How to avoid becoming a liquidation statistic

If ever there was a time to insure your debtors against the event of non-payment, that time is now! That’s the message from Luke Doig, senior manager of investments and economic services at Credit Guarantee Insurance Corporation (CGIC), who told FTW that no matter how good your own credit control is, unless you are paid up-front, the odds of incurring a bad debt due to one or more of your debtors defaulting on payment have risen significantly. And he believes that betting against such an eventuality today would be a major folly. Some 13 business enterprises in the transport, storage and communication sector closed their doors in the first two months of 2009, which is why in today’s global business climate planning is a priority, says Roger Munitich, GM of marketing and research and development (R&D). But creditable planning requires some considerable investigation, according to Munitich. “Information that private companies can gather on the credit-worthiness of a debtor company is usually limited, guarded, and quite probably either incomplete or flawed,” he told FTW. “A credit insurer is usually able to gather more info (including balance sheets) on a confidential basis, analyse it against predictive risk models, apply reports completed by individual site visits amongst others, and determine a risk profile far more comprehensive than would otherwise be the case.” The trick, he added, is to set a credit limit against which the supplier can confidently trade. And, should the debtor default, you can rest easy knowing that the insurer will indemnify the loss up to 80%. Legal costs are usually shared on a pro-rata basis with the insurer, making the process so much easier to swallow. Recoveries made after a claim is paid are also shared between the supplier and the insurer on a pro-rata basis. “The biggest ‘names’, the bluest ‘blue chips’, the ‘sure things’, the ‘best bets’ in the local and global corporate world are no more,” said Munitich. “If they are ailing, imagine the stress and strain that the small to medium enterprises worldwide are feeling as a result of this economic cycle. “If you are unsure in any way, consider the impact of a large debtor defaulting on payment to your company and the consequent stress and strain that will follow.” Doig, meantime, suggested generic planning for turbulent times. “Conduct various simulations (scenarios) of say 10% growth compared to a 25%, or even 50%, contraction,” he said. “This will allow you to get a feel of what impact that will entail and how long one could sustain such an environment. Decide what needs to be done to survive in such a situation.” Both agree that financial controls in their entirety require daily monitoring, be it from collecting from debtors to ensuring that sales efforts are effective. “Cash flow is king,” said Doig. “If working capital is being funded via lending facilities, ensure that this relationship is transparent. In other words, be frank with your banker and give him insight into your business and any difficulties you envisage.”