If so, we'd love to hear it!
Simply click the link below and submit any ideas that you have for us to talk about on future Wheel of Risk episodes!
If so, we'd love to hear it!
Simply click the link below and submit any ideas that you have for us to talk about on future Wheel of Risk episodes!
Alix McCabe: Imagine this, you help manage a successful scrap metal recycling company that's been around for more than a century when one of your most important clients suddenly runs into some solvency issues.
Tim Nemec: At any given time, we had a seven- figure receivable with them. For a small family business such as ours, that would've taken a huge hit on our operations such that we would've been severely impacted.
Alix McCabe: Let me tell you the story of M. Lipsitz & Company and AR concentration risk. Welcome to Wheel of Risk, a brand new podcast series proudly presented by Allianz Trade. I'm your host, Alix McCabe. On every episode, we spin the wheel, land on a new worry, and then tackle it head on by hearing from business leaders who've been through it all before. Plus, we bring you expert advice to help you keep your business safe, secure, and well ahead of the competition. So go ahead, spin the wheel. We've got you covered.
For much of M. Lipsitz & Company's 125 year history, business deals were secured with a simple handshake. But those days are long gone with the scrap recycling firm now facing the gauntlet of a faceless and often turbulent global economy. There can be wild fluctuations in commodity prices and availability, and international politics can also come into play increasing risk even more.
So what happens if a deal is struck but then a client can't pay? That's the situation in which the folks from M. Lipsitz found themselves when one of their biggest customers fell on tough financial times. To tell us more about the predicament and the solution, it is my pleasure to introduce the company's CFO, Tim Nemec. Tim, welcome to Wheel of Risk.
Tim Nemec: Well, thank you very much.
Alix McCabe: Glad to have you here, Tim. But before we go any further, I'd also like to introduce my colleague who's joining us to provide his expertise. Dan North is senior economist for North America at Allianz Trade. Dan, thanks for being here, my friend.
Dan North: Thanks very much, Alix. I certainly appreciate it. It's my pleasure.
Alix McCabe: So just so our listeners are aware, Dan, we will get to your thoughts in the second half of the pod, but first I'd like to hear more about M. Lipsitz & Co. So Tim, for those who aren't familiar, can you give us the rundown? What does your company do, where are you based and how long have you been in business?
Tim Nemec: Our company's based out of Waco, Texas. The company's been in business for over 125 years, started out as one operation. We're now up to 14 locations in Texas and one in Oklahoma. And what we do is we buy scrap materials, washers, dryers, things like that, copper, aluminum, stainless steel. Our role is to process those materials, sort them into the commodities that other users use, the steel mill and other processors who need raw materials.
Alix McCabe: Got it. So if I have this right, you could take my old washing machine, for example, and then recycle it, turn it into raw materials, and then you could sell it to like a steel mill to be turned into something else like a car.
Tim Nemec: Correct. What we would do, we would shred that appliance and separate the iron that would go to a steel mill and the other metals, whether there's some copper wire or other materials, we have another process. We'd sort that out and send to another supplier.
Alix McCabe: And am I correct that you were a family owned business? You are a family owned business, is that right?
Tim Nemec: We are a family owned business, that's correct.
Alix McCabe: I come from a family owned business myself. There are great things about it and tough things. So thanks for the background. Now tell me about the situation that you found yourself in back in 2014 when this whale client of yours ran into financial trouble. Take me through what happened.
Tim Nemec: Sure. We had a customer that was very competitive in the market. We had been selling material to for quite a number of years, but financially were having some difficulties. And some of our other competitors had stopped selling to them and we were concerned about it as well because of their financial situation to the point that we did not think we could sell to them without doing something differently other than taking the entire risk ourselves. So we started looking at credit insurance. We were aware of credit insurance through our trade association and such, but that's when we really started looking at it in earnest.
Alix McCabe: What were the indicators that led you to feel unsafe trading with that customer anymore? You said they were having some financial troubles. How did you learn about it?
Tim Nemec: Well, we had always been asking for financial information, whether it was periodically or just word of mouth from some of our other customers and competitors even. And payment history was starting to be not as consistent as it had been initially. In fact, as their financial statements deteriorated, we actually had meetings with their top personnel and discussed the situation as far as what their plans were to make payments to us.
Alix McCabe: Is this a fairly common scenario in your industry, Tim? Or was this a unique situation that posed itself?
Tim Nemec: It's more of a timing of generational. 20 years ago, a lot of our businesses that we dealt with where mom and pop shops. We knew them personally. We've known them for a long time. We didn't get their financial information, but their reputation and their payment history was word of mouth. We didn't ask for financial information. But as consolidations have transpired over the years in the world, become a global world in most industries, ours in particular, that mode of operation had to change.
Alix McCabe: Tell me a little bit about... So when you were dealing with this customer and having some doubts about their ability to pay, was that stressful internally? You're the CFO, you and your team. Take me through some of that.
Tim Nemec: Absolutely. Obviously our sales team and the ownership, we had some really long discussions because the prices that they were paying were really, really attractive. But from a credit standpoint, we had to decide whether or not that extra price we were getting was worth the risk of selling to them versus another customer that had better financial footing. So it was a
risk that we took for a while and as things kept deteriorating, we felt really uncomfortable to go further, taking that entire risk ourselves.
Alix McCabe: Makes sense. Speaking of risk, Tim, so what kind of risk factors do you face in your industry? I imagine, I don't know, the price of raw materials. Is that fluctuating much?
Tim Nemec: Very much so,Alix. The price for a copper, for example, is traded in open market. It could go up 15 cents a day or down 15 cents a day. Other materials fluctuate a lot as well, but that's the one that we really watch closely because copper's valued anywhere from three to $ 4 a pound. So if we've got a lot of material on the ground in inventory, there's a lot of risks in that particular material. We also have risk of supply and demand of whether or not we can get the material. A lot of times the people we buy from have other issues whether the price of oil is up or down, whether their volume is going to be changed favorably or unfavorably. We're tied to the economy as well. If the economy's doing well, there's demand for raw materials, which means we are going to be able to pay more to our customers. So there's a lot of risk in this business.
Alix McCabe: And you've been in business for a long time. You must have run into hiccups before. So this situation that you faced back in 2014, how did that compare?
Tim Nemec: Well, we've had losses in the past. We've had credit issues in the past, but those are few and far between. Like I said, we were dealing with small companies, a lot of consolidations have gone on in this industry, so we sell a lot of material to fewer customers. So our receivables are larger balances with fewer customers than it was say 20, 25 years ago.
Alix McCabe: So let's talk about potential financial ramifications. So could you give us a better sense of how this situation with that particular client could have affected your company?
Tim Nemec: The customer that we were concerned about, at any given time, we had a seven figure receivable with them. So for a small family business such as ours, that would've taken a huge hit on our operations such that we would've been severely impacted. So that's why we felt a need to protect ourselves in some way or sell at a less profit to a more reliable customer.
Alix McCabe: Yeah, could have been potentially catastrophic.
Tim Nemec: Very much so.
Alix McCabe: Dan, you've been sitting here nodding your head, taking furious notes as you're known to do. I imagine you may have some thoughts.
Dan North: Oh yeah, for sure.
Alix McCabe: Okay, well hold onto them for just a little while longer. We're going to take a quick break and then we'll hear much more from Dan in just a moment.
I'm Alix McCabe and you're listening to Wheel of Risk, a new podcast series brought to you by Allianz Trade. In the fast- paced world of business, there's no shortage of things to keep you up at night, but all business is about risk, trust, and reward. And we are here to help you minimize the former and maximize the latter. To learn more about how a partnership with Allianz Trade can benefit your organization, please visit allianz-trade.us/podcast. That's A- L- L- I- A- N- Z- trade.us/podcast.
Welcome back. Today we've been talking with Tim Nemec, the CFO of M. Lipsitz & Company, about the challenges of keeping a business healthy in the face of uncontrollable factors like customers that can't pay what they owe. Now that we've heard your story firsthand, Tim, I'd like to bring back my colleague Dan North. Dan, how common are trade credit issues in today's global economy? Has the situation, in your opinion, become even more precarious in recent years?
Dan North: Well, Alix, the short answer is yes. Certainly we've seen the supply chain crisis that started with the global COVID lockdown in 2020 and is still with us to a certain extent. We see that, indeed, global trade has become more precarious. During that lockdown consumers and businesses simply couldn't get what they wanted. And if your business, trying to buy goods from other businesses and can't get them, well, you're out of business, and that raises the risk of defaulting on your payments and that could drive the business that's expecting your payment out of business, as well, like Tim's. And this may be particularly true if you're selling into countries where information about businesses may be scarce.
Alix McCabe: So where you don't have information on financials, for example, on a company, so therefore you're sort of trading blindly if you're doing so at all.
Dan North: Yeah, that's correct. And in a sense, that's where we can help because we have a database of 83 million companies worldwide. So if you don't know much about them, we probably do have some information on them.
Alix McCabe: Information is power, right?
Dan North: Yup. Then you can manage that risk a little bit better.
Alix McCabe: So given your expertise, Dan, what are some of the factors that may commonly create trade credit issues?
Dan North: Well, on top of what we just talked about, there's some other problems as well. For instance, over the past few years we've been involved in trade wars and trade wars are usually destructive for both sides. Consumers can't get imports at the price they want and producers can't sell their exports at the price they want. Again, raising the risk of non- payment. It's the same for the overseas trading partner. So typically, both parties lose with the trade war. Also over the past few years since the pandemic, and Tim has affirmed this, there are wild swings in commodity prices and they're wild swings in the cost of transporting good. And those price swings can erode profit margins and that's another factor, again, that could raise the risk of nonpayment.
Alix McCabe: Tim was talking about that earlier with the price of copper, for example.
Dan North: Exactly. And copper's not the only one. Commodities in general have gone through broad swings because of so much uncertainty in the economy, snafus in the supply chain, rebounding demand, or not, in some cases. So it's really been a very volatile time in commodities which are usually volatile anyway, but it's been much more the case now, and the shipping costs. Those have been in surveys that I look at, consistently. Businesses responding to these surveys say shipping costs are killing us. That is a big problem, has been a big problem.
Alix McCabe: Tim, I can see you nodding when Dan's talking about shipping price. Is that something you faced in your business?
Tim Nemec: Oh, very much so. He hit the nail on the head. Our shipping costs have skyrocketed. And this, even with the price increases, the availability of trucking is still scarce. So getting the product to the end consumer has been a challenge. We have our own fleet. Costs have gone up, truck drivers are scarce. We're having to pay more for our truck drivers. So it has raised our costs tremendously.
Alix McCabe: So Dan, when dealing with cases like that of M. Lipsitz & Co, what would be your recommendations for support?
Dan North: Well, of course one of the primary benefits of trade credit insurance is protection against nonpayment. I mean, that's what we've been talking about so far. You're hoping that receivable will turn into cash, but if doesn't, if you get stiffed, you could be in big trouble. Because for many businesses, and I think this is what Tim was talking about, receivables are their largest asset and they're the only ones that go uninsured. So that's where you could really get some support from trade credit insurance. Because if those big receivables go bad, it could bring a company down. And by the way, in terms of protecting receivables against nonpayment, globally, we pay a thousand claims every week. So we do offer a lot of protection for a lot of clients.
But it's not just protection against nonpayment. And I think Tim may talk about this later, but trade credit insurance can help a business grow not only by providing risk protection on existing clients, selling to new clients, but selling to new clients where there's little information. For example, let's say company A sold 200, 000 of goods to company B last year. Often, in this situation, Allianz Trade could come in and say, " We could have offered you $ 300,000 credit limit." That would mean that company A actually had left a hundred thousand dollars of sales on the table. That's how trade credit insurance can actually become an investment with a return on investment, an ROI and not a cost.
Alix McCabe: How common would you say are problems like this across other industries?
Dan North: It's across all industries. It really is. And we cover all industries as well. But there is one more thing that we haven't talked about already. This case to a certain extent, as I'd mentioned, was expanding sales. But let's get back to the primary thing, which is the protection on the whale. That would be a case of what I would call known risk. M. Lipsitz knew the whale was having problems, but Allianz Trade credit insurance, with our availability to so much information, can also provide protection on those unknown risks. Those companies no one is expecting to go bad.
Alix McCabe: Tim, what stands out to you from what we just heard? Is there anything relatable in what Dan was talking about?
Tim Nemec: Sure. What Dan said was true in our case. We use Allianz now when we're evaluating potential new customers. We'll contact them and a lot of times they'll have financial information and have a rating on them, which will enable us to make a decision whether we're
going to do business with that particular customer. So we consider them part of our marketing team from that respect.
Alix McCabe: So we're almost out of time, but I'd like to get some closing thoughts or parting wisdom from you both if you don't mind, before we sign off. So Dan, you are up first. What is the number one thing in your opinion that companies can do in advance of any crisis to shore up protection?
Dan North: Well, the key term there is in advance. You want to get credit insurance while it's available. Like any business, like Tim's business, Allianz Trade only carries so much product inventory. That is the capacity to take on risk. And if we see a certain industry or a certain buyer appears to be going in trouble, there may not be as much product left in inventory where we can cover you. And speaking of in advance, I hope to get to mention a little bit why that's really important coming up.
Alix McCabe: Do it. We'd love to hear.
Dan North: Well, as the senior economist, I really think that there's a very good chance that we're headed into a recession.
Alix McCabe: Come on.
Dan North: Yeah, I'm sorry. I'm sorry to ruin everybody's day, but that's why you might want to think about getting it in advance. And here's what I'm seeing: the Federal Reserve let inflation get completely out of control, and because they've realized that, they've had to raise interest rates so aggressively that they're going to try to kill inflation and they'll probably kill the economy along with. It's just very hard to fight that one major tool the government has to manage the economy and now it's working in the way to strangle the economy.
And there are a couple signs, you see. There's what we call the yield curve, which is just a difference in interest rates between long- term and short- term rates and it's giving off a signal that's been a hundred percent reliable in terms of forecasting recessions. And that's three to five quarters ahead. And then there's another thing, which is when consumers in a survey say, "We're much more worried about the future than right now." It's a perfect predictor of a recession. And that's where we are on that. And high oil prices, housing market already falling apart. It's a very compelling case and I think we're certainly going to be in recession by the first quarter of next year.
Alix McCabe: What's your outlook for timing in terms of how long it would last?
Dan North: That's always the hardest question because there are signals you can see like I just mentioned that tell you that it's coming and even, to a certain extent, when. But it's a little bit more difficult to think about how long and whether it's going to be shallow or deep. Here's what we're thinking at the moment. The labor market right now is still reasonably strong. Consumers are still spending. We've got a fair amount of work in the pipeline, I would call it. New orders and services in business, in manufacturing. So those things are going to mitigate, I think, the severity of the recession. But we think we're going to see negative growth for probably three quarters. That's somewhere near average. We think it's going to be shallow, but it is coming.
Alix McCabe: Okay. Well, it sounds like now is an interesting time for businesses to look into other ways to potentially protect themselves.
Dan North: Indeed.
Alix McCabe: Tim, coming back to you, tell us how all of this turned out. So you had this big customer that was a key customer for you back in 2014 that fell upon some financial troubles. What was the resolution for you?
Tim Nemec: Well, Alix, we did business with him for a few years, but unfortunately the company went under and filed bankruptcy. So we filed a claim with Allianz and it was very efficient. We filed all the paperwork necessary and payment was very prompt. So it worked. Unfortunately, it was a claim that we had to file, but that's why we had the insurance in the first place.
Alix McCabe: Yeah, absolutely. What lessons have you learned that you could share with other maybe CFOs that might find themselves in your position one day?
Tim Nemec: Well, as Dan pointed earlier, receivables is one of the biggest assets on our financial statements. So we've just built the cost of insurance into our cost model. Just like we have insurance on our property and equipment, we now have insurance on our receivables and it's just part of our cost model. And I would suggest any CFO that has a fair amount of receivables to give that a consideration, to add that to your insurance portfolio.
Alix McCabe: It's really great, Tim, to see how your company has turned risk into reward and actually benefited from what could have been a pretty dire situation. Thank you so much for sharing your story with us and for being part of Wheel of Risk today.
Tim Nemec: My pleasure. Thanks for having me.
Alix McCabe: Before you go, I have a favor to ask.
Tim Nemec: Sure.
Alix McCabe: Would you mind spinning the wheel to help us pick our next episode?
Tim Nemec: Sure. Okay, here we go. Oh no.
Alix McCabe: Oh boy. You landed on ‘when the going gets rough’, a case study about the high- risk, fast- paced world of transportation logistics. Buckle up everybody.
Tim Nemec: Dadgummit.
Alix McCabe: My guest today has been Tim Nemec, the CFO of M. Lipsitz & Company. I'd also like to thank Dan North, senior economist for North America at Allianz Trade. Dan, I really appreciate your expertise.
Dan North: Alix, thanks very much for having me and good luck to everybody. Tim, thanks for coming with us.
Tim Nemec: My pleasure.
Alix McCabe: I'm Alix McCabe and this is Wheel of Risk, brought to you by Allianz Trade. Thanks so much for listening to this series premiere episode, and if you like what you heard, please give us a follow wherever you get your podcasts. Talk to you soon.