Preparing retail businesses for January pressure

The existing pressure on the retail industry is expected to increase during the end-of-year period. Mark Hoppe highlights the need for businesses to protect themselves against insolvency.   

Every January there is a spike in the number of insolvencies of retail suppliers. This is due to companies failing to protect themselves against late- and non-payment by retailers struggling to make sales after Christmas, when consumer demand typically falls. 

Christmas can be a difficult time for retailers. It’s considered the most profitable period but, if targets aren’t reached, it can put businesses in a very difficult position for the New Year. 
Suppliers selling to retailers on credit terms risk not being paid for their goods in a timely fashion, or at all. Unless suppliers have credit insurance to protect themselves from bad debts, regardless of the customer’s reason for non-payment, they can end up going down along with the retailer. 

Experience tells us that when retailers need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and, with the first payment of quarterly rent due in January, it can be difficult to survive after a poor Christmas period. 

As retailers approach the busiest time of the year, they should take a moment to think about what trading is going to be like in the lead up to Christmas, before rushing into increasing stock and staffing levels. This is an ideal time to review labour budgets and sales forecasts. 
For example, with the continuing decline in consumer confidence, will the same levels of stock be required as in previous years? Having too little stock will result in loss of sales, but too much stock will necessitate heavier discounting post-Christmas. 

The retail industry is under enough pressure already. Retailer suppliers shouldn’t have to be concerned about having sufficient cash flow over the end-of-year period. Instead, they should get ahead of the curve now so they can avoid going out of business due to bad debt. 

Recent retail collapses such as Dick Smith and Laura Ashley have highlighted how quickly retailers can become insolvent and Christmas is a vulnerable time for this to happen. 
Experts have already warned that these recent high-profile collapses may be just the start of a broader retail industry slowdown. The end of the resources boom and increased competition from overseas and online competitors have made it difficult for retailers to compete effectively. The Australian Securities and Investment Commission’s September 2015 quarterly statistics revealed that insolvencies had increased by almost 10 per cent compared to the previous quarter. 

When consumers stop spending money, it’s a sign the economy is uncertain. Retailers are vulnerable because it is a cost-intensive business. They must carry stock, maintain premises, and pay labour costs, among other overheads, so protecting cash flow is essential. If, as expected, consumers spend less this Christmas, retailers will feel the effects. 

Inventory is often to blame for slow cash flow in retail businesses. As much as three-quarters of a retailer’s assets are tied up in inventory, so finding a more effective way to manage inventory is one way to reduce costs and free up cashflow. Retailers can also face cash flow issues as a result of customers not paying bills on time. 

When retailers pay for inventory up front, then are stuck working with customers who don’t pay on time, they can end up significantly out of pocket. Similarly, if suppliers work with retailers who don’t pay for their goods in a timely fashion, they can end up going down along with the retailer through bad debts. 

Buyers who cannot pay at the agreed time, or are unable to pay at all, can damage the organisation’s cashflow. This can cripple the business and damage relationships with other trading partners. Credit insurance lets suppliers trade confidently, even when consumer demand falls and retailers might struggle to meet payments, as it reduces suppliers’ exposure to risk and can significantly decrease uncollectible account expenses. 

Having a policy can also help a business identify at-risk buyers, and focus energies and the sales force on its most valuable customers. Insured companies tend to practise safer trade with up-to-date information on their trading partners, including whether they are considered at-risk. Consequently, they can make better-informed, strategic trading decisions. 

Credit insurance protects the company against risks that could otherwise cripple the business. Trade credit insurance can help cover the shortfall from companies that don’t pay at all, or pay late. 
Trade credit insurance covers losses that aren’t the customer’s fault but result in non-payment. This can deliver a number of benefits that can help retailers and their suppliers continue trading confidently. For example, it reduces the business’s exposure to risk and decreases uncollectible account expenses. 
Trade credit insurance can also lower the cost of borrowing, letting retailers widen their scope of business and improve cash flow for peace of mind. It takes away unnecessary worry about customers paying on time and lets the business keep its own payment schedule on track. 

It’s possible that tough times are ahead for retailers and their suppliers. These organisations should get ahead of the curve now so they can avoid going out of business due to bad debt. Securing their cashflow means retailers can innovate to stay ahead of the competition and remain viable even as the market tightens. 

Article supplied by Mark Hoppe, managing director of Atradius.