are likely to find your company not getting paid.
Also look at the amount of long-term debt held by the company. A lot of debt is not necessarily a major red flag—this really depends more on the company's business model than anything, but it is another metric which enables one to build a larger picture.
What else to examine? In the case of some ailing retailers, it has become common knowledge that they have struggled to get insurance, which tells you all you need to know.
Another key thing is to keep a close eye on the international press, as well as social media sites such as LinkedIn. Information about a company that may be struggling often works its way onto social media quicker than it does in mainstream media, so it is worth keeping one's ear close to the ground.
Talk, also, to business colleagues and associates. Have they done business with the client you are looking at working with? What were their experiences and what were the clients like as payers? What were their payment terms, did they pay on time and did they ever default on payments?
Another thing to consider is, could groups of suppliers—say from one country—get together to develop a common approach to appraising brands? Such an approach could potentially be coordinated by an industry trade body, to ensure a consistent approach (and this would save time for individual factories carrying out their own due diligence; a possibility to consider).
However, I am reluctant to be too critical of my fellow suppliers here. I understand how difficult things have been these past 12 months and my guess is that a lot of suppliers have accepted orders like those mentioned above just to keep their factory operational and not have equipment lying idle; it is desperation in other words.
Looking ahead, however, surely there is a need for a collective change of mindset among suppliers. One where we attempt to put the shoe on the other foot. We are used to being assessed by brands to see whether we are deemed worthy of their orders. Perhaps it is time for us to ask some questions of them too: do we really need them as a customer or is working with them likely to lead to financial heartache?
Mostafiz Uddin is the Managing Director of Denim Expert Limited. He is also the Founder and CEO of Bangladesh Apparel Exchange (BAE).