We have a customer with a deficit net worth of more than $50 million. Also,
this customer has $1.20 in current liabilities for every dollar in current
assets. At the same time, the company is publicly traded, and while this
company's revenues are dropping it nevertheless has posted more than $1 million
in profits in each of the last two quarters according to its 10-Q most recent
filings with the SEC. The company in question has open account terms with
us requires a credit limit of at least $50,000. How would you recommend handling
this account?
Answer: Unfortunately,
there is not enough information to make a credit limit recommendation.
But, there is more than enough information to offer this advice: Because
of the huge deficit net worth the decision about whether or not to sell
to this customer should not be made by the credit manager - or at least
not by the credit manager alone. Why? Because a deficit net worth of
this size means that the credit department should not recommend terms
other than wire transfer payment in advance. We think it is fair to suggest
that a customer with this large a deficit net worth remains out of bankruptcy
only because its creditors choose not to put the company into bankruptcy.
Whenever this is the case, we are not aware of any rationale for a unilateral
decision to extend a large amount of credit to the customer without senior
management support. |