Thursday, 28 November 2013 12:38

Counting the financial cost of poor credit control

The world of credit control brings to mind the infamous Donald Rumsfeld quote:

"There are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don't know. But there are also unknown unknowns - there are things we do not know we don't know."

Admittedly he was talking about weapons of mass destruction, but the same applies to your customers' financial situations, and effective credit control eliminates as much of the 'unknown' as possible, and maximises the 'known knowns'.

You do this by carrying out credit reference checks on new customers, to determine how much credit you can reasonably extend to them without taking on too much risk, as well as taking prompt action when a payment becomes overdue.

But just how costly can it be if you fail to do this? New figures from Experian show the shocking price paid - quite literally - by some small to medium-sized enterprises in the UK when their business customers fail.

Failing to Prepare

First, the data reveals a lack of preparedness among SMEs, where only two thirds said that they credit check their customers and suppliers at least once per year, leaving one in three effectively floundering in the darkness of the 'known unknowns'.

Nearly a quarter only credit check new customers, leaving them in the dark again in terms of changes to existing customers' circumstances.

And over a third - 34% of those surveyed - admitted that they didn't monitor their suppliers at all until at least the first time they lost money due to supplier failure.

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Experian's managing director of SME business for the UK and Ireland, Ade Potts, says:

"Waiting until you've lost money to do credit checks is a bit like shutting the stable door after the horse has bolted."

In our analogy above, your client or supplier's initial credit rating is a known unknown - you know it's there, but unless you check it, you don't know how creditworthy they are.

But later changes to their circumstances, unless carefully monitored, are unknown unknowns, capable of occurring behind closed doors without you even realising, and therefore capable of delivering the greatest shock to your cash flow.

Preparing to Fail

To recall another classic quote, 'failing to prepare is preparing to fail', and this is abundantly evident in Experian's findings.

In the past five years, 76% of the 600 SMEs surveyed by Experian have lost money due to either client failure or supplier failure - and it's worth remembering that those five years, since 2008, have seen more than their fair share of high-profile insolvencies across the board.

Nearly a fifth of incidents led to SMEs losing between £5,000 and £10,000, while 35% - more than a third of the SMEs surveyed - had lost more than £10,000 in total since 2008.

"The rate of deterioration is far quicker for companies in today's climate, so the sooner you can spot the signs of financial stress, the sooner you can react," comments Ade Potts.

"Ongoing monitoring, addressing financial issues such as late payment of invoices head-on and not relying on one big customer or supplier will help lessen the risk of further losses as a result of insolvencies."

To put it another way, the more unknown unknowns you turn into known knowns, the more confidence you can have in your business's preparedness - and the more stable you should be, whatever shocks take place within your supply chain.

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