Broken piggy bank with euro coins on the shelf.

Every year, January sees a spike in the number of retail suppliers that become insolvent. This is caused by businesses failing to protect themselves against late- and non-payment by retailers facing a decline in consumer demand after Christmas. This pressure on the retail industry highlights the need for businesses to protect themselves against insolvency.

The end of year can be a challenging time for retailers. While it is considered the most profitable period, if targets aren’t reached businesses can be left in a very difficult position for the new year. Retailers often need to achieve an exceptional seasonal sales period to avoid financial difficulty, which is why failures often occur in the first quarter. In this sector, it’s not abnormal to be loss-making during Q1. With the first payment of quarterly rent due in January, it can be difficult for retailers to survive after a poor Christmas sales period.

Suppliers selling to retailers on credit terms risk not being paid for their goods in a timely fashion, or at all. Without a credit insurance policy to protect them from bad debts, the supplier may fall into insolvency along with the retailer.

As retailers approach the busy, end-of-year period, they should consider reviewing labour budgets and sales forecasts in the lead up to Christmas before rushing to increase stock and staffing levels.

For example, with the continuing decline in consumer confidence, retailers should question whether similar levels of stock will be needed as in previous years. Having too little stock results in loss of sales, but overstocking incurs costs and necessitates bigger discounts post-Christmas.

The retail industry is under enough pressure already. Retail suppliers shouldn’t have to be concerned about having sufficient cash flow over the end-of-year period. Instead, they should get ahead of the curve so they can avoid going out of business due to bad debt.

High-profile retail collapses like Laura Ashley and Dick Smith highlight how quickly retailers can become insolvent and Christmas is a vulnerable time for this to happen. Experts have warned that these types of collapses may be the start of a wider industry slowdown. The end of the resources boom, coupled with increased competition from overseas and online, is making it difficult for retailers to maintain a strong trading performance.

When consumers slow down on spending, it’s a sign the economy is uncertain. Retailers are particularly vulnerable because they’re in a cost-intensive business. They need to carry stock, maintain premises and pay labour costs, among other overheads, so protecting cash flow is essential. If consumers spend less this Christmas, as is expected, retailers will feel the effects.

Inventory is often to blame for slow cash flow in retail businesses. As much as three-quarters of a retailer’s assets are tied up in inventory, so finding a more efficient way to manage inventory can be an effective way to reduce costs and free up cash flow. Retailers can also face cash flow issues as a result of customers not paying bills on time.

When retailers pay for inventory up front, they can be left to chase customers who don’t pay on time and can end up significantly out of pocket. Similarly, if suppliers work with retailers who don’t pay for their goods in a timely fashion, they can end up going down with the retailer through bad debts.

Buyers who don’t pay at the agreed time, or are unable to pay at all, can significantly damage the business’s cash flow, crippling the business and damaging its relationships with other trading partners. Having a credit insurance policy lets suppliers trade confidently, even when consumer demand falls and retailers struggle to meet payments, as it reduces suppliers’ exposure to risk and can greatly decrease uncollectible account expenses.

Credit insurance covers losses that aren’t the customer’s fault but result in non-payment. This can deliver a number of benefits that can help retailers and their suppliers continue trading confidently. For example, it reduces the business’ exposure to risk and decreases uncollectible account expenses, letting the business keep its own payment schedule on track. It can also lower the cost of borrowing, letting retailers widen their scope of business and improve cash flow for peace of mind.

Having credit insurance can also help business owners identify at-risk buyers, so they can instead focus their energies and the sales force on their most valuable customers. Insured companies have access to up-to-date information on their trading partners and tend to practise safer trade through better-informed, strategic trading decisions.

It’s possible that tough times are ahead for retailers and their suppliers this January. Businesses should get ahead of the curve to avoid going out of business due to bad debt. Safeguarding their cash flow means retailers can innovate to stay ahead of the competition even as the market tightens.

Mark Hoppe is the managing director, ANZ, of Atradius.


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