Credit risk

Tracking the Demise of a 100-Year-Old Company – Produce Blue Book

Conventional wisdom suggests that 2021 has been littered with business closures following the onset of the pandemic in 2020.

Sure, we’re still coming out of the pandemic or still living with it on many levels and in various ways, but 2021 hasn’t been a blockbuster when it comes to shutdowns or bankruptcies. In fact, the closures in general were in line with produce industry standards.

Extensive trade between developed countries, despite the pandemic and outside of supply chain shortages, appears to be full steam ahead.

While the trajectory for the produce industry also appears to be good, Blue Book Services still saw its fair share of closures last year, and we can’t help but wonder if greater challenges and winds opposites await us.

If so, will companies be ready?

The challenges of running a business are more numerous and more complex than ever, including rising costs for products, materials, labor and insurance; volatile energy prices; industry consolidation and increased competitiveness; changing industry regulations and product safety mandates; and rising taxes, to name a few.

Each year, this Blueprints department discusses a business that closed in the previous year. Our goal is to see if we as credit extenders can learn from business decline or help strengthen processes to minimize the impact. For those who were short-term, perhaps this case study will provide perspective and lead to more proactive action when the next client starts to fail, because it will happen.

The company
This series of articles looks at a business that began its journey in 1905 – a business that grew from horse-drawn carriages to using airplanes, trains and automobiles, operated through two world wars, suffered nearly of 30 presidential elections and has evolved with technology at a rate few product companies could match.

Our case study is of H. Brooks and Company, LLC, BB #:100563 in Brighton, MN.

This company, after Blue Book completed its due diligence, was flagged as suspending operations on July 8, 2021. With such a long credit history, it’s not practical to start from scratch, so we’ll start the January 11, 2019.

That day, when a business investigation was already underway, a service provider called Blue Book checked in and shared a waning experience with H. Brooks. Pay was reported as slowing, ranging from 35 to 50 days on 10-day net terms.

More convincingly, the service provider said the company offered too many excuses for slow or non-payment. At the time of this investigation, H. Brooks was rated XXX C, assigned on December 18, 2014, and considered a good business practice rating, with payments apparently received by vendors in 29-35 days on average.

Twelve months earlier, as seen in Table 1, 28.7% of compensation experiences were reported as going beyond the assigned “C” compensation description. The central tendency for payment was 29 to 35 days, or C, with standard payment deviations including faster than expected payment, as well as outlier experiences that may suggest problematic cases, etc.

For comparison purposes, Table 2 shows three months before and before the experiment of January 11, 2019.

As shown in Table 2, on a robust and in-depth data sample, 26.4% of compensation was reported beyond the assigned “C” compensation description, a slight improvement over the past 12 months and still within the limits of its Blue Book rating.

Although survey data confirms H. Brooks’ XXX C rating, its Blue Book score was lower than what an average XXX C-rated company would normally be, at 676 (average = 770). This often suggests that the data is less consistent and variability can creep in.

Blue Book scores are defined as the likelihood of delinquency and/or default over a 12 month period and range from 500 (high risk) to 999 (low risk), so 676 is considered a moderately risky score. raised. For the context of the score history, Table 3 shows the company’s score pattern over the past few years.

As seen, the company’s Blue Book score ranged between 550 and 730 during this period, considered high to moderate risk. This suggests past volatility in wage performance, with improvement later in the decade, but still with a risk that warranted close monitoring.

Although more limited than the referenced survey response, Accounts Receivable (A/R) contributors shared a higher pattern of past due (more than 45 days) over this period than Tables 1 and 2, and the data is remarkable: 12 months prior to the survey in January 2019, 36.1 percent of the total amount outstanding was overdue; at 6 months, outstanding balances were 44.7%; and 3 months before the survey, 48% of unpaid invoices were recognized as overdue.

This is an excerpt from the Credit and Finance department of the January/February 2022 issue of Produce Blueprints Magazine. Click here to read the full issue.