Give credit ... where it’s due | NZBusiness Magazine

Times are tough, there’s little evidence that anything will change soon, so it is time to credit check all your new and existing clients, writes Steve Hart.
As the New Zealand economy bumps along the bottom, so company debt levels are rising.
Many companies, it appears, are using other firms as interest free lenders as invoices valued at more than $43 million go unpaid for up to 120 days at a time, according to one credit management company.
Unpaid bills to Kiwi firms for up to 62 days currently total more than $1 billion – up from 53 days in 2008.
The problem, say credit industry professionals spoken to by NZBusiness, is that companies are so keen to get a signature on a sales agreement, they are not carrying out the checks to establish that their customer can actually pay.
Data from credit agencies shows a disappointing forecast of more unpaid invoices and company collapses as a lack of cashflow drives them under.
For some firms the damage has been done. They are owed truckloads of cash and are relying on collection agencies to chase the cheques – this can be a race against time before the creditor goes under.
Allan Dickinson, CEO of collection agency DebitSuccess says the situation today is worse than a year ago and there is no obvious sign of better times ahead.
“The situation here is much worse than Australia,” he says. “We haven’t seen wholesale layoffs of staff in New Zealand, but what we have had is a long period of uncertainty and that has changed people’s behaviour.
“We are not seeing anything to show that the situation at grass roots is improving.”
Dickinson recommends firms carry out credit reference checks before dispatching any goods.
CreditWorks is a firm that offers real-time trade payment credit information. The firm’s owner, Ronnie Tan, says when it comes to credit checks, companies shouldn’t just rely on data from telcos and utility firms when agreeing a line of credit with a new or existing client.
“You can’t rely too much on that type of information because it does not represent the true picture of how companies pay their bills,” says Tan.
“A lot of business commentators are saying that business is improving and that it is getting better, but when you see debt levels for 120 days and over sitting at the highest it has been in nine years – $43 million – then it is significant.”
Tan says some of his clients are being told by customers that they simply cannot pay their bills.
“Some firms are just putting their hands up, giving up and shutting down,” he says.
Figures from Statistics NZ don’t look good. In February 2010 there were 470,000 registered companies, down 1.7 percent (7990) from the 2009 figure. It is the first decrease in the number of businesses over the past nine years.
The construction industry had the largest drop in the number of businesses, down by 2,800 from the February 2009 figure of 53,130.
The government department also says there has been a “significant reduction” in the number of business start-ups. There were 44,000 during the year ended February 2010, down 20.4 percent (10,807) from the previous year.
The number of business closures over the year was 55,000, up six percent on the previous year to February 2009. This is the first year since 2001 that business closures have exceeded business start-ups.
What this means for firms trading today, is that their customers may not be around tomorrow and because there are fewer start-ups there’s less chance of a firm being created to replace the lost customer.
Tan says: “Normally, for every ten companies that are struck off, 20 are started up – you have a net gain. But that is not the case right now – that trend has reversed.
“Too many firms are relying on future jobs to pay off current debt. But if there is no future job, and your business is complicated by provisional tax, PAYE and GST – compound this with no cashflow and you start to get a sense of where things are at.
“The last thing a business owner wants to happen is being caught out like a client of ours last month – they were owed $300,000 by one customer who went into voluntary liquidation.”

Cashflow under pressure

According to John Scott, Dun & Bradstreet’s New Zealand general manager, the latest business-to-business trade payment figures indicate that cashflow will remain under pressure this year.
“Latest research shows that an increasing number of New Zealand firms are delaying their bill payments,” says Scott. “A four percent increase in the number of entities paying their accounts late has the potential to inflict cashflow difficulties on a large number of firms. This is a worrying trend as it can draw more and more businesses into the late payment cycle, making it increasingly difficult for firms to escape the pressures associated with slow paying customers.
“In addition, the time businesses are taking to pay each other has increased, which means firms are being denied access to their cash for longer. For small firms in particular, this type of delay in receiving payment for products or services could push a business into severe financial stress.”
The latest business payments research from Dun & Bradstreet – which examined the millions of current accounts receivable records contained on the company’s database – reveals that an additional four percent of New Zealand firms failed to pay their trade credit accounts during the December 2010 quarter compared to the same period in the previous year.
With available cash drying up like water during a Canterbury drought, what are firms to do?
Tan says long standing business relationships should be reviewed as a matter of routine and that new customers should be treated with caution, they may be moving to a new supplier after running out of credit at the previous one.
Dickinson says the day an expected payment from a customer is missed, the firm should be on the phone to query it. Agree a new date for payment and keep track of it.
“It is something many people find uncomfortable to do, especially when there is a strong personal relationship between the two parties,” he says. “That’s when using a third party can help a firm get the payments they are owed as a neutral party.”

Dickinson says his firm abides by the ‘rules of engagement’ laid down by each of its clients.
“If a client wants a softly, softly approach then that is how we play it,” he says. “We understand that we are representing our client and that their business reputation is in our hands when we call their customers for late payments.”

When is a sale a sale?

John Roberts of credit risk firm Veda Advantage says nothing beats having a formal credit policy that is adhered to for every customer.
“Ensure you have a system in place that recognizes that a sale is not a sale until the money is in the bank,” he says. “A sale on credit is not a complete sale. Ensure all customers are evaluated, trade credit limits checked and regular monitoring undertaken.”
Roberts says a part of any firm’s credit policy should be detailed terms of trade that are provided to all customers.
“This should include your process in terms of non-payment of debt for 30, 60 and 90 days,” he says. “It should also explicitly state when you will put all outstanding debts in the hands of debt recovery agencies.
“Credit check every new customer. Existing customers with a good track record of payments must be managed and monitored. Sadly, today’s economic environment has exposed the most unexpected individuals and companies. Rather than wait to find out things are turning sour for them, look for tell-tale signs.”
Roberts says these signs could be payment anniversaries lengthening from 30 to 60 or 90 days. He recommends firms build an internal alert system to proactively monitor and manage customers who are struggling to pay.
“Don’t assume your customers and their businesses will stay the same,” he says. “Check their current credit health and be alert to business changes such as a company director leaving – they may be getting themselves out of harm’s way.”
When things turn really bad with a client doing a disappearing act, Roberts says there may still be hope to recover unpaid invoices.
“When customers go AWOL don’t write off the debt and don’t give up trying to find them,” he says.
“Managing credit risk is not a cumbersome process. With the right tools in place, it is a safety check your business cannot do without.
“As many of us have seen, time and time again, bad debt can ultimately bring about the death of a company. What is troubling about seeing the good suffer at the hands of the bad is that many don’t learn the lesson. The management of credit risk is frequently the most neglected aspect of business in New Zealand.”
Tan says an in-depth knowledge of every customer is essential, because without it “you won’t know where they are at and if you do not know what you are dealing with, you cannot make good decisions”.
Steve Hart is a freelance writer at SteveHart.co.nz