While the extent of the impact on our economy is still to be seen, one thing is for sure: small and medium businesses often bear the brunt of crises and, as the backbone of the Australian economy, this should concern all of us. Small business owners, therefore, need to be taking precautionary steps to protect themselves.
SME supply networks are often complex. Just one payment default can have a knock-on effect and lead to failed businesses and lost livelihoods. In fact, according to CreditorWatch data, 50 per cent of companies that incur a payment default go into administration within 18 months.
With many businesses already under stress from the recent bushfires, it’s more important than ever that SME business owners take the time to assess themselves, and put precautionary measures in place to safeguard their future.
Who are you dealing with?
It’s important that businesses know both their customer and supply chain intimately, as having a key supplier go down can be as equally devastating as a customer pool drying up. Knowing what data to look at can be half the battle.
Court actions, payment defaults, poor credit scores and or insolvency notices are all red flags that are likely to immediately stand out on a simple credit report. Poor accounting or administration practices can also be indicative of a company that is not on top of its financial positioning.
Technology can act as an early warning system to help business owners. Opt for a digital credit platform that sends notifications to alert you to any adverse changes to a supplier or debtor, and watch for businesses that are consistently or increasingly slow to pay invoices. Owners need to be vigilant and not let things slide.
Small does not mean insignificant
When it comes down to it, a struggling debtor is more likely to default on a smaller creditor than a larger one that they rely on for day-to-day operations. This means that small businesses or subcontractors are often the first to be affected by cash-flow issues, and the knock-on effect can be industry-wide.
Where possible, owners should reduce the concentration of your reliance on key partners and customers to 20 per cent at most, to minimise any risk to your business in the long term.
Do your due diligence
Due diligence doesn’t just apply to the onboarding process. It’s a matter of understanding not just your suppliers and customers, but the people within those businesses, as well as their relevant histories.
Just as a director with a payment default is five times more likely to experience another one, a director with one failed business is twice as likely to fail again. The unique uncertainty that the coronavirus brings may give companies an excuse to not make payments. Therefore, knowing the history of the people behind a business you partner with is just as important as knowing the history of the people that you hire. It may be the difference between an invoice being paid or not.
Chase your invoices
In crises, small businesses often fail to meet payment deadlines. Companies will increasingly look to lengthen their payment terms, while at the same time push debtors to pay faster. Businesses should take time to review their due diligence processes, check their terms and cash flow, and invest in the necessary technology and advice to ensure they are paid on time.
For many small businesses and subcontractors, a 90-day payment term has real-life consequences. Overdue payment terms can be the difference between paid or unpaid school or daycare fees. So, don’t wait until an invoice is due to start chasing it up. It’s the squeaky wheel that gets the grease and if you don’t ask for it, you may miss out entirely.
At present, there’s a great deal of uncertainty surrounding the state of the Australian economy. But crisis or not, the steps outlined above are things that small and medium businesses can do to protect themselves regardless. Due diligence, proactive communication and an in-depth understanding of your customer and supply chain is simply good business.
Businesses of all sizes should focus on arming themselves with as much information as possible — it’s that information which will ensure you have the appropriate strategies in place to not just maintain your business but to continue growing in a period of economic uncertainty.
Patrick Coghlan, CEO of CreditorWatch