The right questions make workouts work.(SELECTED TOPIC)

Against a backdrop of uncertain economic conditions and excess financial leverage, the rise in underperforming companies comes as no surprise. For the credit manager, this forces decisions on complex and delicate issues.

Deciding how to proceed with an underperforming customer is first dictated by the creditor company's profit structure and needs. When dealing with a troubled customer, one should take into account past performance, current experience and future relationships.

Cooperating with a customer can bring distinct advantages. First, by working closely with the customer, the creditor increases the probability that loss will be minimized. Second, the goodwill that a vendor earns from its workout customer can salvage or even strengthen a profitable account.

A creditor needs to establish a reasonable profit structure with the customer and have some confidence in obtaining continued business. If the customer does not provide an attractive business opportunity over the longer term, throwing good money after bad is no solution.

When dealing with an underperforming customer, critical variables one must assess are management credibility and the ability of the business to perform "as promised". Often during a workout situation, existing management has lost credibility. Furthermore, management may not have prior experience dealing with a cash crunch or be prepared for the painful adJustments--such as downsizing of operations--that may accompany a workout situation. A positive sign in such a situation is the willingness to change.

To evaluate the viability of a revitalization plan, the vendor first needs to understand the root causes of the customer's problems, and then judge the feasibility of the steps being taken to rectify them. While a turnaround strategy is still in the planning stage, creditors must ask themselves if they agree with the plan and whether the customer can execute all key elements of it. A credible plan should have substantive changes and measurable milestones.

Typically, creditors want to know when they will get paid. But vendors should be asking more. Specifically, vendors should be concerned with how and when the customer proposes to ...