In 2005, Nortel was still Canada’s largest company, but the slide had already begun. They were our biggest customer, and represented about 30% of our business. One day, they just announced that payment terms would change from 45 to 60 days, and that acceptance of future purchase orders was tacit acceptance of these terms.
It was the second red flag in as many quarters. The first had been the shift of accounts payable to a third-party outfit in Nashville. I used to refer to them as the payment prevention department. Overnight, payment questions fell into a black hole. It became impossible to reach anyone inside Nortel who could deal with any kind of payment problem.
The 15-day extension was the tipping point. I gathered our inside sales team and told them to apply “special” pricing on all Nortel quotes going forward. Take whatever we would charge any other customer for something, and add 5%.
The sales team looked at me bewildered. I told them I was serious. Call it a “Nortel tax.”
And to let me know if there was any pushback.
My thinking about this was the same as for a prepayment discount. I was effectively giving them a 15-day loan in the form of extra time to pay, and I was “charging” them 5% for that loan. That’s 5% divided by 15 days, or 0.33% per day, which is 122% return per annum on my “investment” in the extra accounts receivable.
Surprise, surprise! They never pushed back. Not once. That told me two things:
- they weren’t watching costs closely. Their eye was off the ball; and
- they were bleeding cash, so they cared more about how long they had to pay than the amount they had to pay.
As my dad would say, they had the emPHAsis on the wrong sylLAble.
Nortel filed for bankruptcy in 2009. The decline was visible years earlier to anyone watching the right signals.
Customer Warning Signs Matter
When a big client’s finances get shaky, suppliers as unsecured creditors are usually the first to feel the pain when the collapse comes. Large accounts can lull you into a false sense of security because they keep placing orders, even as their fundamentals weaken, and they slowly stretch payment terms, growing their debt.
The risk is even greater if one customer represents a large share of your revenue. That’s concentration risk, and it’s dangerous. One bankruptcy can take you down with them.
During the heyday of the dot-com boom, we had a customer, Maxlink, that was building a wireless network across Canada for commercial data service. Thankfully, and due to no good management and purely good luck, the day they went bankrupt, they owed us nothing. But just one month prior, they owed us over $1 million. That amount of bad debt would have spelled bankruptcy for our small company, which had only $11.5 million in sales that year.
We had let the allure of large orders from (supposedly) large customers overtake our judgment.
When the Giants Stumble
There are two simple takeaways here.
The first warning is not to let a big customer’s volume seduce you into financing their problems. When a client starts paying with time instead of cash—moving A/P offsite, extending terms unilaterally, and shrugging at price increases—it’s a flashing red light that your risk is increasing.
The second is that just because they’re big doesn’t mean they’re good. Sometimes they’re so big they don’t notice or don’t care about modest changes. We bumped their costs by 5% and they didn’t blink!
If the biggest company in the country can go bankrupt, anyone can. Your job, as always, is to have your eye on your business, read the signals early, treat credit like the loan it is, and make sure no single account can take you down with them.
If you liked this, you might like this related post about the silliness of prepayment discounts.
