Fear of the spreading Coronavirus is having a substantial impact on Australian business confidence. Treasurer Josh Frydenberg estimated that the virus may wipe as much as 0.5 per cent of GDP off the national economy. Uncertainty is being compounded by the RBA revealing it will further cut interest rates to try and encourage spending. The news has led to a low level of consumer hysteria, with people prematurely stockpiling goods.
Manufacturers of toilet paper and hand sanitizer aside, crises like these usually spell tough times for SMEs. Complex supply networks mean that just one payment default can have a knock-on effect, leading to failed businesses and lost livelihoods.
Rather than falling into a path to administration, there are three simple and effective steps small businesses can be doing to safeguard their future:
It’s important that businesses know both their customer and supply chain intimately, as having a key supplier go down can be as equally devastating as a customer pool drying up. Knowing the histories of your customers and suppliers can be half the battle and data is key to this.
Court actions, payment defaults, poor credit scores and or insolvency notices are all red flags that are likely to immediately stand out on a simple credit report. Poor accounting or administration practices can also be indicative of a company that is not on top of its financial positioning. New technology like a digital credit reporting agency can provide notifications to alert you to any adverse changes to a supplier or debtor and watch for businesses that are consistently or increasingly slow to pay invoices.
Small business owners should also look into the leaders of new companies they are unused to dealing with. CreditorWatch’s data show that a director with a payment default is five times more likely to experience another one, and a director with one failed business is twice as likely to fail again. The uncertainty that Coronavirus brings may give companies an excuse to not make payments, so knowing the history of the people behind partner companies may be the difference between an invoice being paid or not.
When it comes down to it, a struggling debtor is more likely to default on a smaller supplier than a larger creditor that they rely on for day-to-day operations. This means that small businesses or subcontractors are often the first to be affected by cash-flow issues and the knock-on effect can be industry-wide.
Overdue payment terms can be the difference between paid or unpaid school fees or daycare fees so when customers ask to lengthen their payment terms, SME owners need to remain vigilant. Leaders need to find time away from the management of day-to-day operations to review their due diligence processes, check their terms and cash flow, and invest in the necessary technology and advice. In many cases, it’s the person with the loudest voice that gets the attention, so if you don’t ask for it, you won’t get paid.
As the Coronavirus enters its seventh week, businesses of all sizes should focus on arming themselves with as much information as possible. Small businesses, in particular, should introduce measures to know their suppliers and customers, understand their history and take steps to ensure they have the appropriate strategies in place to get paid on time and in full. These steps, combined with sensible business practices such as reducing reliance on single customers to 20 per cent, will put your business in a great position to emerge from a crisis.
Patrick Coghlan, CEO, CreditorWatch