First published in the Sunday Times on 12th June 2016.
It is often the more mundane aspects of business that matter most — like getting paid. You can manufacture the most fantastic products in the world, but if you do not receive the money you’re due, then you will surely go bankrupt.
I have been fortunate because I have spent most of my career in consumer sectors such as hospitality and leisure, where you are paid in cash when you sell the goods. This means you don’t carry the risk of bad debts, and you don’t have working capital tied up in debtors. It is part of the reason why start-ups are easier in industries such as retailing.
By contrast, producers and wholesalers must generally extend credit to their customers. As a result, they have to chase receivables — and sometimes never get what they are owed. Nagging recalcitrant debtors costs a lot of time and money. A huge industry in what is euphemistically called “credit management” has sprung up over the years to deal with this perennial problem.
I was once part-owner of a fish wholesale business that dealt with many hundreds of small catering accounts. Many of them didn’t pay for three months or more; quite often they went bust owing us money, and we carried a sizeable overhead of staff pursuing customers who had not settled their bills. We were obliged to sell out during the recession in part because of a squeeze on working capital and customer failures.
Unfortunately, slippery customers often behave badly about the money they owe suppliers. Sometimes they lie about why bills haven’t been paid — “problems with IT” is a favourite excuse. Or they arbitrarily knock 10% off what they owe, imposing a retrospective discount simply because they can.
To stop these problems, it is important to do thorough credit referencing on prospective clients in case they are rogues. A sound contract with clear terms of trade is also essential in case of disputes; wherever possible, it should state that the supplier retains title to the goods unless they are fully paid for. An accounts department should always submit invoices promptly, and ensure they are accurate, so leaving no room for wrangles.
Trade credit insurance is a way to protect against bad debts, with the UK market being dominated by three European firms: Euler Hermes, Atradius and Coface. It feels like an expensive service until a big customer goes bust owing you money. Unfortunately, credit insurers tend to withdraw cover from struggling clients, adding to their woes, so it is debatable how valuable they are for most firms. They are at least pretty expert on judging creditworthiness, and have their own armies of po-faced analysts crunching numbers to work out who is about to go broke.
I’ve had the painful, personal experience of trying to persuade them not to pull cover from an ailing retailer I owned — and seeing their withdrawal precipitate its collapse. Of course it was just business. Nevertheless, it was not a process I would like to repeat.
Increasingly, companies try to sell repeat purchase items on subscription, with periodic direct debits or electronic transfers. This helps cashflow and planning enormously, and leaves less wriggle room for disputatious customers. Many of the growth industries of recent times —like mobile phones and digital entertainment — bill this way. I’m sure it is part of the reason they have been so successful.
It helps if you have a unique offering in a new sector; you can then dictate the terms of trade. But in more traditional, competitive markets with lumpy, irregular orders, organising payment by such means is generally impossible.
The government has introduced the Prompt Payment Code to try to tackle the £32bn of overdue cash owed to medium-sized and small companies. It is a voluntary regime with about 1,800 companies signed up, including many larger ones.
One industry plagued with litigation, insolvency and rows about payments is construction.