We know that margins are currently slim. Consumers are tightening their belts in response to interest rate hikes and inflated prices on essential goods, including groceries and utilities. Businesses in industries across the board are also dealing with challenges such as price rises, increased labour costs and higher interest rates, which is elevating their levels of credit risk.

The April 2024 Business Risk Index data from CreditorWatch revealed, unsettlingly, that the rate of external administrations in now well above pre-COVID levels and B2B payment defaults are at record highs. However, this is not a doomsday message. Businesses still have time to implement proper risk management, secure their cash flow and perform strongly across the remainder of 2024.

Let’s explore some useful tactics to help you improve your credit risk management and survive the slump.

#1 Really know who you’re trading with

You might think that you know a trading partner well. You’ve had high-level discussions, long email chains, and enjoyed a reliable and prosperous business relationship over many years. They would never default on you, would they? Don’t be so sure. Do you really know their credit history?

You should assess every new customer and trading partner objectively during onboarding to protect your business from the perils of bad debtors, leveraging analysis of high-quality data. Credit reports from a credit reporting bureau are the only way you can perform proper customer due diligence on your customers. Don’t rely on anecdotes, previous trading behaviour, third-party endorsements, reviews or otherwise. Not when the fate of your business hangs in the balance. You must check the creditworthiness of every trading partner, whether old or new, especially with defaults continuing to rise.

A business credit report takes the guesswork out of knowing which new customers you can confidently extend terms to and which to be wary of.

There is nowhere high-risk customers can hide when you leverage company credit reporting. Your company need not take them at their word – you’ll know if they’ve previously demonstrated malpractice or adverse cross-directorships. You’ll see if they have a habit of defaulting on credit obligations. For these reasons, credit reporting should form a central tenet of your due diligence process.

#2 Don’t forget to monitor

It can’t be a one-and-done exercise, either. A creditworthy business now does not mean a creditworthy business into the future. The risk profile of a business can literally change overnight.

This is where monitoring of your customers is crucial. CreditorWatch subscribers are able set up watch lists so they are sent automatic email alerts if any changes to their customers’ details occur that could adversely affect them.

In a turbulent corporate environment, knowledge is power. If you can highlight the increased credit risk of a trading partner before it’s too late, then there are actions you can take to protect cash flow before the situation becomes terminal.

#3 Manage trading relationships diligently

Business credit checks and monitoring and alerts are only two elements of a multi-layered against late payments and bad debt. Conduct regular reviews of the operational efficiency of your trading procedures, as there are always improvements to find.

You may want to mitigate risk by putting consistently late-paying and high-risk customers on shorter payment terms or cash-on-delivery (COD).

Tools such as Debtor Management can help you prioritise collections by sorting outstanding payments by amount overdue, risk level, days overdue or account name.

#4 Get on top of collections

How well do you follow up on money owed? An email here or a voicemail to an absentee client there won’t get the job done. Give a debtor an inch, and they may well take a mile. There needs to be structure and clarity – this is the amount owed, this date is when it needs paying, and this is what will happen if we don’t receive payment. It is simple, clear and effective messaging that cannot be mistaken for anything else by delinquent trading partners.

Just as the message needs to be clear, so too does the communication plan. Do you have 30-, 60- and 90-day reminder notices, all written to the necessary standard? Which system are you using to automate sending these notices so you don’t fall behind?

Every piece of detail makes a difference, and fewer businesses are paying on time now than the same time last year. You need to prioritise collections to safeguard cash flow and the most efficient way to do that is with automated collections.

#5 One step at a time

The trading environment for Australian businesses is becoming tougher by the day and it will be some time yet before consumer confidence improves.

Now is the moment to pay attention to the finer points of detail, to review each step of the cash flow process to identify high-risk customers, both during onboarding and on an ongoing basis.

Using the right mixture of tactics and strategy, you will greatly improve your chances of avoiding late payments, safeguarding your cash flow and trading confidently throughout the remainder of 2024.

Get in touch

For more information on how to safeguard your cash flow, contact our team today.