Apparel suppliers and manufacturers throughout the COVID-19 pandemic have been hit particularly hard as many of their retail clients either missed, canceled or deferred payments for goods. Major apparel wholesalers have been eating the costs of these failed payments and have had to write them off in the form of “bad debt,” including Nike, PVH, Adidas, Hanesbrands, Guess, Levi’s, Columbia Sportswear and 7 for All Mankind parent Delta Galil. As the second-quarter earnings season heats up, many expect even more wholesalers will bear the brunt of these costs. But now, it’s going to be the wholesalers’ job to figure out how to improve on these relationships, or if worse comes to worse, exit them entirely.
A “bad debt” expense is a financial transaction that a company records in its books to account for any debts it has given up on
collecting. The expense is a contingency that must be accounted for by all businesses that extend credit to customers, as there is always a risk that payment will not be received. It does not necessarily mean that cost can never be recouped again, but it shows that companies are put in an extremely tough position that often requires more creativity to keep the relationship in the positive going ahead.
“A whole lot of bad stuff can be happening already and you don’t necessarily see it because there’s a relatively significant
delay before you ship something and you’re only going to get paid in three or four months’ time,” said Brandon Spear, president of global B2B payment and credit solutions provider MSTS. “It’s one of the nuances of the retail industry which makes it increasingly complex to manage. There are those typically long payments cycles. What we’ve seen in other industries is it’s incredibly important to be proactive with those customers, to not wait until the bills don’t get paid.”
Originally posted on Sourcing Journal.