Strategies: Keep an extra eye on receivables this holiday season

— -- This holiday season, I have an important warning for every small company that sells to large corporations, especially big retailers.

Carefully watch how much they owe you, and do everything possible to collect before December 24. Why? Because I'm afraid the last week of this year will see a number of bankruptcies, even of companies that are household names.

I hate writing a column like this. After all, like most entrepreneurs, I'm an optimist. And I know that when people are fearful, the economy worsens. But my responsibility is to you – my small business reader. And if you sell to a company that goes bankrupt – or if your customers sell to companies that go bankrupt – you could be left in a dire situation.

I'm not alone in worrying about the health of some major companies. Over dinner, a friend told me the large law firm she works for sent a memo with a list of 30 large companies they considered to be risky, warning the attorneys to carefully monitor their billings to those clients. She was shocked at the names on the list – many were stores where she shopped.

In fact, insurance companies that provide "trade credit insurance" are also nervous. This is insurance that large suppliers take out to make sure they'll get paid if something, such as bankruptcy, happens to their customers. These insurance companies are looking at the economic climate, and reducing or eliminating insurance on some companies' receivables.

"Business bankruptcies continued a relentless upward pace in the first quarter of 2008, and data suggests that the trend could increase even further as the year progresses…" That was the conclusion of Euler Hermes ACI, the largest provider of trade credit insurance in the U.S., earlier in the year. The recent financial turmoil has made it even more likely there'll be a rash of business bankruptcies.

My prediction – many of these will happen in the last week of this year. Why?

Every year, big retailers stock up for the holiday season. They order lots of goods from suppliers. You – or your customer – may be one of those suppliers. Retailers probably don't have to pay you until January or February. Most years, that's no problem.

But this year credit is tighter, even with the federal bailout. Over the last few years, large retailers had to keep Wall Street investors happy by showing high year-over-year growth. To do that, they rapidly expanded the number of stores or bought up smaller retailers. That meant taking on a lot of debt.

So going into this holiday season, many retailers who would otherwise be considered healthy have big, big bills and nervous bankers. And they're facing a potentially very slow holiday season. After all, consumers are also nervous. They have lower limits on their credit cards, reduced values on their homes, and the worth of their 401ks has dropped. So it's not likely to be a very merry holiday season at many retail stores.

It turns out that the last week of December is a very good time to declare bankruptcy. I should know – the parent company of my former book distributor declared bankruptcy on Dec. 28, 2006.

Why is that the perfect time for a big company to declare bankruptcy? They've got a lot of cash in the bank – from holiday sales. They've got a fair amount of inventory – the stuff they didn't sell over the holidays. And they've got a big pile of bills – from purchasing all that inventory for the holidays. Once they declare bankruptcy, the bills get put on hold, but the cash stays in their bank account. That's the ideal time for a nervous bank to call a loan or credit line.

But it means you – if you've got accounts receivable from these retailers – won't get paid. Sure, you may get pennies on the dollar a couple years from now, but that isn't going to help you stay in business in the meantime.

So, as you're shipping out your goods to customers, carefully watch how much credit you're giving, set earlier due dates on your receivables, and monitor payments closely. Do everything you can to collect quickly. Don't be alarmed, but don't be foolish. And we'll all come out of this holiday season in good financial health.

Rhonda Abrams is president of The Planning Shop, publisher of books for entrepreneurs. Her newest book is Successful Marketing: Secrets & Strategies. Register for Rhonda's free business tips at For an index of her columns, click here. Copyright Rhonda Abrams 2008.