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As UK insolvencies hit the headlines, don’t let your customer’s failure become your own

The news of the demise of Carillion, Palmer & Harvey, Toys R Us and Maplin has dominated the media in recent months, sending shockwaves throughout their supply chains.

With Euler Hermes estimating that the UK is poised to suffer the second largest increase in business failures of any leading global economy this year, it is likely that this trend is set to continue. Forecasting an 8 per cent increase in British businesses going to the wall, they predict that only China would experience a sharper rise in corporate insolvencies in 2018.

There is no doubt that the rash of retail bankruptcies, partly due to a reduction in consumer confidence and partly as a result of the “Amazon-effect” is starting to take its toll. Figures compiled by Deloitte reveal that 118 retailers went into administration last year, representing a 28% increase on the 92 that filed for insolvency in 2016. Particularly striking was the number of large retailers going bust, defined as those operating more than 10 stores – which rose by 55 per cent.

The fundamental issue that suppliers are facing is that they view many of the well-known names hurtling towards insolvency as being ‘secure’ from a credit control and business point of view.

Losing a major customer or contract can have massive implications for business and we have seen first-hand the impact this has had on our clients, and the consequential knock-on effect experienced throughout the supply chain.

The loss of a major customer instantly switches the focus for a business and sales team to the rest of the customer base. It creates a pressing need to generate more work from the other customers and demands a strong focus on payment performance improvement to try to compensate for the loss of income.

This dramatic switch in focus highlights the reliance that businesses have on receiving large regular payments from their major customers. This, in turn, can serve to throw into sharp relief the lack of focus from their credit departments on realising payment of the other sales ledger balances.

Where the credit control team has not taken a proactive approach to chasing the other customer balances on the sales ledger, ensuring payment to terms, significant remedial action will need to be undertaken to fill the cash flow gap.

This time is absolutely critical for the business and it is usually far too late to change the payment behaviour of the customer base overnight. For that reason, it is important that credit departments are always proactively chasing all debts due, that they understand what they expect the customers to pay and when and that they take immediate steps to resolve any issues that stand in the way of payment being made.

The other key factor to consider is the impact of the loss of credit insurance against a major customer and the decision a business needs to make when this happens. Should the business continue to supply and discuss improved payment terms or proforma payments with the customer? It is crucial to remember that, in this situation, many suppliers will be taking the same approach and therefore it may not be possible for your customer to adhere to your request.

Regularly reviewing credit limits helps to control and effectively limit your exposure to the risk of bad debt. You may wish to set a lower credit limit for new customers, until you have an idea of their payment performance.

However, keeping strong relationships with your customers through both your sales and credit control team and good, proactive credit control will ensure that you identify any warning signs early – before it’s too late.

Words such as ‘unexpected’ and ‘unavoidable’ are used far too frequently by credit control departments in the aftermath of a customer entering into liquidation. It’s just this kind of scenario that a holistic and proactive approach to credit management actively seeks to avoid.

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