Anyone living on the East Coast of Australia is aware of the crazy weather patterns we have experienced during 2022.
La Nina, whilst easing, is predicted to continue on for the third straight season. This rare weather event has only happened twice since the 1900’s and the extensive rain has inflicted floods amongst many communities.
However, there is another weather pattern brewing, where dark clouds and storms are predicted in the business community. The statistics and trends are already showing signs of another major event, which I am calling, ‘La Insolvo’ (businesses becoming insolvent).
It is predicted to occur over the remainder of 2022 and into 2023. It will cause havoc across businesses and impact suppliers and also customers.
Led by the building and construction sector, our statistics show financial pressures are being experienced already. Since the beginning of the year, overdue reporting (customers overdue past 90 days from due date) have doubled against ‘normal’ periods in time.
The chart below shows the flow of overdues reported in this sector since the beginning of 2022 (notation – NCI statistics compiled overdue reports 2022).
People tracking statistics of businesses entering administration on ASIC, have already seen the dark clouds arrive with the number of businesses entering external administration back to pre-pandemic levels.
Economic factors such as high inflation, labour shortages and increase in labour costs, raw material and energy prices surging, have meant the cash flow ‘buffer’ from government support many businesses benefited from during the pandemic, is gone.
Also gone is the protection for directors of a business, who no longer are meeting their debts as they fall due, previously relying on the short-term mechanisms for insolvent trading during the pandemic.
What can you do about La Insolvo???
If you see weather predictions or clouds outside, you grab an umbrella and put on a jacket to protect yourself from the elements. Businesses can also take cover by implementing a number of simple elements to ensure they are not caught stranded in the ‘La Insolvo’ weather pattern.
Implement these elements now!
- Know who you are dealing with – conduct a wash of your customers aged trial balance to make sure no changes have occurred to your customers business structure over the past 2 years.
- Monitor your customers against changes or adverse events – by monitoring your customers, receive early warning signs and alerts which may save you from getting caught by a financially stressed customer.
- Register your security interests – if you supply goods, ensure you are protected in the event of an insolvency to have the means to recover your goods not paid for, or negotiate with an administrator on recoveries for those goods.
- Conduct annual credit assessments – do not set and forget credit limits with your customers. Build in an annual review to check if anything has changed with their financial health.
- Get trade credit insurance – most businesses insure against theft of their stock or their premises burning down. So why not protect yourself against the event of one of your customers becoming insolvent and not paying you? Credit insurance typically returns 90% of what you are owed at the time of insolvency. Wouldn’t that be comforting to have?
Don’t wait for ‘La Insolvo’ to impact your business. There are plenty of ‘umbrellas’ available to protect your business.
To find out more, speak to an NCI specialist trade credit insurance broker who can advise you on the best trade credit solutions in the market to protect your business.
Click here for a special offer. We will conduct a free wash of your debtors aged trial balance and provide a report on any adverse events noted on our database as a starting point.