How can I prepare my business for a cash flow shock in 2021?
With the vaccine roll out programme now gathering momentum and optimism for a gradual easing of restrictions on the horizon, most businesses, including those that have been closed or operating on significantly reduced capacity, may be turning their thoughts to potential challenges to future cashflow.
Most businesses have suffered a product demand shock because of the pandemic. Obviously, some sectors have fared better than others as the demand for PPE, hand wash and home IT solutions has rocketed. However, the vast majority of businesses will have been negatively impacted by the Covid-19 outbreak. Their ability to pay their suppliers might come under pressure.
How might a business take steps to protect their cashflow and navigate what will hopefully be a swift return to pre-Covid-19 levels of trade?
Colin, thanks for taking the time to offer some expert guidance. Let’s start by asking you to explain what Atlas Risk Management does and how you help your customers, especially during these unprecedented times.
Atlas Risk is a specialist trade credit insurance broker established over 19 years ago to help businesses to avoid bad debts, protect their balance sheets and secure their future. It is all about supporting a business to grow, but to ensure this is done safely and securely. We typically work with companies with turnovers ranging from £5m up to £1bn.
What is Trade Credit and how can a trade credit insurance policy help a business to grow?
Put simply, to increase sales a company needs to either sell more to existing customers (meaning they expose themselves to a greater level and concentration of risk), or they need to find new customers, who (by definition) they do not have an existing trading relationship with. Our clients will refer to their insurance underwriter and ask for their view on increasing the insured credit limits for the existing customers, and make a new application for cover on the potential new ones. After considering all the information to hand, if the insurer’s risk underwriter agrees the new limits and increases required, then the business owner can take on the new customers and take a higher risk with the existing ones, but without losing any sleep!
What happens if the risk underwriter does not agree to the limits?
If the risk underwriter is aware of something adverse about the customer, they will not agree to the credit limit request. Our job at Atlas Risk Management is to immediately try to see if we can provide any additional information that may help to change their mind. If an appeal is unsuccessful, we then need to let our clients know exactly why the risk underwriter would not recommend agreeing credit terms for this particular buyer. Naturally, the business can still accept the sale but at least the decision is made from a position of knowledge, transparency and with eyes wide open. Perhaps the sale can still be made, but with cash in advance or on a shorter credit period than usual.
So, can you give us an example of a typical concern that your clients might raise with you during this challenging time for most businesses?
Like Griffiths & Armour, all of our current client meetings and conversations are held virtually so when we get the opportunity to have a chat with our client base the overriding concern is cashflow. Most clients are working hard to forecast their own cashflow requirements, but there is also the added concern that their customers still have the required liquidity to pay their bills.
What sort of guidance can you give businesses who have these concerns to help them through this period?
We aim to steer them away from bad risks (meaning customers that have a high probability of not being able to pay). It might seem like a simplistic approach to take with an often complex subject but we believe taking a common-sense approach to credit management can be a huge help. Here are a few practical steps that a business can take away and consider:
Raise and send your invoices promptly with clear values and a defined contractual due date.
Send a statement of account regularly.
Speak to your customer, confirm they are in receipt of the invoice and agree with the amount and ask them when you can expect settlement.
Keeping in regular dialogue will help you to gain an insight into their issues and perhaps gain an inkling that their finances may have been squeezed.
Promote an open and transparent relationship. If they are comfortable to admit that they cannot meet the payment of £20,000 at the end of the month, you are more likely to be able to help them. Perhaps you can support them by agreeing to reschedule the debt to include 4 monthly payments of £5,000.
If you have the capability to support a customer through this tough time, they will probably remain a loyal customer for the foreseeable future.
You cannot help them if you don’t have an open and trustworthy dialogue.
Government intervention during the pandemic has been well publicised but has it helped to avoid insolvencies and therefore bad debts?
The various support schemes have indeed had a major positive impact. In fact, the level of insolvencies in Q4 of 2020 were lower than those in Q4 of 2019! This obviously feels counter-intuitive but the furlough schemes and loans together with the changes in the legal insolvency framework have reduced the number of insolvencies. We have seen well-publicised household names that already had financial problems becoming insolvent including the Arcadia Group (Top Shop, Dorothy Perkins, Burtons etc), Debenhams, Edinburgh Woollen Mill, but in reality, we are still waiting for the losses to appear across the economy as the various support schemes are phased out and come to an end. The Government has also stepped in to reinsure the UK credit insurance market in partnership with most of the trade credit insurance companies to ensure that the insured credit limits remain in place, avoiding the removal of insured limits on a large scale which would most likely lead us to a credit crunch issue on the back of the pandemic demand shock! All Government help and support has been gratefully received and our hope as well as those of our clients is that the end of such schemes is managed sensibly by the Chancellor and HM treasury. The reinsurance support is currently set to end in June this year.
Looking ahead, can you give us your view on what might be around the corner later this year and into the future?
Yes, we should all be optimistic and be as positive as possible about the future, especially with the vaccine roll out now in full swing and hopes for the economy to start moving in the right direction but we should also be realistic about what could be ahead. Typically, when GDP falls there is a direct correlation with business insolvencies. Most economic forecasters agree we will see a spike in business failures sometime this year. Many companies have survived using the Government loans, but these will need to be repaid and some of these companies were already servicing large levels of debt prior to the pandemic. As we expect to pull out of the lull in economic activity and orders start to pick up, we traditionally see working capital is stretched, unfortunately sometimes beyond the limit and a business fails. In conclusion, choppy waters ahead where close relationships and risk avoidance will be key.
Carl Edwards, Partner and Group Director at Griffiths & Armour said,
“At G&A we advise clients on all aspects of risk and by partnering with Atlas Risk Management this allows our clients to receive specialist credit advice from a firm with the same professionalism and service culture as G&A. I would encourage all clients to get in touch and find out how an unforeseen bad debt can be insured or managed, especially in the current economy and business environment”
If you have any questions on this article or would like to discuss Trade Credit Insurance for your organisation, get in touch by using the enquiry button below and a member of the team will contact you to arrange a suitable time to contact you.