After all, aren’t we in an unprecedented era where there is more building work available than the sector can handle? And shouldn’t that translate into more cash changing hands and everyone being able to pay their bills?
Working primarily in and around the building industry, we at CreditWorks get to see a lot of the pain associated with this growth market. In presenting on this subject to a variety of supply companies and credit providers – under the working title of Credit Risks in a Rising Market – we endeavour to isolate the key reasons businesses fail in this part of the economic cycle.
These include not least the cash flow process, which is often less than desirable (particularly in the Canterbury and Auckland regions at present), and the age old issue of under-capitalisation and growing too fast too soon.
HOW TO SPOT A FAILING COMPANY
First off, companies seldom become insolvent overnight. In fact, current insolvency laws that apply to assist a liquidator in clawing back funds after liquidation allow for the assumption that the company has been insolvent for at least 6 months prior to the initiation of liquidation proceedings.
So should you have been able to see it coming? In most cases, the answer will be yes. Changes in credit behaviour and trading patterns tend to become evident well before the actual failure occurs.
Often it is the increases in debt exposure levels, which are as a result of either (a) a greater work load necessitating an increased credit facility from suppliers (translate: larger supplier overdraft) or because (b) debt is ageing out.
Both of these scenarios need investigation. The first because of potential under-capitalisation (see earlier comments), the second because they are not paying their bills as they fall due, but are still accumulating debt (eg Starplus Homes ).
Other signs can be a change of name (sometimes a precursor to a pending Notice of Intent to Liquidate, which notice which will appear later under a nondescript name), a change or resignation of directors (à la Mainzeal), or items such as defaults, Judgments, and Public Notices appearing on credit bureau websites and in various publications.
Unfortunately, by the time these latter items appear as a matter of public record, it is often too late. The damage has been done, and it is a case of every man for himself in trying to salvage something out of the situation.
So the important aspect is in having that advance knowledge. Being able to spot changes in credit behaviour as they occur and being able to react accordingly. And this is where a bureau such as CreditWorks comes into play.
HOW TO STAY ON TOP
CreditWorks was formed some 13 years ago at the request of the Building Industry Federation and at the behest of the 6 major building supply merchants at that time who were keen to have access to a centralised debt repository where they could view a comprehensive picture of a customer’s debt levels in the market – not just their own.
From those early days CreditWorks has grown to a point where over 350 local and national companies supply data into the database and in return get access to a mine of debtor information from the $1.5 billion of amalgamated debtor trial balances that are submitted on a daily, weekly or monthly basis.
However, while accessing the database and pulling down trading reports is an important (dare I say integral) part of any member’s credit approval process, it is neither practical, nor financially viable, to have to visit the database on a regular basis to search for notifications, or to identify changes to customers’ credit behaviour.
Therefore monitoring becomes an important part of any credit management control process. The importance of being alerted to changes in a company, or to their debt profile, is paramount. Whether it is changes at the Companies Office (change of name/status/directors etc) or advice of notices appearing in the papers, or court records, you need to be advised.
Similarly, if a customer starts to extend their debt in the wider market, both in terms of volume and ageing, it is invaluable that you be alerted as soon as it occurs. Being able to customise these advices to suit your needs and requirements is an advantage and helps to qualify the value of the information you receive.
With the wealth of information available, and the accessibility of this “push/pull” technology there is little excuse for being caught with bad debt when a company fails. However having the information at your disposal is one thing, being prepared to act upon it is another.
If there is a policy of “pursuit of sales” at all costs, then nothing will save you from the inevitable tears accompanying your customer’s failure. And, rest assured, in the current environment, there is more pain to come.
Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at firstname.lastname@example.org or call him on 09 520 8133 to find out more.