Many Australian businesses are not protecting themselves against the risk their customers might go insolvent, according to a joint survey by the Institute of Internal Auditors – Australia (IIA) and credit insurer, Atradius.
A survey issued to more than 400 Chief Audit Executives found that despite almost one in five businesses experiencing a significant financial loss due to debt defaults in the last year, almost 20 percent did not take action to mitigate the risk of non-paying customers.
In addition, the survey found that 70 percent of businesses do not insure against customer insolvency, a surprising result given the number of high profile corporate collapses in the wake of the Global Financial Crisis.
These results coupled with the latest Dun and Bradstreet business-to-business payment figures which found that lagging payments are hurting half of Australian companies, send a very clear message.
David Huey, managing director of Atradius Australia and New Zealand warns businesses to “Keep a close eye on your creditors’ ability to pay their bills.
“While local economic indicators point to recovery, cash flow is still a concern and we’re continuing to see a spate of corporate insolvencies.”
Not only do businesses need to know who their clients are but also their client’s clients as one major insolvency can have a crippling affect throughout a supply chain,” added Mr Huey.
The IIA/Atradius survey also identified some of the risk mitigation strategies used by the respondents included implementing a credit management policy (79 percent), reducing reliance on a single buyer (37 percent), requesting up-front payment (32 percent) and credit insurance (11 percent).
Despite a large number having a credit management policy, alarmingly less than half (45 percent) undertake credit checks on would be buyers and for those who do credit check, 95 percent relied only on credit agency rating.
According to IIA chief executive Chris McRostie, even though the threat of recession has receded, organisations must not repeat the mistakes of the past. “As we found out, one of the big lessons from the GFC is that low probability, high impact risk can indeed crystallize and precipitate catastrophe for the unprepared.
“The upshot is that organisations cannot afford to be complacent and the risk of a major customer being unable to pay their bills is a major risk in anyone’s language.
“We strongly encourage companies to vet all possible solutions on a cost-benefit basis to work out what’s right for them. In some cases, credit insurance will make sense, in others it won’t – but companies will never know unless they do a proper risk analysis in the first place,” added Mr McRostie.
