What SMEs can do to minimise their risk exposure in 2023

A published study examines the financial risks emerging in today’s challenging business environment and provides advice on how to avoid them. It outlines the risks faced by firms in today’s business environment. 

Most organisations see inflation, interest rates and a shortage of skilled workers as their top three issues. But they also have to deal with many other issues like supply chain disruptions as well as productivity, climate change and geopolitical uncertainties.

CreditorWatch’s Risky Business reveals the various tools that businesses can use to understand the level of risk they face and determine the creditworthiness of their customers, as well as casting an eye over the current credit landscape to reveal what’s keeping business people awake at night and what they can do about it.

Let’s start with some facts about the running environment. Although some indicators may have declined, overall business conditions are still manageable. According to CreditorWatch’s October 2022 Business Risk Index (BRI), the industries with the highest likelihood of default over the next 12 months are food and beverage services (7.25 per cent), arts and leisure services (4.62 per cent), and transportation, postal, and warehousing: (4.57 per cent). The BRI indicates that the likelihood of default in the next 12 month has increased in all regions of Australia, except for Wyong and Lower Hunter in New South Wales.

What Smes Can Do To Minimise Their Risk Exposure&Nbsp;In 2023

Another telling data point is the shift in the balance of firm cash holdings versus debt levels between June 2121 and June 222. COVID was implemented by corporations to reduce their debt levels by approximately 25% compared to pre-pandemic levels. Cash holdings increased by 30%. After June 2021, however, this has drastically changed. As a result, most corporations’ cash holdings have decreased while their debt levels have increased. This can create dangers for employees and is something that businesses must manage.

Patrick Coghlan from CreditorWatch said that businesses need as much information as they can get on factors like the current economic outlook, and what it means.

“It’s important to be judicious when extending credit. Customers entering insolvency without notice is a trend businesses need to be aware of. Covid stimulus payments are now unwound. This has exposed some businesses that were artificially aided during that time but have not corrected problems in their operations. These are among the businesses going into insolvency at the moment,” said Coghlan.

It is risky to do business. There are several steps that firms can take in order to reduce their risk.

Collaboration with suppliers

From From a payment perspective companies have the opportunity to work with suppliers in a mutually advantageous way. Large construction companies might invite suppliers to join them on the tendering process. This is so that all parties can identify points at which they have the opportunity to renegotiate terms in order to adjust to changes in external environments.

Match inflows with outflows

Shavantha Mallawa, CEO of CreditSource, stated that many businesses face specific short- and long-term risks. These include the escalating input costs, rising labour costs and a shortage of skilled labour. These risks are magnified by inability of customers to pass on cost escalations.

“It’s also essential in this part of the cycle to match inflows with outflows, says Mallawa. “Companies with low cash reserves or liquidity issues struggle more in this environment because there is a reluctance to offer payment terms seen previously. We are seeing some firms pay suppliers on time and ahead of time to secure their products and services. So, companies with low cash reserves will struggle to compete.”

Keep close to your customers

One of the best ways to reduce the risk of non-payment or late payment is to understand customers’ circumstances, says Pilavidis.  

“Now is the time to stay close to your customer. Visit their websites to get a sense of how the business is doing. Understand individual customers’ situations to identify the risks and secure opportunities for your business, for instance, maximising sales from good customers. 

“Access to technology is key, as well as automation to improve processes and procedures. This frees credit managers from building customer relationships and proactively identifying risks. You can also use this data to spot changes in customer behavior. For instance, unusually prompt payment of invoices may be a sign of stress,” he adds.

Improve working capital management

To help guide business decisions, working capital management has been an essential business principle. In an uncertain operating environment, it’s never been more important for organisations to optimise this part of their enterprise to maintain sufficient cash flow to meet short-term operating costs and debt obligations. Reworq Consulting Founder and CEO John Field say it’s essential to recognise working capital as a source of value. 

“Working capital is not straightforward. So, implement robust measures to improve accounts receivables, accounts payables and inventory management. Better working capital management preserves cash and can provide a critical lifeline when the business faces significant trading or liquidity constraints.”

He says most businesses have plentiful chances to identify opportunities across their operations to enhance working capital management. The idea is to develop a roadmap to support the company’s strategy and business objectives. 

“The key to success lies in embedding the right behaviours across the whole business, not just in finance, but driven by executive management with a sustained focus on change and future financial success,” he notes.

You might consider trade credit insurance

The interest in credit insurance has risen more than ever before, particularly among exporters as well as the construction industry. This sector is known for making good use of trade credit. “The smartest guys in the room take out trade insurance through the cycle,” says Bastos.  “With trade credit insurance, you can sleep at night in the knowledge you’re going to be able to pay your suppliers and your employees, and your business is going to be viable,” he adds.

Please read the entire paper Here.

Register Here for CreditorWatch’s webinar on December 1.

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