Watch For Red Flags! (January 2008)

Some years ago, I was offered an opportunity to join a well funded start-up company. As part of my due diligence I read the business plan and shared it with a trusted advisor to help me evaluate the company. We talked about some specific concerns. As we talked, it was clear that I was weighing my personal desires (move to a new city, a much needed change from big corporate environments to a smaller company, etc.) more heavily than the business plan. I won’t forget his words to me on one of our calls. He said, “There are red flags. You can choose to ignore them by calling them pink or magenta, but we both know that they are red flags.”

If you’re in St. Louis and you read the St. Louis Business Journal, you’ve probably seen the stories about the “fig” (a St. Louis based company) bankruptcy. Most recently, it accounted the tales of numerous creditors and the amount of their claims in the bankruptcy filing. While I empathize with anyone who is forced to recover through the bankruptcy process, it’s probably fair to suggest that at least some of these suppliers chose to ignore the red flags that were in front of them (or as I had done, chose to believe that the flags weren’t actually red, but rather pink, magenta, or some other color that suggested less severe warnings).

When reading the articles, it is clear that many of the creditors extended fig many months of credit. I think an interesting question is how many of these vendors consciously evaluated the risks of extending further credit in light of slow payment for past goods or services versus how many simply chose to ignore the warning signs that were in front of them? It’s likely that in most cases, vendors chose to believe the best case scenario of increased business and profits to follow (well, at least as soon as they got paid). Knowingly or unknowingly, those extending significant credit were acting as mini venture capital firms and deserved to earn returns appropriate for the risks they were incurring.

When a customer isn’t making timely payments they are effectively asking you (the vendor) to act as a lender. In the case of fig, suppliers weren’t just supplying short-term, low risk financing; they were effectively supplying high-risk venture funding. If they didn’t realize the risks that they were taking, they certainly couldn’t ask for an appropriate return for that risk.

Choosing to accept the risks of extending significant financing to customers is a business decision that deserves careful consideration. Every situation is different and no one answer can address every situation. Extending credit to a growing customer could serve to secure a long term relationship and could prove very profitable. However, simply choosing to ignore the red flags is clearly a bad path. Even if things turn out well in the end, it will be due to luck rather than good business judgment.

In my case, I ignored the red flags. I quelled my inner voice and told myself other people who read the business plan were smarter or understood it better. Every time that I have done this, I’ve regretted it, even when things turn out well in the end.

Never ignore red flags. Heed their warning. Understand, evaluate, and then make a thoughtful decision.

If you need help with your business, financial plans, or goal setting, please give me a call at (314) 863-6637 or send an email to And, remember . . .
your cash is flowing. know where.

Copyright @ 2008 Homza Consulting, Inc.

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