Our recent Business Pulse Check showed 7% of respondents have experienced more late payers and defaults, while 4% are struggling to pay creditors. In recent client coaching sessions, I am also noticing that there is an emergence of fiddly credit issues that are starting to take up a little more time for both business owners and their credit staff. These issues range from company liquidations, more creative excuses for not paying, down to just not paying on time, or paying later than normal. In some cases, the debtor has grown their exposure with the company over recent months without any further analysis of the increasing credit risk.
In a paper I wrote earlier this year on the Changing Face of Credit Risk I emphasised the need to continue to be vigilant with your credit control processes and procedures.
With the Christmas break coming up it is critical that everyone makes sure they have robust processes in place for collecting outstanding debts – including pro-actively following up overdue amounts expediently. Anything left outstanding on Christmas Day is unlikely to be paid until late January, with the resultant impact on your company cashflow at a time when it is most needed.
In the meantime I would suggest you remain focused on the following:
Watch for changing signs with any clients i.e. increased exposure/delays or excuses in paying.
Where appropriate be pro-active in updating Terms of Trade, particularly in cases where you may not have personal guarantees and exposure is increasing.
Use credit checking more regularly for clients who are showing different patterns in their payments.
If appropriate, consider registering under the PPSR register.
For clients showing changes in trading/payment patterns consider putting in place credit watch processes.
As business owners we all undertake activities every day that loosely sit under one of four categories-:
Important and Urgent
Important and Not Urgent
Not Important but Urgent
Not important and Not Urgent
At one of our recent meetings of The Alternative Board in Christchurch, we undertook an exercise to establish how our business owners planned their activities during a normal day. The results were not only relatively consistent but also quite alarming!
Everyone was able to put a particular activity they had undertaken in the previous day into one of the above categories and the following themes emanated from the ensuing conversations.
For obvious reasons everyone placed priority on the Important and Urgent activities above everything else
A significant part of some people’s day was taken up with activities relating to the Not Important but Urgent category. Further discussion reveals that a lot of this activity came from staff and other enquiries. In some cases, this reflected a lack of training or specific operating processes and procedures within the organisation. This then necessitated the business owner getting involved in urgent issues that could have been handled elsewhere had better training or processes and procedures been put in place.
A surprising amount of time was spent on the Not Important and Not Urgent category. This including following social media, looking at emails of little relevance to the business owner and reading the media.
The biggest concern that came out of this assessment was the lack of time and effort put into the Important but Not Urgent activities. This category included such activities as-:
Proactive communication with key clients with a view to building key strategic alliances
Development of Databases/CRM systems to allow proactive communication with clients and prospects
Further development of websites, particularly around providing online sales capability
Development of written processes and procedures
“Why is this the case?” was the question asked. And “What was required?” to ensure that more emphasis was placed on this important category of daily activities in every business owner’s life.
The general answer to these questions was that in some cases the activity needed to move into the Important and Urgent category to prompt more proactive activity. A common comment was “No one will die if I do not do this activity.”
But guess what? Covid-19 came along and what was previously deemed Important but Not Urgent suddenly became Important and Urgent. This new sense of urgency was created through;
Business owners unable to communicate with clients about their status under Covid levels because they had not put the time into developing their Database/CRM system. This had a direct impact on revenue streams.
Business owners unable to automatically ramp up online sales due to a lack of investment of time in putting the process in place.
So, what’s the message here?
If you leave something that you have deemed as important for too long, at some stage it will go from being not urgent to urgent. This will not only cause unnecessary stress but may lead to wrong decision making because of the urgency now created.
It’s critical that business owners have-:
clearly identified what the activities in this IMPORTANT and NOTURGENT category are
ensure that they understand the risks should that activity become IMPORTANT and URGENT at short notice
understand what those risks mean to the underlying stability of the business and
make sure there is enough time going into this activity to reflect the ongoing risk.
These Important but Not Urgent activities form part of the monthly reporting from members of our Peer Group Advisory Boards. Fellow members continue to remind each other of the importance of ongoing regular work being done on these particular objectives to avoid some of the practical pitfalls that Covid has shown us can occur, as a result of failing to do so.
As we move back down through the Covid-19 alert levels and more businesses commence trading, it is clear that it will not be ‘business as usual’ for most businesses for some time. There may well be a small short surge as businesses open, but at present most business owners have little confidence in predicted business and public confidence beyond that period, as the impact of restructuring and redundancies take hold.
This raises the question of what steps business owners should now be taking to assess the risk of doing business with clients going forward. It would be great to be able to tighten terms of trade and insist on higher deposits or shorter payment terms, but practically that is unlikely to work in a lot of cases.
So what can a business owner do to improve credit management processes? Here are some ideas.
1. Review and update your terms of trade to ensure they are robust enough
2. Ensure, where appropriate, that you have protection through the Personal Property Securities Register by registering your interest in the goods sold.
3. Set up a credit watch arrangement with your credit agency to ensure that any issues with major clients are advised early. This at least gives you a head start over other unsecured creditors.
4. Review your client base and determine those clients where a failure to pay two months debt would severely impact on your business viability and look at taking our debtor insurance on those clients.
5. Where practical, look for higher deposits or shorter repayment terms.
6. Do proper due diligence on new customers including credit checks. This is a time when customers may be changing suppliers because of credit issues with the current one.
Like with health and safety and employment law, it is not sensible to use the old adage: “It will never happen to me”. Over the past few years some well-known companies have fallen over and I would love to have a dollar for everyone who said to me: ‘That was a surprise”.
Well-known brands in the media at present are publicly advising of difficulties, so one would be naive to think that any company is immune from failure
Now is the time to review and improve your credit risk procedures to bring them in line with the significant improvement that has occurred with health and safety processes in recent times.
– Steve Wilkinson, TAB Business Owner, Christchurch & North Canterbury