Credit considerations for the new financial year

Keith McLaughlin discusses the credit lessons Kiwi businesses should take from the past few years – and what they should be doing to manage their credit scores going forward.

After almost two years of on-again, off-again restrictions due to the pandemic, business owners need as much certainty as they can get. A crucial element of business sustainability is protecting cashflow and ensuring customers and suppliers are financially reliable.

It has been a challenging period for businesses across all industries and regions of Aotearoa. As we begin to look towards the hopeful slowing of Omicron and a return to relative normality, there will be a need to take a step back and review what the future holds.

With the new financial year just around the corner, now’s the time for businesses to do just that – take stock of their operations and do an audit of both their customers and businesses they work with to ensure they’re working in the most cost-efficient manner.

Our latest Credit Indicator Report showed a decline in business credit ratings across all industries during 2021, highlighting the importance of protecting your own cashflow. One way to reduce your risk is to limit your exposure to businesses with low credit scores (See chart below).

What this means is twofold. Firstly, maintaining a strong credit score – both personally and in business – is crucial when it comes to future borrowing. It acts as a barometer for how reliable you and your business are with making repayments in full, and on time.

For a business, this is likely to impact how suppliers dictate their payment terms with you, not to mention better access to credit and capital from lenders for business improvements or expansion.

By the same token, understanding the calibre of your customers and suppliers helps mitigate potential poor outcomes that could have been avoided.  

For example, businesses with higher credit scores are 15 times more likely to pay their bills on time than companies with low credit scores.

This makes taking stock of suppliers, customers, and other businesses you work with regularly an important part of forecasting future cashflow – you want to make sure you aren’t putting yourself under undue financial stress by working with potentially unreliable parties.

The end of the financial year is a good time to reassess your current business relationships, identify any ongoing issues you have with late payments, and make decisions about how to change these outcomes for the coming year.

How can you manage your own credit score?

The number one thing you can do to maintain or improve your business’ credit score is to ensure you pay your bills on time.

Having good accounting and compliance practices as part of your bookkeeping will go a long way to helping this be as painless as possible.

However, if you are having issues with paying your bills, it’s important to seek support. Getting on top of your obligations and working out a repayment system, for example, will be better for your credit score in the long term.

Of course, meeting your own repayment conditions is often intrinsically tied to your cashflow – and how reliable your customers are at making their repayments.

How can you assess other businesses credit scores?

Before you begin a relationship with a new customer or supplier, knowing their credit score will help you decide how you approach credit risk management.

To do this, you can order a business credit report from a credit bureau like Centrix which can give your business insight into the company’s credit score, defaults, insolvencies, and a general picture of their credit health.

If your customer, prospective customer, or supplier has a low credit score, this means that they are at a higher risk of defaulting on future payments

Of course, you don’t need to turn down business from those with lower credit scores. By structuring your terms and conditions differently and with caution, you can help protect yourself.

For example, limiting the amount of credit you extend to them by setting shorter repayment windows will protect your business without being too out of pocket.

With the challenges we’ve all faced over the last few years, its clear many businesses are struggling to make ends meet.

Now’s the time to take stock of your existing customer and supplier pool and, for those who are consistently failing to meet their repayment obligations, investigate their credit score to get an understanding of why.

Armed with this information, you can make informed decisions about the reliability of your supply chain and cashflow to ensure you and your business are ready for the new financial year.  

Keith McLaughlin (pictured above) is Managing Director of Centrix.