In January 2011 English songwriter, Jesse J, released her single, 'Price Tag'. The number one hit proclaimed "it's not about the money". In the trade credit world, 2016 will be ALL about the money and much may hinge on cash flow, capital reserves and credit availability.
In the Australian financial half-year reporting season (31 December 2015) there have been many businesses who have reported deteriorating profitability as well as more than the norm reporting 'impairments' further impacting on their profit.
Whilst this simply may be a moment in time result, it reminds companies who are constantly assessing credit risk, the importance of knowing your customer and their financial position.
Only a small percentage of our clients admit to annually approaching their large customers for updated financial statements to ensure the levels of credit that they have justified in the past can continue to be justified into the future.
ACTION – So what should you be considering to combat future credit risks?
1. Take a moment to conduct a spread of risk of your debtors aged trial balance. This will provide you with a snapshot of where your income is generated from.
2. Undertake a full review of your top 10 customers, including obtaining financials and understanding their market and trading conditions.
3. Focus on their net worth and liquidity. Analyse what available capital they may have within their balance sheet and how long they could endure poor financial results. We have already experienced a number of major failures in 2016. Many of these are linked to poor cash flow, lack of capital, losing bank support or simply due to market conditions. And whilst I enjoyed the Jesse J 'Price Tag' hit, I have to disagree with the chorus and say that 'it's all about the money'.
Kirk Cheesman is Managing Director for NCI. Ph: + 61 8 8228 4869, Mob: +61 419 865 313 E: Kirk.Cheesman@nci.com.au
About National Credit Insurance (Brokers) Pty Ltd: National Credit Insurance (Brokers) Pty Ltd are Australia's leading specialist trade credit insurance broker in Australia, New Zealand and Singapore, with offices in all major capital cities. NCI is an Australian owned and operated organisation established in 1985, and are wholly owned by Steadfast Group Limited (Australia's largest broker network).
For more information on National Credit Insurance (Brokers) Pty Ltd, please visit www.nci.com.au.