Time and again we write about insolvencies, businesses losing money and unfortunately the times where businesses are unable to continue due to a bad debt. We have recently witnessed a number of insolvencies around Australia and the globe that have had a major impact on Australian businesses.

There is not one common denominator among all failures, but we can pinpoint specific occurrences in industries that develop a domino effect within that sector. For example, in Food and Retail we have observed Toys R Us (Australia and US), Jamie Olivers, Sumo Salad and Zumbo’s fall into administration recently.

These smaller shopfronts are often placed in prominent positions that attract high rent costs, there are multiple pros and cons for a prominent position like this but with thin margins, even the slightest change can impact the profitability of smaller businesses. This beginning of the domino effect places pressures further up the supply chain, on businesses such as distributors and wholesalers.

One of 2018’s (so far) most well recognised insolvencies is that of Toy’s R Us, a global conglomerate that has been facing uncertainties for a number of years. With an everchanging retail landscape many would argue that their inability to adapt to market demands and conditions resulted in losing market share at rapid rates. Toys R Us struggled to compete with the online retail sector, again facing the challenges that are associated with bricks and mortar stores.

Although we talk of the downfall of these businesses, what impact does this have on everyday Australian businesses? Failures like these can impact consumer confidence at a retail level, this adds to the cycle that, as confidence drops, so does spending which inevitable puts more pressure back on the retailers. There are macroeconomic events which can help break this cycle, but it also starts with smart business management from those that are at the forefront.

While these are some issues we can pinpoint for the retail sector, they won’t affect building, construction or other industries. Strains on the building and construction industry are rampant with margins continually squeezed to extremely low levels, meaning that the slightest quotation or error can result in a net loss for the project. Ultimately, this puts strains on the company, it’s sub-contractors and suppliers; again, this is all part of the domino effect that occurs, see below:

Simplistic building supply chain:

 As you can see from the flowchart, the main contractor has many stakeholders that are reliant upon them. If they face issues and fall, there are many other stakeholders that will inevitably have issues, from the suppliers to the buyers. Besides prudent credit management there are many steps a business can take to reduce their exposure to certain risks.

If any of the links in this supply chain (excluding the end user) has a trade credit insurance policy, then the flow on effects stop with them. It allows those potential losses to be recouped in a timely manner, in turn allowing them to continue to pay suppliers and creditors while resuming work, keeping the project underway.

At times, every business will face cash-flow problems, but it is those businesses who learn from these lessons and seek advice that will trade confidently through the next tough time. Throughout a 3-month period (June-August 2018) NCI have paid out over 330 claims worth more than $18,000,000 (see below where they occurred). These are the businesses who are proactive in their credit management, that see the risks and that are not afraid to ensure that the domino stops with them.

Claims received by NCI, Q2 2018:

It is clear that no matter what the industry, any business that trades on credit must observe strict credit management processes, however, even the strictest of credit managers can get caught by a bad debt.

Kirk Cheesman
Managing Director
National Credit Insurance Brokers.

October 2018 - FNSCRD505 - Respond to corporate insolvency situations - FNS51520 Diploma of credit management

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