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Challenges range from inflation to partner insolvency and there are four ways to dodge disasters, says the agency.
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Businesses must be financially fit to ward off risks: CreditorWatch
01 December 2022
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12 minute read
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According to CreditorWatch, businesses faced multiple challenges ranging from inflation, interest rates and the skills shortage to the accommodation crisis, climate change, supply chain disruptions and geopolitical uncertainty.
“The good news is, Australian businesses, by and large, are in great shape,” said CreditorWatch CEO Patrick Coghlan.
“Those faring best in this extremely challenging operating environment are drawing insights and making better business decisions from the information they have at their fingertips.”
Mr Coghlan said businesses needed to have as much information as possible on their partners as some that were propped up by government stimulus throughout the pandemic were starting to fall into insolvency.
“It’s important to be judicious when extending credit,” he said. “A trend which businesses should be aware of is customers entering insolvency without any warning.”
“As COVID stimulus payments have been unwound, this has exposed some businesses that were artificially supported during that period but have not addressed problems in their operations.”
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“These are among the businesses going into insolvency at the moment.”
CreditorWatch’s October Business Risk Index revealed that the industries with the highest probability of default were food and beverage services at 7.25 per cent, arts and recreation services at 4.62 per cent and transport, postal and warehousing services at 4.57 per cent.
The index also showed that external administrations dropped for the third month in a row but were still up 59 per cent since January, with court actions up 50 per cent year-on-year.
CreditSource CEO Shavantha Mallawa said businesses that were unable to protect themselves from risk by increasing costs would be caught out.
“From a profitability perspective, the food manufacturing industry is able to pass on cost escalations to clients,” he said.
“The mining industry has also benefited from escalating commodity prices, with profitability growing exponentially between 2020 and 2022.”
But the construction industry, from residential to civil, had been caught out.
“A lot of companies are making small profits and a significant portion have made losses due to the escalation in material prices and labour,” he said.
“This has resulted in significant issues for this sector, we have seen failed residential builders hit the headlines, but large commercial construction companies have been most affected in terms of not being able to pass on rising prices.”
CreditorWatch said businesses should take five measures to mitigate risk.
The first was to collaborate with suppliers over payment to achieve a mutually beneficial goal.
For example, large construction companies should bring suppliers along their tendering journey so that all parties had the opportunity to renegotiate contract terms to take into account changes in the external environment.
Another measure was to ensure inflows matched outflows, CreditorWatch said.
“Companies with low cash reserves or liquidity issues struggle more in this environment, because there is reluctance to offer payment terms seen previously,” said Mr Mallawa.
“We are seeing some firms pay suppliers not just on time but ahead of time to secure their products and services, so companies with low cash reserves will struggle to compete.”
The third action was understanding customers’ circumstances to avoid the risk of not being paid, according to Nick Pilavidis, CEO of the Australian Institute of Credit Management.
“Now is the time to stay close to your customer, get a feel for how a business is tracking by visiting their sites,” said Mr Pilavidis.
“Understand individual customers’ situations, not only to identify the risks but also to secure opportunities for your business, for instance maximising sales from good customers.”
The fourth step was to enhance working capital management to ensure a business could maintain sufficient cash flow to meet short-term operating costs and debt obligations.
The final step was to consider accessing trade credit insurance.
“The smartest guys in the room take out trade insurance through the cycle,” said Roberto Bastos, manager of the enhanced information department at Coface.
“With trade credit insurance you can sleep at night in the knowledge you’re going to be able to pay your suppliers and your employees, and your business is going to be viable.”
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