Treat your credit risk like health and safety
Opinion: Steve Wilkinson sets out practical ways business operators can manage their credit risk exposure, such as by taking out debtor insurance.
The emphasis for most businesses in terms of risk management over recent years has been in the areas of health and safety and employment law. Failure to apply proper processes and procedures in both these areas have cost a number of businesses significantly in recent years.
While these two issues will remain relevant as we move forward there is an emerging risk for all businesses as we start to move out of the Covid-19 situation, and that is credit risk.
It is clear to us all that a large portion of businesses in New Zealand have suffered during the lockdown period, and while it is obvious that those involved in both tourism and hospitality will have suffered the most, it is difficult to really understand the longer-term financial implications of these past few weeks on other businesses – time will tell.
As we moved back down through the alert levels and more businesses recommenced trading, it became clear that it will not be ‘business as usual’ for most companies 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 takes hold.
This raises the question of what steps business owners should now be taking to assess the risk of doing business with clients. It would be great to be able to tighten terms of trade and insist on higher deposits or shorter payment terms, but in practice 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 them.
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.
As with health and safety and employment law, it is unwise to think in terms of 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 media brands 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 is the owner of The Alternative Board in Christchurch and North Canterbury