Amid news that alcohol wholesaler and retailers Conviviality has officially appointed administrators to the business, other economic indicators highlight a rumbling undercurrent of uncertainty in the UK.
In the last month alone, announcements in the press have included profit warnings from apparently stable businesses, retailers reporting their distress, news that construction sector growth is down for the 9th consecutive quarter, and that profits are down 64% among the UKs top 100 restaurants. What’s more, The Association of British Insurers (ABI) who provide a good litmus test for the industry, have highlighted that claims paid out due to bad debt during 2017 were up 7% compared with 2016 and that 2018 is on trend to exceed 2017 figures. In fact, claims in 2018 ran 100% higher in January and February than claims in the same period in 2017, according to anecdotal conversations with insurers.
All of this news points to a need to review your approach to trade credit risk. Payment performance alone is not indicator of future strength – we have a client who was paid £250,000 by Carillion on Thursday 11th January (good payment performance) yet Carillion went bust on Monday 15th January leaving a much larger unpaid debt. Sensible and sometimes brave decisions need to be taken and levels of credit need to be regularly reviewed as market conditions change. Credit insurance is not the only answer, but consideration of credit insurance always provides a good benchmark against which to judge alternative arrangements.
Ultimately, these stories mean that the risk of bad debt is increasing for all companies, and that all companies should review their credit risk strategies to fit. It’s less rational than ever to use past performance as the basis for assessment – the level of future risk is higher than the level of historical risk.
Certainly an interesting period and one which should have businesses thinking very carefully about the way they manage credit.