The Olympics of credit management
This article first appeared in MG Business in September 2008
In normal times, by my rule of thumb, the average trade creditor gets about one bad debt for every 200 customers on credit terms for an average write-off of about 0.5% of credit revenue. Some have many fewer than that; some have more but allow for the higher risk in their pricing. In any case, in normal times, it’s not life or death. In a recession, arrears and bad debts are still not life or death (and we should bear that in mind) but it’s a great deal more serious than in good times. Many more businesses are going to fail.
Neil Bhikharidis from Aon Trade Credit Insurance says that there are many more companies paying off debt under payment arrangements. On average the companies he deals with are reporting about a third more overdue debt as compared to this time last year, and this despite the fact that sales are generally down and everyone is paying much closer attention to credit management.
A recession is a bit like the Olympics for credit staff. They have years and years of participating in lesser events; then along comes a recession and they know it’s the most important event they’ll ever “compete” in, the one that everyone will remember, and it’s much harder than any other situation they’ve been in. The pressure is on to perform.
“In a situation where turnover is down, and the light at the end of the tunnel is a long way off, companies which fail to reduce their spending and fail to get their money in will find that they are in deep trouble,” says Bhikharidis.
Unlike the Olympics, a recession doesn’t come around every four years, but when one does arrive, you need to be peaking, at the very top of your game. Credit staff haven’t had a recession since the early 1990s. Anyone with 10 years in credit management probably considers themselves something of a veteran in credit industry terms, so it’s obvious that many credit staff will never have experienced a recession from the sharp end. And of course, it’s already clear that this recession is going to be much worse than the last one.
The other day I sat in on one of our seminars for trade credit staff (all dealing with business customers, rather than consumers) and chatted with the attendees. One of the things that struck me was how focussed they were. This is something we’ve seen with our other credit seminars this year, too. No-one is attending credit management seminars because the boss thought they deserved a day off, or because there was some spare money in the training budget. They’re all there because they really want to learn how to do their jobs better. Suddenly the pressure is on credit staff to perform.
The people I talked to in the seminar were very aware of this pressure. Some of them were working longer hours; some of them were being joined by new staff; some of them were new to credit management themselves. They were all seeing the signs of more businesses in trouble and having to work harder to collect overdue accounts.
So in the space I have left in this article, what law should trade credit staff really be thinking about at the moment? Well, there is a great deal of law that is important to credit management, but here are three points to think about.
On 1 May 2002, the Personal Property Securities Act 1999 (PPSA) came into force in New Zealand. This is the law the covers the taking of security over almost anything other than land. If you sell goods on credit, on the understanding that you have the right to take them back if they are not paid for, you need to understand the PPSA.
A large and surprising number of creditors still don’t understand it. Whether you have 100 customers or tens of thousands of customers, if you haven’t registered the security interests which are in your contracts, (and there are many credit managers who still haven’t) you’re probably not on top of your game yet, and you should be talking to an expert about what you can do to remedy the situation (and quickly).
In many ways the PPSA is really tricky law, though the main principle is very simple – if you want to retain security over things you supply, you need to register on the Personal Property Securities Register. Registration costs $3 and takes two minutes, assuming you have a contract which allows you to take security. If your customer goes into receivership with $50,000 worth of your stock sitting in their warehouse, then that $3 registration should save you $50,000.
A second legal issue that will be relevant to many creditors is voidable transactions. If your customer pays off their debts to you at $10,000 a month for five months, then goes into liquidation a week later, the likelihood is that you will have to pay that $50,000 back. There is new law covering this issue, and credit staff need to understand it, as I’ve previously explained in this magazine.
The third legal issue that will be relevant to many creditors relates to personal guarantees from directors and shareholders. Your company may not ever take guarantees, but imagine a situation where a customer says, “my company is in trouble; can I pay it off over the next six months while you continue to supply me?”
Isn’t this a good time to start taking guarantees, along with anything else that gives you a better chance of being paid if your customer goes bust? Like Olympic athletes, you need to use every legal opportunity to get an edge.
Get it wrong and you and your fellow employees may be out of a job.
This article first appeared in MG Business in September 2008
Peter Hattaway – www.hattaways.com – is a director of Hattaways, specialists in credit management training and consulting. This article is not legal advice.