Weathering the storm of unforeseeable bad-debt losses.(SELECTED TOPIC)

In accounts receivable management, credit executives must constantly evaluate the risk versus reward of extending credit to any given company. The sales department sees dollar signs when a large prospective customer wants to do business, but large receivables from a single company translates into increased risk should that company find itself unable to pay their invoices. This issue of concentration is faced daily by companies all over the country.

Even when selling to customers that have little perceived risk associated with them, credit managers know that default is always a possibility, and the greater the outstanding receivables, the greater the impact in the case of a loss.

That was certainly the case for Emsco Group, a manufacturer of snowboards, sleds and lawn care products, as well as cleaning supplies and children's toys. They are a Pennsylvania-based company that sells in large volume to household name retailers. In early 2002, Emsco was exposed when discount giant Kmart filed for Chapter 11 bankruptcy protection. Kmart was one of Emsco's largest customers at the time of the filing, having more than $3 million in outstanding receivables.

"Luckily, we have long conducted business with the protection of credit insurance," said Dianne Clark, Credit Manger for Emsco. "We are a relatively modest, privately-held company and can't afford to take a hit with such large customers."

Emsco has insured their receivables with Euler Hermes ACI for well over 25 years. When they filed a claim in January 2002, they received a claim benefit in excess of $3 million less than 90 days after the event while experiencing little interruption to their business operations.

Even prior to the Kmart claim, Emsco has realized other benefits from their credit insurance policy, including a better financing arrangement from their bank.

"Our bank Loves that we have credit insurance because we are a seasonal company and often sell on extended terms," Clark said. The bank, which lends against the accounts receivable, is assured that the receivables will be paid when they are credit insured.