The recent manufacturing boom has allowed British businesses to grow, with a favourable export market giving many a chance to launch onto the international platform. However, for a number of SMEs, their growth is being hindered by their inability to accurately judge a customer’s financial position.
According to a report by data company Experian, 76 per cent of SMEs have lost money when a purchaser’s firm collapsed over the past five years. This amounts to a total of £10,000 per company lost since 2008 – money desperately needed to establish a secure financial base in the current economic climate.
Experian managing director, Ade Potts, believes that SMEs must regularly check the credit ratings of their customers and suppliers in order to cushion themselves from financial issues affecting these firms.
He says; “Although over half of SME owners said that they did check their customers’ and suppliers’ credit ratings once a year, this is not often enough to identify potential problems.
“The rate of deterioration is far quicker for companies in today’s climate, so the sooner you can spot the signs of financial stress, the sooner you can react.”
Worryingly, the report also revealed that 34 per cent of respondents only began to monitor the credit reports of suppliers after a financial toll had been taken. Although many of the larger firms in the UK, such as Jaguar Land Rover for example, set up programmes to assist their smaller suppliers financially during the recession, this is not always possible for an SME which has financial concerns of its own – should their main supplier go bust, this can often lead to a “domino effect” in which their own business is placed at risk of failure.
Small firms suffered particularly during the recession, as many did not have the capital behind them to compensate for a sudden dropped order or failed payment. KPMG partner Richard Fleming advises all small firms to protect themselves against customer insolvency by taking out trade-covered insurance in order to remain financially secure.
He says; “SMEs have a big dependency on a small number of customers.
“Unlike large companies, they don’t have the balance sheet or reserves to withstand the shock.
“SMEs find it hard to say no but, coming out of recession, cannot necessarily deal with the demand for big orders which the business often cannot finance.”
There are several ways, along with trade insurance, in which businesses can minimise the risk of customer insolvency. The most effective method is to build and maintain a close working relationship with customers and suppliers, so the early warning signs of financial hardship are easy to spot.
However, it is also always advised that businesses make building up capital their major concern. With a solid financial base, failed payments are certainly a nuisance – but, fortunately, do not necessarily predicate the failure of an SME.
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