Insolvency levels rose by 2% in the UK in 2017 with more than 18,000 company insolvencies. This equates to an average of 47 firms falling victim to insolvency each and every day. In an uncertain economic climate, the risk of insolvency is ever present and Atradius economists predict this upward trend will continue with an increase of at least 4% in 2018. Insolvencies remain concentrated in the construction, retail and hospitality sectors although there are impacts across all sectors.
When a business fails, it’s not just bad news for that company, the negative impacts ripple across the entire supply chain. If the insolvent firm is your customer, it will financially hurt your business, and if it’s one of your primary customers, it could cripple it.
While there will always be the exception to the rule, the majority of insolvencies do not come out of the blue. Evidence of distress will arise as a precursor to company failure and should be recognised as a warning sign indicating an insolvency could potentially be on the horizon. As a trade credit insurer, responsible for paying claims in the event of a non-payment, Atradius is proactive in securing robust business intelligence, monitoring and analysing the credit behaviour of millions companies worldwide. This allows us to identify the risk of non-payment and warn our customers if we observe any deteriorating trends. But there are also steps you can take as part of your own risk management strategy and here are some of the red flags to look out for in order to protect your business from the risk of insolvency:
- Track payment behaviour: Are you experiencing any changes such as late payments or unpaid bills? Has your customer changed banks or offered bills of exchange in lieu of payment? If your customer is starting to often take longer to pay, it could be a sign that they are struggling with cash flow. Don’t ignore late payment, follow it up, talk to your credit insurer and engage collection support if you need to. Did you know that customers insured with Atradius have access to collections services included in their policy?
- Changing orders: A company which is firefighting will often trade less strategically. Watch out for overtrading with lower profit margins, a permanent use of full credit lines and smaller more frequent orders which may suggest they can’t afford to meet their usual demand and are exhausting all lines of credit as times get tougher.
- Disputes: Have you seen an increase in invoice disputes? This can be used as a tactic to buy more time before payment.
- Lack of information: A business should have good visibility into a customer’s financial position and have assurance of its ability to pay, especially where receivables balances are large. If you can’t see what’s happening with your customer, ask why. Check with Companies House if your customer has entered a late filing for its annual accounts. If so, it could suggest either a breakdown in normal organizational functions or that there is something to hide.
- A drop in communication: If you’re unable to get hold of senior staff, is it because they’re busy or are they avoiding you? Make sure you’re getting the answers you need – particularly if it’s regarding unpaid bills.
- Renegotiation: Has your customer started asking for price reductions or variations to your agreement? Rather than holding firm, it may make more sense to work with your customer by increasing lines that are selling stronger and even reclaiming stock which they’ve been unable to shift.
- Staff turnover: Has there been redundancies, high staff turnover or management changes? This can often be an indication of company distress.
- Industry performance: Keep an eye on how the wider market is performing and any changes which may impact the entire sector. Likewise, a lack of good news in the industry such as contract wins or staff appointments may be a warning sign. And, if your customer’s close competitors are shutting up shop, it makes sense to check how your customer is faring.
It can be difficult to stay on top of all of these action points, particularly if you are a small business. But, if you can’t do it yourself, get support. With news of business collapse or insolvency an almost constant in the headline press, a proactive approach to risk management is vital to future proof your business.
Tanya Giles, Regional Manager for Wales and South West, Atradius