Preparing for the Storm!

This article appears in our Q1 2022 issue of Finance Transformation Magazine. To download the issue, click here

Sue Chapple, CEO of the Chartered Institute of Credit Management (CICM), explains that when the tap of Government Pandemic support is finally switched off insolvencies will inevitably rise and how Businesses can prepare.

Even when things are going well, and the economy is booming, businesses can be challenged. The sudden and unexpected loss of a major customer or a protracted payment dispute can put pressure on cashflow which, if not carefully managed, can soon turn an inconvenience into something more substantial.

It is widely understood that many businesses fail, not because they don't have a great product or service, or even a full order book, but simply because they run out of cash. Too much time 'doing the day job' and not enough time focused on cashflow can mean the difference between success and failure.

It's a familiar issue and such challenges are difficult enough when times are good. Add into the mix Brexit, a sluggish global economy and the most devastating pandemic of the last 100 years, and that challenge is taken to another level.

The Government responded quickly and decisively to COVID-19 to help small businesses with a variety of employer and employee support programmes and funding packages, and in tax breaks and payment holidays.

However, such support cannot go on indefinitely, and there are already clear signals that the Government is tapering the withdrawal of support to reflect the opening up of the economy and the need to balance the interest of businesses with those of their creditors.

The smart money says that when the tap is finally switched off, insolvencies will inevitably rise. Data from the Insolvency Service showed that more than 4,500 fewer companies entered into an insolvency process in 2020 compared to 2019, and around 3,000 fewer companies entered into one between January and August of 2021 and the same period in 2019.

What that undoubtedly tells us is that there are several thousand firms out there that would have become insolvent were it not for the pandemic, and the financial support that followed soon after. It also suggests that there will be a large number of insolvencies later this year.

It may not be a flood, but perhaps more likely a trickle that turns into a steady flow over a sustained period of perhaps several years. Banks which might have once turned almost a blind eye to Zombie-companies for fear of negative publicity may also see it as an opportunity to do what they probably should have done several years ago and allow them to fail. This will inevitably swell the numbers.

The concern among CICM members, however, in assessing risk is in identifying which businesses with which they currently trade (or wish to trade in the future) were in distress before the pandemic, and which have become distressed because of it.

Both will have benefited from the Government's support measures, and so distinguishing between the two could be a challenge. It could be argued that it doesn't matter, that whether the business was weakened before or after, they are still a risk. That is true up to a point, but risk is relative, and some risks are better than others.

So, what should businesses be doing to prepare for the storm that will inevitably come? Ask any professional member of the CICM and they will tell you that the adage 'know your customer' has never been more important.

They will be using their experience and contacts within the CICMQ Best Practice Network to share information with their peers where it is appropriate to do so. They will also be engaging closely with the commercial credit reference agencies (CRAs) and credit insurers, tapping into their knowledge of specific businesses, sectors, and even whole countries for a better understanding of the potential risks that they face.

Our advice would be to follow their lead, and to look and learn not just from published data, which by definition is 'historic', but also to source more up-to-date management accounts and late payment data. This will give you a much better picture of a company's true financial position and its viability going forward.

They will also be deploying many of the basic techniques, monitoring traditional and social media for any news that might give cause for concern, such as the loss of a major client or resignation of a senior board member - both of which might provide an early warning of a business in trouble.

From what my members tell me, many of their customers in the supply chain have taken a serious dip in revenues and profit, but that doesn't mean that the underlying business, and therefore the opportunity, isn't sound. It depends on your appetite for risk and entering into any agreement with eyes wide open.

Industry depends on credit to trade; maintaining lines of credit is therefore essential to the economic recovery. The good companies will invariably survive, but it takes the skill of being a CICM member following best-practice credit management principles to sort the wheat from the chaff and put their organisation on a firm footing for future growth.

About the author: Sue Chapple

Sue is the Chief Executive of the Chartered Institute of Credit Management (CICM), the largest recognised professional body in the world for the credit management community. She has more than 25 years' experience in operational credit management within financial services, utilities and the public sector, and is passionate about promoting the critical importance of cash flow within companies and government.