Despite a buoyant IT market in Australia, IT businesses must still be aware of the potential for late or non-payments to damage cashflow and operations, and take steps to protect themselves.
The IT market in Australia is benefiting from the digital transformations occurring across various industries in both the public and private sector. Organisations are spending on upgrading their business technology, from service and maintenance to cloud computing and security solutions and more. IT retailers are also riding a positive wave with consumers spending more on smartphones, tablets, IT accessories, video games, and more.
However, the IT market remains competitive with both domestic and international suppliers across different layers in the industry vying for customers. Usually, when IT businesses fail, it’s one of a combination of factors such as having the wrong product mix, facing high operating costs, losing contracts, and struggling to secure finance. Late payments can also put undue pressure on an otherwise-successful business.
A recent survey commissioned by Atradius found that, for business-to-business (B2B) invoices, approximately 55 per cent of the total value in the ICT industry were paid late, putting pressure on those suppliers. A report released by the Australian Securities and Investments Commission (ASIC) in December last year showed that ‘information media and telecommunications’ firms contributed to 225 external administrators’ reports during the 2015-16 financial year. Inadequate cashflow was the top cause of failure in the information media and telecommunication segment, accounting for 112 of the 574 reported failures.
We have identified five ways for IT businesses to protect themselves against the risk of insolvency:
1. Improve customer knowledge
It is essential for IT companies to know who they are doing business with and understand their credentials and business environment. For example, if dealing with a retailer it’s important to know that business’s geographic reach, product mix, and key operating costs. The IT retail business in particular is generally volume-driven with narrower margins so a small mistake can lead to high losses.
2. Purchase money security interest (PMSI)
A PMSI is a security interest or claim on property that lets businesses who provide goods on an invoice basis to obtain priority ranking ahead of other secured lenders. A PMSI helps minimise losses if businesses fail.
3. Transactional cover and financial guarantees
For well-established IT businesses, locked-box or escrow arrangements can be considered where the transactional value and structure is significant but financials are not supportive. Alternatively, for mid-sized value deals, these arrangements may be considered based on the customer’s situation and PMSI. Additionally, many local businesses are willing to issue a corporate or directors’ guarantee, which IT businesses should have verified by an asset liability statement from the director.
4. Invoice management
It’s imperative to have a dedicated credit manager within the finance team to ensure payment terms remain within globally-accepted norms of 30 to 60 days from invoice. Any variation or delay must be identified and addressed. Any line of credit extended to the customer should be built in a phased manner and monitored closely, and any single high value transaction should not be considered for run-rate business limits. Also, once any seasonal uplift is over, credit limits should be bought back to normal run-rate business requirements.
5. Business protection
Trade agreements, contracts, and trade credit insurance are further strategies IT businesses can use to protect themselves from late payments. Trade credit insurance protects the businesses from risks that could send the business into a financial tailspin, including covering late or non-payment.
Businesses with trade credit insurance are covered from exposure to risk and the cost of outstanding expenses. By protecting businesses’ income, it preserves cashflow and lets IT businesses innovate and stay ahead of their competition. Even more importantly, it lets them remain viable in an uncertain market.
Mark Hoppe, Managing Director – ANZ, Atradius