Managing credit into 2010
Google the definition of the word "customer" and one of the first items that comes up is "someone who pays for goods or services". 2009 is proving to be a year when many businesses have come to realise the difference between providing goods or services and actually getting paid for them.
In the last few months I have had an interim management project which led to the Administration of a significant and long-establish Kent-based business. The die had been cast some time ago, well before my involvement. The outcome, through a so-called "pre-pack", is a business trading at the same address, with similar name, the same products, the same customer base, but under completely new ownership and new management team.
A brand new limited company acquired the assets and the trading from the Administrator. The staff are happy that jobs are saved, and customers barely notice the difference. The main losers, apart from the former owners, are the suppliers to the old company who may receive a payment from the Administrator but probably very little.
Chances are that the larger suppliers would have substantially protected themselves some time back through the imposition of tight credit limits, or even pro-forma invoicing and cash before delivery. Many will have had bad debt insurance. These larger suppliers have teams dedicated to limiting their exposure.
So unfortunately it tends to be the smaller businesses without those resources that suffer the most. The bad debt they suffer may put some out of business which could, in turn, have a further ripple effect within the local economy.
A number, though, will trade with the new company after the dust has settled, pleased to have the continuing business. By doing so, they'll at least have a chance to claw back some of their losses through profits on future trading. Better that than a bad debt and no ongoing business.
Eventually, many of those smaller suppliers will come to realise that they allowed themselves to become vulnerable to the bad debt. It's not a palatable message, but if you depend on one business for 40% of your sales you are in a high risk position. Invoice discounters will rarely fund that sort of customer concentration for that very reason.
If you don't apply and police credit limits, monitor payment patterns, or don't have some other form of leverage to ensure prompt payment, then you can leave your business wide open to the shock of bad debt. I had to make, and received, some fairly difficult calls during my time with the company, and it was hardly appropriate to tell someone who had suffered a bad debt that it was their fault, but that is partly the case.
So, what action can a small business take? Spreading the customer base cannot happen overnight, but it has to be priority. Credit insurance is hard to come by, so it means being tougher on customers.
Before taking on a new customer what status checking are you doing? If public record information isn't clear or up to date, ask directly for it. If it "isn't available", or the customer takes offence at being asked, assume the worst. Trade on pro-forma only. For existing customers look at the settlement pattern. Is the number of days taken to settle getting longer? Are they gradually spending less (perhaps a sign that trading is falling off)? Go to see them and find out what is really going on. Bear in mind that the larger suppliers will almost certainly be imposing tougher limits than you, so you have nothing to lose.
For many, the cost of credit control may be considered prohibitive. A company's sales ledger is usually its biggest single asset. You don't leave your freehold property uninsured and unlocked. So why take a similar risk with money owed to you?
October 2009
