Account-Ability

How one company's problems with accounts payable and the IRS jeopardized its future.

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Danny Sullivan learned the hard way how problems with accounts payable can jeopardize the future of an otherwise solid business

June 5, 1990. It was just about 9:00 in the morning when Danny Sullivan, the 34-year-old owner of Village Shoes, an upscale retailer in the wealthy Detroit suburb of Grosse Pointe, pulled his '87 Mustang into the parking lot behind his store. He was somewhat distracted, thinking about a meeting he had scheduled for that morning with his financial advisers and an Internal Revenue Service official to try to resolve a tax dispute that had dragged on for nearly five years.

When he rounded the corner of Kercheval Street, the main shopping drag in town and home for 14 years to his $750,000 shoe store, his hopes were dashed with a vengeance. The locks on Village Shoes' front door had been changed. Large pieces of masking tape framed a notice that proclaimed the store and its property had been seized by the state of Michigan. Two of the store's saleswomen paced the sidewalk uncertainly. Several armed policemen waited by the front door, as Sullivan recalls, "so that they could slap me with a warrant and stop me in case I went crazy and tried to break into my own store."

The day marked an end to Sullivan's 18-month struggle to find a way to withstand Michigan's economic slowdown and the resultant collapse in his customers' purchases of luxury shoes. He had been negotiating with his suppliers about ways to reorganize his accounts-payable obligations into smaller, more manageable levels and longer payment schedules. He also had been battling the IRS and the state over failure to pay taxes.

But when he saw the policemen and the new locks, Sullivan realized there was no room left for negotiation. After obtaining permission to enter his office through the store's unlocked back door, he started making phone calls. Within hours he had retained a bankruptcy lawyer, who filed a petition on Village Shoes' behalf for Chapter 11 protection from its creditors, including state and federal tax authorities. The following Monday Village Shoes reopened for business, while Sullivan's bankruptcy lawyer and financial advisers began the painstaking process of evaluating whether his company stood a chance of financially reorganizing under a bankruptcy-court-approved scheme.

Saddest of all about Danny Sullivan's experience is that so much of it stemmed from his own misguided business decisions -- decisions that placed growth ahead of profitability, customers ahead of creditors. As a result, he lacked the kind of accounts-payable controls that could have helped Village Shoes creatively respond to its sales slump. Michigan's economic recession was beyond Sullivan's control. But it took years for him to realize that his accounts-payable problems were not.

Unfortunately, Danny Sullivan's story is far from unique. When the economy is weak, as it has become throughout the country over the past two years, growing companies face twin pressures from sales slowdowns and the buildup of accounts-receivable problems. When credit and other sources of financing also dry up, as is the case today, cash-strapped managers must struggle to find ways to meet their financial obligations. All too often, what seems to be a solution is to stretch out, or occasionally even skip, their company's payments to suppliers, service vendors, bankers, or the tax man. "You keep telling yourself you'll be able to catch up and straighten it all out as soon as business picks up," Sullivan comments. "But pretty soon I began to feel as though I'd never get out from under it all."

Accounts-payable crises can snowball faster than almost any other financial problem -- to the point where they can jeopardize the future of businesses with otherwise strong growth potential. Yet few entrepreneurs view their bill-payment operations as worthy of the same attention they'd pay to sales or marketing activities. All too often they delegate the responsibility to overloaded bookkeepers who are already preoccupied with data processing or their own bill collecting. Danny Sullivan never realized how big a payables problem he had, until it was too late. "I kept thinking that if I could just figure out a way to raise some money, I could restock my most popular shoe lines and boost sales, and then everything would be all right again."

At first it did seem as though sales -- and sales alone -- were Village Shoes' problem. Sullivan had begun to notice a drop-off in customer activity as far back as January 1989. "There were little signs, but they kept on building," he recalls. "First, I noticed that men, particularly fathers, had stopped buying luxury shoes and were only spending money on items that they really needed. Then women started curtailing their purchases. Children's shoes were the last to be hit, but then we started to see a drop-off there as well."

Sullivan's inventory kept expanding during those slow winter months. "As a specialty retailer, I've normally got to place my orders with manufacturers and designers as much as a year in advance," he explains. "So there was no way to cut back on inventory buildup that winter and spring, even though I could watch my sales shrinking. Shoes just kept on coming." He had to find a way to pay manufacturers for the upscale shoes and boots he had long ago ordered, even if his customers were no longer buying them.

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