Cash-flow concerns set to continue

AICM CEO Nick Pilavidis
AICM CEO Nick Pilavidis

Cash-flow issues are likely to remain one of the most pressing for SMEs as they seek to return to normal operations after the effects of COVID-19. While there are some promising developments, especially around the strength of the Australian economy, it’s unclear when conditions will return to normal – or what is being called “COVID normal”.

Last year, Jirsch Sutherland carried out a survey of business directors and found that cash-flow concerns were the main source of sleepless nights. While the government’s stimulus packages helped to alleviate those concerns, their withdrawal will once again focus attention on how to survive.

The Australian Institute of Credit Management (AICM) recently released its 2021 Risk Report and found that while creditors are carrying less delinquent debt compared to this time last year, their risk outlook continues to rise. AICM CEO Nick Pilavidis says while Australia is yet to see significant increases in corporate and personal insolvencies, there are signs that individuals are feeling the pressure.

“An unknown factor in assessing the outlook is the level of unviable businesses, businesses that have ceased trading, and the number of zombie companies that are out there,” he says.

Time to focus on fundamentals

The report found that many credit providers are in a stable position to manage an increase in risk, but they are not able to support every customer that shows signs of cash-flow pressures. Credit professionals, who are custodians of cash flow and mitigate credit risk, recommend focusing on the fundamentals of credit and risk management including:

  • Know your customer
  • Understand industry trends
  • External data and analysing their exposures
  • Thorough risk assessment
  • Direct relationships with customers
  • Sales and organisational intelligence
  • A network of credit professionals across industries and sectors
  • Ensuring records and securities are accurate and up to date

Pilavidis says fewer than 50 businesses have sought refuge through the federal government’s insolvency measures implemented on January 1 this year, and this indicates many businesses are still “hiding behind the artificially created business environment”.

“Reports from credit providers suggest there are a significant number of legal enforcement proceedings that commenced in recent weeks, so we expect to see this change dramatically throughout Q2,” he says.

Equifax Head of Product and Rating Services Brad Walters says while there are many positive signs highlighting business resilience, “we also see signs of increasing financial stress across small-and-medium businesses at a time when JobKeeper and other temporary protections have, or are, being phased out”.

“Winter is coming,” he says. “Don’t get bitten by zombie companies. Now is the time to double down on credit risk fundamentals.”

Strategies to navigate the cash-flow challenges

Andrew Spring, Jirsch Sutherland Partner
Andrew Spring, Jirsch Sutherland Partner

Jirsch Sutherland Partner Andrew Spring says while the impact of both financial stimulus and debt forbearance measures by governments have allowed many businesses to continue and provided time for them to adjust their operations to deal with the changing marketplace, there are those in the credit community who are now expecting a few rain clouds.

“Over the coming months, many COVID-19 impacted businesses will struggle, creating various challenges for credit professionals,” he says. But, he adds, there is a number of strategies that can help prepare clients navigate what’s ahead, including looking for the signs a client is experiencing significant or prolonged financial distress and/or has increased exposure to risk by:

  • Getting to know your business clients by finding out:
      • who their customers are
      • what supply risk(s) they face from others
      • whether they have increased operating costs that may impact their viability
      • whether they have trading restrictions risks
      • whether they are selling discretionary items
      • whether they are vulnerable to technology disruption
      • whether their client base will be impacted by the end of the government stimulus
  • Understanding where their pressure is coming from. The ATO, banks and landlords will recommence pursuing payments, which may impact your clients’ ability to pay trade suppliers.
  • Looking out for changes in their behaviour which can indicate distress (for example, a client who is usually friendly and engaged during your conversations may act disinterested or refuse to accept your call).

Early intervention minimises losses

Spring says if clients are operating under flexible working arrangements with staff, ensure they look for early warning signs, such as requests to renegotiate payment terms and plans and difficulty engaging with the business, and report this to you as soon as possible.

“If the customer shows signs of financial distress, do not shy from asking them whether they are seeking help,” Spring says. “If a client/customer is in financial distress and heading towards insolvency, you need to act without delay as the earlier the intervention, the more likely losses are minimised.”

Spring says insolvency practitioners have a responsibility to creditors to achieve the best outcome. “By engaging with the insolvency process, particularly during a voluntary administration, and building a relationship with the insolvency practitioner, you have a better understanding of the process and how to maximise the outcome with the least disruption to your business,” he says.

He adds when dealing with clients and their customers, it’s important to keep in the mind the following:

  • the expansion of the ATO’s director penalty regime and the deferral of rent (which may be subject to personal liability) and financing commitments may have devalued your personal guarantee and changed the risk profile of your customer.
  • You have options and do not have to accept compromise offers without being given sufficient justification.
  • Take a proactive stance on encouraging early action on insolvencies to reduce your losses. Anticipating insolvencies is as much about ‘gut instinct’ as analytics, however, your instinct needs ‘feeding’ with information gained from regularly engaging with your clients.
  • When you suspect a client is avoiding/delaying payments and/or not being honest and transparent about their situation, keep in mind that trade credit is a privilege, not a right, and that you can ask for supporting evidence on financial performance to justify providing credit and continuing credit.

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