A new report addresses how businesses can identify early warning signs to protect against insolvent customers.
A report by CreditorWatch analyses the current state of consumer and business confidence, with guidance for firms to minimise the risk exposure of insolvency from economic pressures.
The Safeguard your business from insolvency report reveals that insolvencies continue to rise, particularly for the construction and retail trade industries.
According to CreditorWatch’s Business Risk Index, the rate of external administrations has dramatically increased after the decline seen during the pandemic and is now back to pre-COVID rates. Looking forward, CreditorWatch’s default rate prediction shows a steep increase, above and beyond what we saw in earlier 2020, pushing up to 5.8 per cent.
CreditorWatch’s CEO, Patrick Coghlan, says insolvency risk management should now be core to business operations, if it’s not already.
“FY24 will be difficult for Australian businesses and consumers,” said Coghlan.
‘’By September 2023, the full impact of the RBA’s 12 cash rate rises will have been passed on by the banks, and the flow on effect will impact roughly 40 per cent of Australian households that are coming off fixed term onto variable interest rates. This, accompanied by low levels of consumer confidence, leads to an expected increase in external administrations.”
He continued: “And yet, Australian businesses are incredibly resilient through tough times. Many have invested in technology and automation and trimmed fat from their businesses.”
To help credit professionals and businesses overcome these tricky conditions, the report offers insights from industry experts such as Australian Institute of Credit Management (AICM) CEO, Nick Pilavidis; Cathro & Partners Principal, Andrew Blundell; and GM Advisory Services Director, Ginette Muller. They discuss strategies to avoid risk of insolvency, including proactively managing risk, being aware of early warning signs of insolvency and ways to protect businesses from insolvent customers.
Pilavidis outlines four key areas businesses can actively shape to minimise risk exposure: people, processes, communication, and security. He recommends investing in accounts receivables, collections and risk areas, with a Certified Credit Executive (CCE) where possible, as they achieve better results in safeguarding businesses from insolvency.
Blundell notes that understanding the early warning signs of insolvency can also help credit professionals avoid risk. He explains the signs of cash flow and working capital stress, including deteriorating performance, accounting irregularities, insufficient capital expenditure, dividends exceeding performance and multiple management resignations.
Muller discusses the process to undertake if a customer appears to be spiralling into insolvency, in order to protect your business. This includes deciding whether to pursue litigation or negotiation and to ensure your outstanding invoices are paid by this customer. Muller also explains the types of payment agreements to pursue.
Mr Coghlan concludes: “There’s a question mark over when certainty will come back to the economy, but with the right tools, businesses can navigate the period ahead and come out the other side stronger.”
The report is available in full here: https://creditorwatch.biz/3Q2BnTV.