Handing Receivables Properly

Although the verdict is not in on the exact circumstances that led to the crash and burn of Arrowhead Industries Corp. recently, the reseller's fate serves as a cautionary tale. It is a tale of how a company with a revenue run rate of almost $52 million saw its future quickly unravel soon after IBM Credit Corp. pulled the plug when auditors discovered an $8 million hole in the reseller's accounts receivable.

Arrowhead's fall points to the need for resellers to maintain sharp checks and balances on their business, said fellow resellers, and to have necessary precautions in place even if the business is running smoothly. Arrowhead President and Chief Executive Kenneth Hunt denied any wrongdoing. But other resellers said it appears that Arrowhead's top management may have not have been watching for the warning signs, perhaps because business was growing briskly.

All things seemed to be running smoothly for Hunt since he bought a majority stake in Arrowhead in July 2006. It was his first plunge into the channel. Prior to that, Hunt, a Native American with a sales and marketing background, had been working on a project on an Indian reservation. The company had 60 employees and was on track to break the $70 million revenue mark this year. Hunt was seeking to add electronic-commerce features and was looking to add locations.

Those plans, however, ended Aug. 18, when Hunt told employees he could no longer continue to pay them because IBM was closing its $18 million credit line. Hunt closed five days later. "They forced us out of business," said Hunt. He said he could have saved his business, or even had the opportunity to sell it, had IBM granted him more time. IBM Credit would not comment on the issue concerning Arrowhead. Hunt said the apparent problem cropped up within the company's accounting software. SBT Accounting Systems Inc., based in San Rafael, Calif., said it was not notified by Arrowhead of any problems.

Hunt said it was during an IBM audit in July when Arrowhead's future began to unravel. "IBM came in to do their normal audit and during that time our chief financial officer discovered some discrepancies," Hunt said. "He had informed the other auditors and IBM that there were problems with the SBT system".

"Nobody knows how the discrepancy got there, and we got experts on the software to go over the accounts receivables," Hunt said. "There were no problems until a month ago. IBM has been auditing us every three or four months for the past four years."

Resellers said that despite the apparent software glitch, Arrowhead seemed too small a business to have had such a credit line. Said Paul Rajewski, president and chief executive of MicroAge, The Corporate Center, an $80 million reseller in Cerritos, Calif.:" Eighteen million dollars is excessive for the size of that company."

Rajewski and other resellers generally agreed that a credit line of between $12 million and $14- million may have been more suitable. "If you are a box pusher, making one to two points on the business and you are not paying attention to your books, you are toast," Rajewski said. "You have no margin for error in the box- pushing business."

Eventually, the combination of errors sent Arrowhead into a tailspin. Hunt was banking on IBM Credit to extend a lifeline for at least 90 days to pay a skeleton crew to handle receivables, and track bills and returns. That did not come to pass.

Account Receivables