When Your Best Client Goes Belly Up

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Digital Library > Acquiring and Managing Finances > Cash management"When Your Best Client Goes Belly Up"

Surprised by a cash crunch, CEO calls on suppliers for help, tightens credit, spreads risk — and doubles sales.

Mathew Levine launched his custom-packaging business in 1990 and was prepared to make personal sacrifices to earn success. But he didn't expect to dig into his own pockets to keep his company afloat.

Three years after starting the Metro Packaging Group Inc. in New York, Levine had $1 million in sales. Then one of his biggest accounts — a cosmetics firm — went bankrupt. Suddenly he lost 8% of his sales and was stiffed for nearly $100,000.

The news stunned Levine. He knew he couldn't let the setback affect his other customers, and he worried about whether he could take such a financial hit and maintain his growth rate. "It was a watershed moment for the business," Levine says. "I knew that we would suffer a cash crunch, and we would need to do a lot of explaining to a lot of people."

Confronting the Damage Head-On

News of the cosmetic company's bankruptcy spread quickly. Because it was one of Levine's more visible clients, he feared that his firm would get dragged down in the undertow. Levine knew that how he communicated the damage would largely determine the response of others.

He decided to level with everyone. Levine called his suppliers, banker and accountant immediately to discuss the situation. His message: We lost a solid client. It took us by surprise. We've taken a broadside, but it's survivable. And, most important, here's our plan.

Levine thought that an honest appraisal of the problem would serve his interests better than brushing aside the bad news or diverting attention to other issues. "My main goal was to reassure our suppliers that we could weather the storm," Levine says. "We had to lean on them for better terms, and we were able to convince them to work with us to get through this."

The Road to Recovery

Next, Levine began to implement structural changes to regain financial footing. During his first three years in business, Levine extended generous credit. He trusted clients to honor their debts, even if it took an extra few months. He thought the resulting goodwill would pay off in stronger relationships — but now Levine knew he had gone too far.

His first step was to tighten credit policies. There would always be some bad debts, but narrowing his exposure would soften a blow.

Over the next year, Levine focused on rebuilding. He sought to regain lost volume by aggressively pursuing both new and repeat business. The lost account was used as a survival story. "We'd tell our customers,' we took a pretty good shot and we're still here. We're in this for the long haul,'" says Levine. "That got us some respect."

Lessons From Near-Disaster

Levine struggled through four "really scary" quarters before the business bounced back. Throughout that harrowing year, he spent more than $10,000 of his own savings to keep the company alive.

As new orders gradually flowed in, Levine sought to spread his risk more effectively rather than pinning too much on one high-profile account. He established a "steady diet of reliable clients" instead of elephant hunting for a big customer. "We decided to grow in smaller pieces with a business that had better margins," he says.

In 1998, the company earned $2 million in sales. With a more stable, diversified client base, Levine no longer worries about having too many eggs in one basket.

Writer: Morey Stettner

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Acquiring and Managing Finances

Articles in our Entrepreneur’s Resource Center appeared in print and online newsletters published previously by the foundation. More than 1,000 articles can be found in the categories below, addressing timeless challenges faced by entrepreneurs of all types.