JSP Credit Management have spent years tussling with the seemingly never-ending world of late payers and unpaid commercial debts, and if there is one thing they know now, nearly 20 years later, it is that when it comes to reducing credit risk, prevention is absolutely better than cure.
What this means is that it is not necessarily easier (at least at first), but it is almost always more sensible, and arguably more cost-effective to put measures in place as a business that will serve to protect them from the perils of extending credit to their clients before the problem happens, rather than trying to rectify it once the damage has already been done.
Picture this, ABC Limited who turn over £52k per year (or about an average of £4,500 per month) receive an order for work totaling £10k. ABC are so keen to honour such an order they press on as quickly as possible putting all their resources into it and produce a wonderful piece of work for their client. However, there is a problem.
ABC did not do any due diligence on their client before incurring significant costs to fulfill their client's order and a week or so past the due date of their invoice all of a sudden some of the shine seems to be disappearing from all the excitement they first felt when they received their client's order. The finance team are getting the run around from their client’s accounts department and they are having to incur even more costs to recover the money that’s owed to them.
In the meantime, ABC has put all of their resources into fulfilling their client's order have not been able to fulfill other orders so have missed out on revenue there, they have incurred significant overheads in fulfilling their client's order and their suppliers are beginning to get frustrated that their invoices are not being as ABC are awaiting settlement of their invoice and long-standing and important relationships with key suppliers are beginning to get strained. Suppliers put a stop on ABC’s account meaning they can no longer do any work for anybody else and before long their ability to operate is under serious threat.
Sure, the above example is an extreme one, but not uncommon. JSP Credit Management have heard this story all too often themselves in the past and the risk is very real. Furthermore, the above example might suggest that given the numbers involved that only smaller companies are vulnerable to a similar fate but that is far from the truth. The numbers are relative. Take Carillion for example, it posted revenues of £5.2bn in 2016 (https://www.bbc.co.uk/news/business-42666275) but on 15th January 2018, it went into liquidation.
So now we have a clearer idea of the kind of problems which can be caused by not giving due care and attention to your company’s credit risk. We now need to think about what kind of things could have prevented ABC (and Carillion) from nose-diving so quickly into an uncontrollable financial disaster rendering each business helpless to reverse the damage done by several bad decisions, or rather a lack of good decision.
Cash flow can perpetuate a vicious circle of bad practice if a business is not armed with the knowledge that they need to stop this from happening, which is where we come in. We know that a poor cash-flow position can result in an even greater emphasis on a higher volume of sales, and we know that when there is more pressure on sales, there is less attention paid to the quality of the sale. This in turn then creates even larger cash-flow problems due to the inevitable problems with payment from their clients, and so the cycle continues. That is just standard human psychology and behaviour.
What ABC Limited should have done before they even accepted their client's order was to vet their prospect at the very least in the most basic way by producing a credit risk report on their company. A credit report would have been able to provide ABC with various pieces of financial information from which they would have been able to make an informed decision on whether they should be accepting an order from them. It must be remembered that fulfilling an order which does not get paid does not count as a sale.
In fact not only is it not a sale but it also actually becomes a liability to the company when the costs of fulfilling the order are factored in and depending on the size of the order this can be seriously detrimental to a company’s financial stability. Admittedly, credit risk reports do not make sense to everybody, but they serve as a very useful tool for ensuring that the work that is being done is being done for a client who is more likely to pay than not, and preferably on time too.
If you are one of those people who find credit risk reports more like a foreign language than a tool to use to help boost your cash flow then why not visit our website at www.jspcreditmanagement.co.uk or give us a call on 01827 929209 to discuss your needs. We also operate on a no-win-no-fee basis for bad debt recovery and our credit control and credit risk services can be ordered via our website with the littlest of hassle.