Risk management must involve management of your customers
In Macks Advisory’s experience, it’s never occurred to many owners of small businesses that their financial future may depend to a considerable extent on the financial stability of their customers.
When it does occur to them, more often than not, it’s too late.
ASIC’s latest overview based on last year’s reports from 8,500 administrators says insolvencies are increasing, and that 63% of these reports have revealed alleged insolvent trading – 5% more than two years earlier.
Each failed business was somebody’s customer. It’s increasingly likely more SME operators will get into financial difficulty because their customers’ businesses have failed – unless an operator (and we hope you’re one) employs a risk management strategy that includes customer management.
Build relationships on firm foundation
But first things first. If you’re running a business ensure its trading terms are stated unambiguously on all appropriate documents, and that all legal registrations are up to date. For example, on the Personal Property Securities Register. If a customer goes into administration or otherwise gets into financial trouble, these documents are vital to your protection.
If it’s possible, know your customer before starting a business relationship – especially if at some stage of the relationship it’s likely you might consider extending credit to the customer.
Keep discreet tabs on customers. Their financial health might not be as good a year or so after trading began – or in say three, five or 10 years.
What’s happening in a customer’s industry? How are things going in their particular business? If you or staff members are unable to discretely keep tabs on such things, then it may well be worthwhile contracting specialists to get this information for you.
Consider aiding a customer’s survival
While information on customers obtained for you by a specialist might not have been something you could yourself readily have discovered, it would nonetheless be obvious in many instances when customers are struggling financially.
Suddenly a good payer of long standing is no longer reliable. This alone should signal you to move quickly, possibly for mutual benefit.
Bearing in mind that a customer who survives a financial crisis is one who survives to pay your bill, this could be a time to consider what might be done to aid that survival.
A discount for the customer’s prompt payment, or extended credit, could be viable options. Better perhaps to lose some immediate revenue if indications are you’ll retain the customer in the long term.
Consider trade credit insurance. If customers want to go beyond standard terms on contracts, there are instances – especially with valued customers -- where it’s commercially viable to take out credit insurance and retrieve the cost by factoring it into extended payment arrangements made with these customers. Trade credit insurance is a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit defaulters.
When the worst comes to the worst
Immediately you hear a customer’s company has gone into liquidation, make yourself known to the liquidator, and pass on information you may have collected about “what’s been going on” – especially if that’s likely to support claims you may have made as a creditor.
It’s wise to be seen as an active creditor (as distinct from a passive one), helping rather than hindering administration or liquidation processes, also by displaying an appreciation of what could be commercially viable and what couldn’t.
Perhaps you’ve already been involved as a creditor in an administration or liquidation and observed what can happen to a company where it’s profitably depended almost entirely on just one or two major customers who went belly up. If you’ve seen at close range how dangerous that can be for such a company, then it’s a lesson well learned.
As part of your risk management strategy, where possible, diversify to spread your financial dependency on the business health of your customers.
A hypothetical scenario to bear in mind
Let’s say a business known to you goes into administration owing your business $1m. This may be enough to cripple your business financially. You have alternatives. You can elect to follow the debtor into insolvency and pass the million-dollar loss or some proportion of it on to your creditors, or you can ask your shareholders to raise funds to prevent that.
Accordingly, we can work with you to structure a proposal that can put to shareholders that in essence convinces them it’s to their commercial advantage to facilitate funding to your company this may or may not necessitate formal appointments but in any event will be designed so as to reduce the risk of more significant financial loss
Thus, not only do we assist a client but we also attract interest from others to reduce the risk of potential clients in the process.
However, all businesses don’t have shareholders willing and able to raise essential funds in situations like this, but if, unlike in the above, all had credit insurance, they’d more likely have had no problem anyway.
Credit insurance is available to SMEs and multinationals alike. Typical businesses availing themselves of credit insurance include companies in building and construction, plumbing and electrical distribution, steel, advertising and media, foodstuffs and beverages, financial risk, exports, grain, and agricultural products.
Any business that sells products or services on credit can be covered by credit insurance.
One of the most important questions you might ask yourself in devising a risk management strategy that should include customer management, is simply this: “What would be the impact on my company, and indeed on me personally, if I suddenly discovered one or two of my biggest customers couldn’t pay what they owe my company?”
