Appetite for risk can vary from person to person and from organisation to organisation. Sometimes this is a calculation based on facts and sometimes it is an emotional position.
In the world of credit risk management, it can be demonstrated that the right combination of skills, facts and processes can mitigate the risk of doing business on credit. Despite the merits of such a scientific approach, emotion can still play a significant part. One key area where an emotional response can prevail over a scientific approach is when a customer is perceived as being too big to fail.
Having a contract with a known high street or blue chip brand can be seen as a sign of success. Newer and smaller businesses, in particular, may pride themselves on that landmark deal, and not surprisingly. In the normal course of events, business with such a customer may be on a different scale and promise greater longevity than run-of-the-mill accounts.
However, in different trading conditions, the emotional response might mean that routine checks and decisions that are applied to the run-of-the-mill accounts are not applied to their bigger counterparts. This can be a matter of simple complacency as it is harder to envisage a big brand going to the wall. Alternatively, it might be a case of being in denial; after all, if you are in too deep, you might not easily accept the extent of your predicament. When you are highly reliant on such a customer, creating a strategy to trade out of your position without damaging your own business is not straightforward.
Recent examples – Carillion, Maplin, Palmer & Harvey, Toys’R’Us – have all had headline grabbing impacts on customers. What is less well publicised is the sometimes ruinous effects on these businesses’ supply chains. The ripple effect can mean that a business is subject to problems from not only the failing big brand, but also from their multiple suppliers who are swept up in that failure.
Nevertheless, it is not too difficult to guard against this phenomenon. Many of these big brands have demonstrated the same patterns of behaviour on the run-up to failure, and sufficient diligence will provide the early warning signals. Some or all of them have exhibited high gearing - leading to high interest payments, significant levels of group inter-debtedness and a business model that is under pressure.
Regular monitoring of such customers is the answer. This should include an understanding of their balance sheet pressures and those of the parent companies that are supporting them. Equally important though is a willingness to adopt Plan B. This may involve tightening up your credit policy to protect your business, or it may consist of the nuclear option of walking away.
However glamourous the customer, no one is too big to fail. If a business is struggling to stay alive then that will be reflected in how they are paying their bills. And if a customer cannot pay their bills, they are probably not worth having as customer.
Head of Resellers & Partnerships, Graydon UK
Nigel will be speaking at the Dynamic Credit Management events in October.