A published study examines the financial risks emerging in today’s challenging business environment and provides advice on how to avoid them. It highlights the risks that firms confront in the current business environment.
For most organisations, the top three problems are inflation, interest rates, and a skills shortage. However, they are also coping with a number of other issues, including supply chain disruptions, productivity, the housing crisis, climate change, and geopolitical uncertainty.
CreditorWatch’s Risky Business reveals the various tools that businesses can use to understand the level of risk they face and determine the creditworthiness of their customers, as well as casting an eye over the current credit landscape to reveal what’s keeping business people awake at night and what they can do about it.
Let’s start with some facts about the running environment. While some indicators have deteriorated, overall business conditions remain manageable. According to CreditorWatch’s October 2022 Business Risk Index (BRI), the industries with the highest likelihood of default over the next 12 months are food and beverage services (7.25 per cent), arts and leisure services (4.62 per cent), and transportation, postal, and warehousing: (4.57 per cent). According to the BRI, the probability of default over the next 12 months has grown in all regions of Australia (except for the Lower Hunter and Wyong in New South Wales).
The change in the balance between firm cash holdings and debt levels between June 2021 and June 2022 is another telling data point. When COVID struck, corporations cut debt by around 25 per cent from pre-pandemic levels, while cash holdings increased by 30 per cent. However, this stance has dramatically shifted after June 2021. As a result, most corporations’ cash holdings have decreased while their debt levels have increased. This raises the hazards in the working environment and is a dynamic that businesses must carefully manage.
CreditorWatch CEO Patrick Coghlan said it is important in trying market conditions for businesses to have as much information at their disposal on factors such as the current economic outlook and what it means for businesses.
“It’s important to be judicious when extending credit. A trend that businesses should be aware of is customers entering insolvency without any warning. As Covid stimulus payments have been unwound, this has exposed some businesses that were artificially supported during that period but have not addressed problems in their operations. These are among the businesses going into insolvency at the moment,” said Coghlan.
Business is inherently risky. But there are many steps firms can take to mitigate their risks.
Collaborate with suppliers
From a payment perspective, companies have an opportunity to collaborate with suppliers in a mutually beneficial manner. For instance, large construction companies should bring suppliers along on the tendering journey. The idea is to identify points at which all parties have an opportunity to renegotiate contract terms to take account of changes in the external environment.
Match inflows and outflows
CreditSource CEO Shavantha Mallawa said many businesses are facing specific short- and medium-term risks. These include escalating input prices, labour shortages and the rising cost of labour. An inability to pass on cost escalations to customers exacerbates these risks.
“It’s also essential in this part of the cycle to match inflows with outflows, says Mallawa. “Companies with low cash reserves or liquidity issues struggle more in this environment because there is a reluctance to offer payment terms seen previously. We are seeing some firms pay suppliers on time and ahead of time to secure their products and services. So, companies with low cash reserves will struggle to compete.”
Stay close to customers
One of the best ways to reduce the risk of non-payment or late payment is to understand customers’ circumstances, says Pilavidis.
“Now is the time to stay close to your customer. Get a feel for how a business is tracking by visiting their sites. Understand individual customers’ situations to identify the risks and secure opportunities for your business, for instance, maximising sales from good customers.
“Access to technology is key, as well as automation to improve processes and procedures. This frees credit managers from building customer relationships and proactively identifying risks. This also allows you to harness data to identify changing customer behaviours. For instance, unusually prompt payment of invoices may be a sign of stress,” he adds.
Enhance working capital management
Working capital management has always been a business fundamental to help guide business decisions. In an uncertain operating environment, it’s never been more important for organisations to optimise this part of their enterprise to maintain sufficient cash flow to meet short-term operating costs and debt obligations. Reworq Consulting Founder and CEO John Field say it’s essential to recognise working capital as a source of value.
“Working capital is not straightforward. So, implement robust measures to improve accounts receivables, accounts payables and inventory management. Better working capital management preserves cash and can provide a critical lifeline when the business faces significant trading or liquidity constraints.”
He says most businesses have plentiful chances to identify opportunities across their operations to enhance working capital management. The idea is to develop a roadmap to support the company’s strategy and business objectives.
“The key to success lies in embedding the right behaviours across the whole business, not just in finance, but driven by executive management with a sustained focus on change and future financial success,” he notes.
Consider accessing trade credit insurance
Interest in credit insurance is higher than it has been for a long time, especially among exporters and the construction sector. This is a sector that traditionally makes good use of trade credit insurance. “The smartest guys in the room take out trade insurance through the cycle,” says Bastos. “With trade credit insurance, you can sleep at night in the knowledge you’re going to be able to pay your suppliers and your employees, and your business is going to be viable,” he adds.
Read the paper in full here.
Register here for CreditorWatch’s webinar on December 1.
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