Storm Clouds Over the Susquehanna
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
George Weaver, age 37, is a fourth-generation executive with the family business, Jefferson Foods. He’s the CFO of a food processing business that began as a farmstand on his great-great grandfather Franklin Weaver’s farm near the town of Jefferson, just a few miles from the Susquehanna River in York County, Penn.
With assets of $750 million and annual sales of $200 million, Jefferson Foods has thrived as a supplier of canned and frozen vegetables and baked snacks to grocery store chains and other vendors in the Mid-Atlantic Region of the United States.
It’s a stable business. They don’t do organics, but they make a darned good can of corn, harvested within a perimeter of a 50-mile radius from where George now stands on the seventh tee of the Hanover Country Club. Teeing off ahead of him is Grady Miller, also the scion of a venerable York County food processor, Red Lion Snacks. They do potato chips and pretzels, made with local ingredients, and have been making money at it almost as long as the Weavers have.
It’s a beautiful late June day, not too hot, with cumulous clouds above. But George has worries on his mind.
The global pandemic was a shocker in terms of what it did to smaller businesses in Pennsylvania, Maryland, Delaware and New Jersey, the geographic sweet spot of Jefferson Foods’ sales base. The bigger grocery store chains held on okay, but many a small grocer went under, never to return. To date, pandemic-related issues knocked out 20% of Jefferson Foods’ customer base.
Adding to it all, inflation is reaching rates George has only heard about and never experienced as a business executive. Labor shortages are a prominent topic of conversation when he’s on the phone with his customers.
The East hasn’t seen droughts like those that have hammered Midwestern farmers. But what if? What if all these conditions further deteriorate and the chickens come home to roost at the same time, or close to it?
George is on the phone with his banker when he hears something that worries him even further. The banker shares the story of another well-known local business that just saw its credit terms hardened.
This is an auto dealer. Different business with a different set of problems. However, a number of economic factors (global supply chain issues related to microchip manufacturing the most visible culprit, plus inventory limitations due to the knock-on effect of lower sales volume), have caused the bank to tighten the auto dealer’s credit terms.
The conversation with the banker haunts George, almost subconsciously.
That same week, George picks up the scent of trouble with two of his largest supermarket clients. Customer demand is still strong, but labor shortages are chipping away at sales volumes.
The labor issue affects Jefferson Foods in multiple ways. Farmers in the Mid-Atlantic are struggling to find enough workers to harvest important crops such as tomatoes, corn, green beans and potatoes.
That’s pinching the amount of processed food products Jefferson can produce, which is eroding sales. In the past two quarters, Jefferson Foods’ sales were off an average of four percent.
In addition, driver shortages in trucking are hampering the ability of regional supermarkets to stock inventories. As a result, they’re not moving as much product as they normally would, which is pinching not only their top-line numbers, but also their cash flow.
It’s now that a move that seemed right on point three years ago seems less glowing. Jefferson Foods borrowed $20 million in 2019, pre-pandemic, to upgrade its manufacturing processes, including an entirely new, state-of-the-art canning line. That debt seemed manageable back then. It’s looking less so now.
Like gathering storm clouds, within a span of another six weeks, the picture darkens. A major grocery chain, representing 10% of Jefferson Foods’ business, unilaterally changes its terms from 45 days to 60 days and in a few cases longer on the payment of their invoices. The change in terms results in Jefferson having to use its own operating line of credit to manage cash flow effectively. Yet more bottom-line erosion!
George and the rest of the leadership team huddle. What to do? The consensus is to grant the more lenient terms. These customers have been with Jefferson Foods for decades. “Things will turn; we need to do what we can to keep them going,” the team reasons.
It’s late September and Grady and George are where fate determined generations ago that they should be. As the oak tree leaves turn red and the locust tree leaves turn brown-mustard yellow, they are again on the 7th tee at the Hanover Country Club.
This time, though, Grady can’t help but notice that George is not in a good space. The usually even-tempered, peaceful George bears a dark, worried expression.
Grady is going through his practice swings but then stops himself and turns to George.
“Okay, what is it?” Grady asks the guy he’s known since they played Little League baseball together in the fourth grade.
George looks at his friend and shares that Jefferson Foods is facing pressures he’s never known it to face. Key customers are running afoul of 60-day terms that were granted just three months ago.
For the first time ever, George might end up having to go to his bank in an attempt to extend the terms of a $20 million, 10-year loan.
“Asking to go to a 20-year term with all the extra interest is going to hurt,” George says.
Grady pauses and looks out into the distance.
“So I’m going to take a wild guess here and conclude that you don’t have any accounts receivable insurance in place,” Grady says.
“No,” says George, feeling even more out of his depth and feeling tweaked by the condescending tone Grady can slip into sometimes.
Grady lowers his head and resumes his practice swings, almost dismissively.
“Accounts receivable insurance,” he says again. “I think of it like an aspirin to keep my banker’s nerves steady. You pay a manageable premium and the insurer acts as your backstop if your customers have a case of the slows and your banker is getting edgy. It pays for flat-out losses too if a customer goes under.
“I’ve never had to use it for that but still received a benefit,” Grady continued. “It provides my bank comfort that I have my accounts receivable protected and therefore, my cash flow is protected against a sudden bump in the road caused by a customer’s default.
“It’s tailor-made for exactly what you’re going through,” Grady says.
Grady lowers his head and smacks a monster drive down the center of the fairway. George watches the small, bouncing white ball like somebody seeing a vision in a nightmare.
When George can finally speak, he asks, “How did you find out about it?”
“Jenks Graham,” Grady says.
Jenks was George’s doubles partner when they won the city tennis tournament in York. Seems like forever ago. Now he’s an insurance broker in Baltimore. Doing very well by all accounts.
Despite the worries choking him, George starts to breathe a little bit better as he tees up his shot.
“Maybe he can help me yet,” George says to himself. “Man, I need it.” &
Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®
Recognizing that outstanding payments are often the largest asset on a balance sheet, securing against a loss should be mission critical. Accounts Receivable Insurance is an important safeguard, designed for protecting a company’s accounts receivables.
At its core, Accounts Receivable insurance offers indemnification for an event that results in a loss due to nonpayment, including insolvency. However, this coverage offers many additional benefits for companies facing circumstances similar to those featured in this scenario.
Accounts Receivable insurance aims to allow companies to grow and protect earnings and creates potential for enhanced financing. Here are some real world examples of how Accounts Receivable insurance can provide credit certainty during an uncertain economy:
- Extension of payment terms, with protection: allows customers to manage through cash crunches or slowdowns that occur.
- Helps companies manage concentration risk: can assist in the disclosure of concentration in a company’s notes to financials.
- Protects the balance sheet from a key customer default: such as suppliers selling to key retail customers, which could impact an income statement in a given quarter.
- Protects against the non-payment by a company’s customers due to an unforeseen event, such as a costly Cyber loss, or instance of fraud.
By building Accounts Receivable Insurance into their program, CFOs and Risk Managers are better prepared to secure their balance sheets AND manage risks that are critical to their organization’s bottom line.
This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.
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