e-Curing the Holiday Humbug

Then the big guns fired: The U.S. Commerce Department validated those predictions when it reported on Nov. 14 that actual sales fell by record levels, even including online sales. The Census Bureau put advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, at $363.7 billion, a drop of 2.8% ('0.5%) from September, and 4.1% ('0.7%) below figures for October 2007. Total sales for August through October were down 1.3% ('0.5%) from the same period a year ago, the Bureau said. The August-to-September change in percentage was revised from '1.2% ('0.5%) to '1.3% ('0.3%).

Retail trade sales were down a whopping 3.1% ('0.5%) from September and were 5% ('0.7%) below 2007 levels, the government reported. (Editor's note: For a detailed look at the Census Bureau's quarterly economic report, see, “Third Quarter e-Commerce Report,” in this issue.)

And take a look at these careening commerce categories:

• Sales among motor-vehicle and parts dealers sales were down 23.4% ('2.1%) from October 2007; and
• Sales of furniture and in home-furnishings stores were down 13.5% ('3.3 %) from last year.

Another report warned of “the most difficult holiday season in memory,” with a 3% drop in online sales during the week that ended Oct. 25, compared with the same period in 2007. The data, from such online and economy research groups as Hitwise, Comscore and The Conference Board, seemed to be clear results of U.S. consumers' confidence having been shaken by the credit crunch and financial-services crises. The Conference Board's Consumer Confidence Index fell from about 64% in September to 38% in October ' and Web sites took a hit, especially in the music-sales industry, where figures in October tumbled toward the download dumpster by 21% over the same period the year before. And a study of consumer confidence conducted by Port Washington, NY-based NPD Group, a firm that assesses retail spending patterns, sorts out trends and forecasts activities based on polling consumers, found last month an emphasis on “spending less.” A survey of more than 2,000 people online found that overall spending would be down by 8% this year, including among technology purchases, although those appeared to be on track to remain relatively strong.

The business-to-consumer (“B2C”) market is not the only one facing tough times. In the business-to-business (“B2B”) market, firms challenged by revenue loss from declining sales were also warned that it will take longer to collect on what sales they have left. For example, on Oct. 31, the Wall Street Journal reported that many small firms were falling behind in paying creditors, because their own customers ' especially larger companies ' were themselves delaying payment, and lenders won't advance working capital funds against overdue receivables under a typical line of credit ' news that was unfortunately neither a trick nor a treat for anyone trying to run a firm. (See, “Slow Payments Squeeze Small Business Owners,” Kelly A. Spors and Simona Covel, The Wall Street Journal, Oct. 31, 2008.)

Online Businesses Not
Immune in General Crisis

Of course, anyone trying to keep an e-commerce site afloat didn't ' and still doesn't ' need to read the newspaper to realize the business downturn: the grim news appears every day in the cash till, in the aging-of-receivables report, and in overdue payables. While the down times are as inevitable a part of a business cycle as the booming times, that realization doesn't satisfy the bank, the critical vendor at the door or the payroll processor that must be paid.

Conserve Cash

That being the case, until online spending returns, and with some force that offers struggling enterprises some sustainability, e-commerce firms must plan for the worst, in the same way that their predecessors always have ' but with e-flexibility. Let's see how a few common strategies retail sellers and other businesses have used to increase their chances of being “still around” for the rebound play out differently online.

First ' and second, third, and in as many places as you care to list: Conserve cash. In troubled times, having cash preserves the ability to act to solve problems, or to take advantage of competitors' difficulties. Lack of cash, in contrast, makes it difficult, if not impossible, to respond to the unexpected punches that a failing economy throws at all businesses, whether in the form of slashed credit limits from lenders, or extra costs resulting from suppliers' or customers' financial problems. Of course, this principle is not unique to e-commerce ' a demand for payment from a lender appears the same to an online retailer as it does to its bricks-and-mortar counterpart. Yet there are some aspects of cash management in which tech firms may have different spending priorities.

For example, scrutinize the IT department's (and vendors') requests for software and hardware upgrades. Typical upgrades can be quite pricey, and must be paid for many times over, for each computer in the firm. Moreover, comparison-shopping for competitive bids won't work ' no one wants to undergo the expense and trauma of changing a firm's software just to avoid an upgrade charge. While the vendor certainly will tell you that each upgrade is mandatory, let your IT professionals decide whether that is an accurate programming judgment, and not just a sales pitch.

But don't forget your business common sense by placing total trust in IT's recommendations, either, because IT justifies many spending requests for upgrades with its mantra of “best practices” ' especially to supervisors who have no technological basis to question the IT staff's judgment. However, is that term really the result of a technical analysis, or simply a new edict from the vendor's marketing or finance department to boost revenues? While vendors often characterize an upgrade as best practices, IT must determine whose best interest is at issue ' the vendor's or its customer's.

Also, will the requested new technology work as intended, to cut costs or generate revenue, or will it bring its own problems and new costs ' and just increase the burden on cash and your already overworked staff? For example, a director of litigation consulting at a firm that provides technology for lawyers to use in courtrooms recently told me that he will simply not upgrade any computers to Window Vista for use in courtroom demonstrations because of his perception (correct or not) that the risk of a malfunction ' with potentially catastrophic effect on a jury and the case ' is too great. If an upgrade creates risk and drains cash, why even consider it ' especially if an older product works well, or a tried-and-reliable alternative is available at less cost?

Know Your Business,
And Your Partners

Similarly, think about which products will drive revenue and profit, so that inventory turns quickly. Unless your business is built on a model of stocking everything and shipping quickly, carrying unnecessary inventory just ties up your own line of credit and other liquid assets, compared to ordering as needed. Since any promotions will likely require additional inventory financing, consider whether your cash flow is sufficient to support your marketing plans; too often the treasury and marketing departments do not coordinate their strategy and projections.

And remember: Your own suppliers may view your business in the same way that you should look at your customers, as discussed below, and become wary of your finances. If they, in turn, restrict your trade credit or tighten terms, you may not be able to purchase enough inventory to remain competitive, especially compared to online just-in-time sellers. That “credit noose” could turn a difficult selling season into a death spiral, as less cash leads to reduced inventory, fewer customer visits to the Web site to see new arrivals and, ultimately, no new or repeat business.

Keep IT and Employees
Safe and Secure

Although a cash crunch challenges all firms' purchasing plans, that dilemma creates particularly difficult choices for IT staff. With vendors upgrading products constantly, particularly to add security measures, a halt or slowdown in spending could leave the system at risk, at best, or compromise security or functionality, at worst. The goal of an IT-budget response, therefore, should be to determine what proposed spending is necessary to maintain operations, especially in the area of security, and nothing more.

Another tech concern in a time of restricted cash flow will be proper treatment of employees ' tech and on the business side. It may have been tempting in the past to cut costs by simply laying off those people the firm had paid as independent contractors, who could be terminated without additional costs for COBRA and other benefits or severance. Today, however, that practice may just be an invitation to paying legal fees to respond to a government investigation, as labor regulators (and employees' attorneys) now require that many more tech staff be classified as employees, with all of the costs for payroll taxes and benefit obligations required by that status. Similarly, long hours, once the e-commerce employee's badge of honor, can now drain cash quickly, if the nonexempt employees are required to work traditional tech schedules that stretch hours and budgets, because they must receive overtime pay.

As noted in The Wall Street Journal article, payables and collections also become a “trickle down” problem in a troubled economy. Even if your business does not directly sell at retail, you will be affected if your customers depend on retail sales ' if they can't collect their bills, or their customers are dragging payments out longer and longer, they can't pay you on time, either, so scrutinize your collections and credit departments, and the terms you offer. Because online retailers almost always require payment by credit card already, the sometimes-steep fee should already be built into the business model, and not worsen the cash pressure. But for commercial sellers who offer payment terms, consider whether every customer should routinely get standard terms (e.g., 30 days, 60 days, etc.), or whether some (perhaps all) should be required to pay by credit card, or COD ' especially firms in struggling sectors. While the typical credit-card fee can be high, collecting 95% of your receivables (after the processing fee) is certainly better than collecting none.

Credit Management
And the Credit Manager

The role of the credit manager in setting credit policies becomes even more important when cash is tight, to try to prevent your customers' cash-flow problems from becoming your cash-flow problems. The customer whom you may take a chance on in good times with an extension of credit may not be worth the risk today, when that extension cuts into your own credit line that finances your receivables ' especially if it will not be paid for some time, if at all.

Sadly, no matter how good your credit manager may be, in these times, some customers ' and vendors ' will not survive. Again, attention to what may be happening in the marketplace is critical to avoid being swept up in others' problems. Unusually large discounts, especially cash-only sales, may signal more than desperation: a push to raise cash to finance a bankruptcy. Similarly, declining inventories at a supplier or customer may point to a firm facing its own cash shortfalls, so shipping inventory to it on credit could just increase the size of a claim in bankruptcy, which may never get paid. While there are legal remedies for creditors who act very quickly after a customer seeks bankruptcy protection ' within days ' such as stopping goods in transit or reclaiming inventory that has already been shipped, avoiding the problem by controlling credit shipments cuts down the potential loss in the bankruptcy, and the hit to your own credit line.

Special e-Comm Concerns

For an e-commerce firm, however, there are other consequences from cash shortages that may be more serious than simply another unpaid bill or receivable. If your firm is dependent on a supplier to keep operations moving, especially in critical selling seasons (such as holiday shopping), dependence on a single seller that suffers its own cash hiccups could shut down your firm. Finding a qualified alternative supplier before the crisis hits could make the difference between keeping the business afloat, and losing expensive, hard-won customers to another site that has adequate inventory available. Beginning to source your requirements from multiple vendors uses the power of diversification to establish yourself as an “established customer” of several firms, rather than a new customer forced to buy COD, or limited in the variety and volume of products it can get from a supplier forced to ration its inventory. If the worst does occur, despite your efforts to control your exposure to a customer's bankruptcy, don't forget to make any necessary proof-of-claim filings at the bankruptcy court, because if anything is paid out, you want to be certain that your firm will at least get its share.

Even more important, though, is that e-commerce sellers often can distinguish themselves only on their brand image, which is determined (in part) by how well they perform their basic functions: offering desirable merchandise on an easy-to-use Web site, and then shipping it in a timely fashion, and in good condition. You cannot allow cash problems to interfere with how your e-business runs, and with the brand image it presents to customers. Cash shortages could make it harder to get and keep in stock the inventory that customers want, and harder to keep the key employees who maintain the Web site. Without that infrastructure, your firm could suffer delays in processing orders, and even in processing payments to provide needed cash. In the face of such problems, an unhappy customer needs only a simple online search to find someone else who may do better. And once customers leave your site, you may not be able to win them back. Even if they stay, they may provide unflattering ratings that deter new customers, at one of the many unedited “review” sites, and which, paradoxically, may be easier for potential or existing and ' you hope ' returning customers to find than your own site, despite your best marketing efforts. (See, “e-Commerce Meets American Idol,” e-Commerce Law & Strategy, May, 2008.)

Take Charge, and Maybe Win!

A more positive approach to the credit crunch is to take the offensive and anticipate some of the potential problems facing your firm. For example, rather than waiting with bated breath for a lender to foreclose, why not proactively discuss your firm's problems with that lender, and suggest your own action plan and potential solutions to your problem? After all, once a lender must even think about foreclosing, its costs can cut into any profit from a loan (much less the expenses and aggravation of disclosing non-performing loans to shareholders and regulators, and dealing with their reaction). With all those expensive consequences of a loan gone bad, your lender may be very motivated to consider alternatives that avoid them; instead, be proactive with your lender, before it acts against you. For example, Steve Economou, managing director of Curtis Financial Group, a Pennsylvania-based investment banker, recently advised clients to review bank-loan documents to consider how a hypothetical significant revenue decline would affect loan covenant ratios ' and give lenders the right to claim defaults. If a technical default would occur, he advocates proposing your own strategy to the bank, as well as the more traditional response of considering financing alternatives. “The bank may like your alternative better than their solutions ' liquidating your firm's assets, or selling your note at a deep discount.”

Similarly, the cost of a non-performing contract may allow you to force a renegotiation for better terms. Your creditor may prefer to get something, even if less than what had been required by the contract, rather than a chance to pay fees to collections or bankruptcy attorneys. Of course, that situation can cut both ways ' a firm that knows its contract partner is in trouble may just use the opportunity to squeeze out even harsher terms. Although that is not a recipe for a long-term relationship, an immediate profit boost may be worth whatever
hypothetical cost to a relationship or long-term harm may result, especially since business lives are fleeting in e-commerce anyway.

In fact, many firms that have kept cash available may see difficult times as a “sale” on desirable assets for those with the cash to seize the opportunity from sellers forced to unload them below long-term value in order to meet immediate cash needs. Similarly, you may have a competitor you always wanted to eliminate, but with which you didn't want to get into a price war; in these difficult times, it may just be cheaper to make an aggressive offer to purchase it. If competitors are forced into bankruptcy, then those handling the sale may be more concerned about selling assets quickly than in getting the highest prices, especially for IP assets that may be of great value to an e-commerce or tech firm, but that the liquidator may not understand, or have the time to value or market properly (see, www.law.com/jsp/PubArticle.jsp?id=1202425721523).

Use the 'e-Advantage'

In fact, there may be a “red lining” to all of these problems, both for the color of the season and the proverbial negative-income statement hue. As noted in several of the gloom-and-doom reports cited earlier in this article, customers who still need to buy in this economy often perceive online sellers as providing a better value and selection for their limited purchasing dollars ' all the reasons that led to the growth of e-commerce in the first place. According to a Conference Board study: “Online consumers intend to spend less in stores this holiday season than last year, but slightly more online.”

Similarly, a study in USA Today reported that companion e-commerce sites may provide retailers a boost in the down economy, because of the perception that consumers ' who have grown increasingly internet savvy ' can find exactly what they want (especially in clothing) more quickly than in a store ' and get a good deal on it. (See, www.usatoday.com/money/industries/retail/2008-11-04-online-retail-holi day-shopping_N.htm?csp=Tech.)

All of these advantages that e-commerce firms, operations or divisions have over their bricks-and-mortar counterparts may be accentuated because the traditional firms will face cash demands to pay for and maintain that brick and mortar, and stock it with inventory, that virtual firms (with just-in-time inventory) don't need to pay. In fact, today's e-commerce survivors of the dot-com boom and bust may be better able to ride out the storm than their long-standing bricks-and-mortar counterparts; indeed, according to many of the same reports, e-commerce, even with declines, was perceived to be more attractive to buyers than traditional sellers. “Online consumers intend to spend less in stores this holiday season than last year, but slightly more online. Consumers will be expecting free shipping and deals not available in stores when they shop online,” said a story based on data from several sources, including The Conference Board and marketing and marketing-trends firm TNS that was reported Nov. 14 on the Web site of the Dow Jones publication MarketWatch.

Conclusion

So, rather than become defensive in the economic downturn, e-commerce firms alert to the pitfalls mentioned in this article, and who can discipline their cash flow, may be able to do more than “make the best of what's still around” as their traditional competitors are “falling down.” Instead, e-commerce firms can cut further into the market share of traditional retailers unable to adjust to the demands of increasingly e-savvy consumers who see the benefits of online shopping as the answer to the problems they face at the cash-strapped retail sellers, and who can find exactly what they want online.

“When the world is running down
You make the best of what's still around.”
' The Police, 1980

As the holiday shopping season began this year, gloom-and-doom predictions greeted consumers and e-commerce firms alike.

Early in the shopping season, in an article in USA Today, the National Retail Federation predicted only a 2.2% growth rate in overall holiday shopping, and even though Forrester Research predicted a 12% rise in online sales, that forecasted number would represent the slowest growth of holiday shopping online in many years. But, truth to tell ' or to sell ' both those sets of numbers seem rosily optimistic in 20/20 hindsight viewing the economy's struggles later in the year. The final blow to online retailers' hopes hit home just before Thanksgiving, when comScore, a firm which monitors consumer behavior, reported a 4% drop in online spending (compared to 2007) in the holiday run-up in November, the first decline since it began that measurement ' and predicted no further growth in December, either. (See, www.businessweek.com/technology/content/nov2008/tc20081125_473588.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis; http://bits.blogs.nytimes.com/2008/11/25/for-first-time-e-commerce-market-shrinks/?hp.)

Then the big guns fired: The U.S. Commerce Department validated those predictions when it reported on Nov. 14 that actual sales fell by record levels, even including online sales. The Census Bureau put advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, at $363.7 billion, a drop of 2.8% ('0.5%) from September, and 4.1% ('0.7%) below figures for October 2007. Total sales for August through October were down 1.3% ('0.5%) from the same period a year ago, the Bureau said. The August-to-September change in percentage was revised from '1.2% ('0.5%) to '1.3% ('0.3%).

Retail trade sales were down a whopping 3.1% ('0.5%) from September and were 5% ('0.7%) below 2007 levels, the government reported. (Editor's note: For a detailed look at the Census Bureau's quarterly economic report, see, “Third Quarter e-Commerce Report,” in this issue.)

And take a look at these careening commerce categories:

• Sales among motor-vehicle and parts dealers sales were down 23.4% ('2.1%) from October 2007; and
• Sales of furniture and in home-furnishings stores were down 13.5% ('3.3 %) from last year.

Another report warned of “the most difficult holiday season in memory,” with a 3% drop in online sales during the week that ended Oct. 25, compared with the same period in 2007. The data, from such online and economy research groups as Hitwise, Comscore and The Conference Board, seemed to be clear results of U.S. consumers' confidence having been shaken by the credit crunch and financial-services crises. The Conference Board's Consumer Confidence Index fell from about 64% in September to 38% in October ' and Web sites took a hit, especially in the music-sales industry, where figures in October tumbled toward the download dumpster by 21% over the same period the year before. And a study of consumer confidence conducted by Port Washington, NY-based NPD Group, a firm that assesses retail spending patterns, sorts out trends and forecasts activities based on polling consumers, found last month an emphasis on “spending less.” A survey of more than 2,000 people online found that overall spending would be down by 8% this year, including among technology purchases, although those appeared to be on track to remain relatively strong.

The business-to-consumer (“B2C”) market is not the only one facing tough times. In the business-to-business (“B2B”) market, firms challenged by revenue loss from declining sales were also warned that it will take longer to collect on what sales they have left. For example, on Oct. 31, the Wall Street Journal reported that many small firms were falling behind in paying creditors, because their own customers ' especially larger companies ' were themselves delaying payment, and lenders won't advance working capital funds against overdue receivables under a typical line of credit ' news that was unfortunately neither a trick nor a treat for anyone trying to run a firm. (See, “Slow Payments Squeeze Small Business Owners,” Kelly A. Spors and Simona Covel, The Wall Street Journal, Oct. 31, 2008.)

Online Businesses Not
Immune in General Crisis

Of course, anyone trying to keep an e-commerce site afloat didn't ' and still doesn't ' need to read the newspaper to realize the business downturn: the grim news appears every day in the cash till, in the aging-of-receivables report, and in overdue payables. While the down times are as inevitable a part of a business cycle as the booming times, that realization doesn't satisfy the bank, the critical vendor at the door or the payroll processor that must be paid.

Conserve Cash

That being the case, until online spending returns, and with some force that offers struggling enterprises some sustainability, e-commerce firms must plan for the worst, in the same way that their predecessors always have ' but with e-flexibility. Let's see how a few common strategies retail sellers and other businesses have used to increase their chances of being “still around” for the rebound play out differently online.

First ' and second, third, and in as many places as you care to list: Conserve cash. In troubled times, having cash preserves the ability to act to solve problems, or to take advantage of competitors' difficulties. Lack of cash, in contrast, makes it difficult, if not impossible, to respond to the unexpected punches that a failing economy throws at all businesses, whether in the form of slashed credit limits from lenders, or extra costs resulting from suppliers' or customers' financial problems. Of course, this principle is not unique to e-commerce ' a demand for payment from a lender appears the same to an online retailer as it does to its bricks-and-mortar counterpart. Yet there are some aspects of cash management in which tech firms may have different spending priorities.

For example, scrutinize the IT department's (and vendors') requests for software and hardware upgrades. Typical upgrades can be quite pricey, and must be paid for many times over, for each computer in the firm. Moreover, comparison-shopping for competitive bids won't work ' no one wants to undergo the expense and trauma of changing a firm's software just to avoid an upgrade charge. While the vendor certainly will tell you that each upgrade is mandatory, let your IT professionals decide whether that is an accurate programming judgment, and not just a sales pitch.

But don't forget your business common sense by placing total trust in IT's recommendations, either, because IT justifies many spending requests for upgrades with its mantra of “best practices” ' especially to supervisors who have no technological basis to question the IT staff's judgment. However, is that term really the result of a technical analysis, or simply a new edict from the vendor's marketing or finance department to boost revenues? While vendors often characterize an upgrade as best practices, IT must determine whose best interest is at issue ' the vendor's or its customer's.

Also, will the requested new technology work as intended, to cut costs or generate revenue, or will it bring its own problems and new costs ' and just increase the burden on cash and your already overworked staff? For example, a director of litigation consulting at a firm that provides technology for lawyers to use in courtrooms recently told me that he will simply not upgrade any computers to Window Vista for use in courtroom demonstrations because of his perception (correct or not) that the risk of a malfunction ' with potentially catastrophic effect on a jury and the case ' is too great. If an upgrade creates risk and drains cash, why even consider it ' especially if an older product works well, or a tried-and-reliable alternative is available at less cost?

Know Your Business,
And Your Partners

Similarly, think about which products will drive revenue and profit, so that inventory turns quickly. Unless your business is built on a model of stocking everything and shipping quickly, carrying unnecessary inventory just ties up your own line of credit and other liquid assets, compared to ordering as needed. Since any promotions will likely require additional inventory financing, consider whether your cash flow is sufficient to support your marketing plans; too often the treasury and marketing departments do not coordinate their strategy and projections.

And remember: Your own suppliers may view your business in the same way that you should look at your customers, as discussed below, and become wary of your finances. If they, in turn, restrict your trade credit or tighten terms, you may not be able to purchase enough inventory to remain competitive, especially compared to online just-in-time sellers. That “credit noose” could turn a difficult selling season into a death spiral, as less cash leads to reduced inventory, fewer customer visits to the Web site to see new arrivals and, ultimately, no new or repeat business.

Keep IT and Employees
Safe and Secure

Although a cash crunch challenges all firms' purchasing plans, that dilemma creates particularly difficult choices for IT staff. With vendors upgrading products constantly, particularly to add security measures, a halt or slowdown in spending could leave the system at risk, at best, or compromise security or functionality, at worst. The goal of an IT-budget response, therefore, should be to determine what proposed spending is necessary to maintain operations, especially in the area of security, and nothing more.

Another tech concern in a time of restricted cash flow will be proper treatment of employees ' tech and on the business side. It may have been tempting in the past to cut costs by simply laying off those people the firm had paid as independent contractors, who could be terminated without additional costs for COBRA and other benefits or severance. Today, however, that practice may just be an invitation to paying legal fees to respond to a government investigation, as labor regulators (and employees' attorneys) now require that many more tech staff be classified as employees, with all of the costs for payroll taxes and benefit obligations required by that status. Similarly, long hours, once the e-commerce employee's badge of honor, can now drain cash quickly, if the nonexempt employees are required to work traditional tech schedules that stretch hours and budgets, because they must receive overtime pay.

As noted in The Wall Street Journal article, payables and collections also become a “trickle down” problem in a troubled economy. Even if your business does not directly sell at retail, you will be affected if your customers depend on retail sales ' if they can't collect their bills, or their customers are dragging payments out longer and longer, they can't pay you on time, either, so scrutinize your collections and credit departments, and the terms you offer. Because online retailers almost always require payment by credit card already, the sometimes-steep fee should already be built into the business model, and not worsen the cash pressure. But for commercial sellers who offer payment terms, consider whether every customer should routinely get standard terms (e.g., 30 days, 60 days, etc.), or whether some (perhaps all) should be required to pay by credit card, or COD ' especially firms in struggling sectors. While the typical credit-card fee can be high, collecting 95% of your receivables (after the processing fee) is certainly better than collecting none.

Credit Management
And the Credit Manager

The role of the credit manager in setting credit policies becomes even more important when cash is tight, to try to prevent your customers' cash-flow problems from becoming your cash-flow problems. The customer whom you may take a chance on in good times with an extension of credit may not be worth the risk today, when that extension cuts into your own credit line that finances your receivables ' especially if it will not be paid for some time, if at all.

Sadly, no matter how good your credit manager may be, in these times, some customers ' and vendors ' will not survive. Again, attention to what may be happening in the marketplace is critical to avoid being swept up in others' problems. Unusually large discounts, especially cash-only sales, may signal more than desperation: a push to raise cash to finance a bankruptcy. Similarly, declining inventories at a supplier or customer may point to a firm facing its own cash shortfalls, so shipping inventory to it on credit could just increase the size of a claim in bankruptcy, which may never get paid. While there are legal remedies for creditors who act very quickly after a customer seeks bankruptcy protection ' within days ' such as stopping goods in transit or reclaiming inventory that has already been shipped, avoiding the problem by controlling credit shipments cuts down the potential loss in the bankruptcy, and the hit to your own credit line.

Special e-Comm Concerns

For an e-commerce firm, however, there are other consequences from cash shortages that may be more serious than simply another unpaid bill or receivable. If your firm is dependent on a supplier to keep operations moving, especially in critical selling seasons (such as holiday shopping), dependence on a single seller that suffers its own cash hiccups could shut down your firm. Finding a qualified alternative supplier before the crisis hits could make the difference between keeping the business afloat, and losing expensive, hard-won customers to another site that has adequate inventory available. Beginning to source your requirements from multiple vendors uses the power of diversification to establish yourself as an “established customer” of several firms, rather than a new customer forced to buy COD, or limited in the variety and volume of products it can get from a supplier forced to ration its inventory. If the worst does occur, despite your efforts to control your exposure to a customer's bankruptcy, don't forget to make any necessary proof-of-claim filings at the bankruptcy court, because if anything is paid out, you want to be certain that your firm will at least get its share.

Even more important, though, is that e-commerce sellers often can distinguish themselves only on their brand image, which is determined (in part) by how well they perform their basic functions: offering desirable merchandise on an easy-to-use Web site, and then shipping it in a timely fashion, and in good condition. You cannot allow cash problems to interfere with how your e-business runs, and with the brand image it presents to customers. Cash shortages could make it harder to get and keep in stock the inventory that customers want, and harder to keep the key employees who maintain the Web site. Without that infrastructure, your firm could suffer delays in processing orders, and even in processing payments to provide needed cash. In the face of such problems, an unhappy customer needs only a simple online search to find someone else who may do better. And once customers leave your site, you may not be able to win them back. Even if they stay, they may provide unflattering ratings that deter new customers, at one of the many unedited “review” sites, and which, paradoxically, may be easier for potential or existing and ' you hope ' returning customers to find than your own site, despite your best marketing efforts. (See, “e-Commerce Meets American Idol,” e-Commerce Law & Strategy, May, 2008.)

Take Charge, and Maybe Win!

A more positive approach to the credit crunch is to take the offensive and anticipate some of the potential problems facing your firm. For example, rather than waiting with bated breath for a lender to foreclose, why not proactively discuss your firm's problems with that lender, and suggest your own action plan and potential solutions to your problem? After all, once a lender must even think about foreclosing, its costs can cut into any profit from a loan (much less the expenses and aggravation of disclosing non-performing loans to shareholders and regulators, and dealing with their reaction). With all those expensive consequences of a loan gone bad, your lender may be very motivated to consider alternatives that avoid them; instead, be proactive with your lender, before it acts against you. For example, Steve Economou, managing director of Curtis Financial Group, a Pennsylvania-based investment banker, recently advised clients to review bank-loan documents to consider how a hypothetical significant revenue decline would affect loan covenant ratios ' and give lenders the right to claim defaults. If a technical default would occur, he advocates proposing your own strategy to the bank, as well as the more traditional response of considering financing alternatives. “The bank may like your alternative better than their solutions ' liquidating your firm's assets, or selling your note at a deep discount.”

Similarly, the cost of a non-performing contract may allow you to force a renegotiation for better terms. Your creditor may prefer to get something, even if less than what had been required by the contract, rather than a chance to pay fees to collections or bankruptcy attorneys. Of course, that situation can cut both ways ' a firm that knows its contract partner is in trouble may just use the opportunity to squeeze out even harsher terms. Although that is not a recipe for a long-term relationship, an immediate profit boost may be worth whatever
hypothetical cost to a relationship or long-term harm may result, especially since business lives are fleeting in e-commerce anyway.

In fact, many firms that have kept cash available may see difficult times as a “sale” on desirable assets for those with the cash to seize the opportunity from sellers forced to unload them below long-term value in order to meet immediate cash needs. Similarly, you may have a competitor you always wanted to eliminate, but with which you didn't want to get into a price war; in these difficult times, it may just be cheaper to make an aggressive offer to purchase it. If competitors are forced into bankruptcy, then those handling the sale may be more concerned about selling assets quickly than in getting the highest prices, especially for IP assets that may be of great value to an e-commerce or tech firm, but that the liquidator may not understand, or have the time to value or market properly (see, www.law.com/jsp/PubArticle.jsp?id=1202425721523).

Use the 'e-Advantage'

In fact, there may be a “red lining” to all of these problems, both for the color of the season and the proverbial negative-income statement hue. As noted in several of the gloom-and-doom reports cited earlier in this article, customers who still need to buy in this economy often perceive online sellers as providing a better value and selection for their limited purchasing dollars ' all the reasons that led to the growth of e-commerce in the first place. According to a Conference Board study: “Online consumers intend to spend less in stores this holiday season than last year, but slightly more online.”

Similarly, a study in USA Today reported that companion e-commerce sites may provide retailers a boost in the down economy, because of the perception that consumers ' who have grown increasingly internet savvy ' can find exactly what they want (especially in clothing) more quickly than in a store ' and get a good deal on it. (See, www.usatoday.com/money/industries/retail/2008-11-04-online-retail-holi day-shopping_N.htm?csp=Tech.)

All of these advantages that e-commerce firms, operations or divisions have over their bricks-and-mortar counterparts may be accentuated because the traditional firms will face cash demands to pay for and maintain that brick and mortar, and stock it with inventory, that virtual firms (with just-in-time inventory) don't need to pay. In fact, today's e-commerce survivors of the dot-com boom and bust may be better able to ride out the storm than their long-standing bricks-and-mortar counterparts; indeed, according to many of the same reports, e-commerce, even with declines, was perceived to be more attractive to buyers than traditional sellers. “Online consumers intend to spend less in stores this holiday season than last year, but slightly more online. Consumers will be expecting free shipping and deals not available in stores when they shop online,” said a story based on data from several sources, including The Conference Board and marketing and marketing-trends firm TNS that was reported Nov. 14 on the Web site of the Dow Jones publication MarketWatch.

Conclusion

So, rather than become defensive in the economic downturn, e-commerce firms alert to the pitfalls mentioned in this article, and who can discipline their cash flow, may be able to do more than “make the best of what's still around” as their traditional competitors are “falling down.” Instead, e-commerce firms can cut further into the market share of traditional retailers unable to adjust to the demands of increasingly e-savvy consumers who see the benefits of online shopping as the answer to the problems they face at the cash-strapped retail sellers, and who can find exactly what they want online.