Avoiding insolvency – are your suppliers or customers dragging you down?

4 October, 2016

invoicesA sizeable proportion of UK corporate insolvencies in the past year were caused by late payments by customers or the insolvency of a supplier/customer. Although these may seem like factors outside your control, there are steps you can take to guard against the risk of being dragged under with them.

New research by the insolvency and restructuring trade body R3 has found that 23% of insolvencies in the past year were primarily or mainly caused by the late payment of goods and services. Another 20% of insolvencies were due to the failure of a key supplier or customer.

High customer concentration (over reliance on a small number of customers) is risky because you are putting all your eggs in one basket. You can find yourself in the undesirable position where the customer dictates the terms of the relationship, exerting downward pricing pressure and wielding negotiating leverage over contract terms.  If that customer (or indeed supplier) then goes under, this can have a devastating effect on revenue, profit and cash flow, and can ultimately destroy your business.  Customer diversification – spreading the risk amongst a larger number of small customers (or suppliers) – will reduce the impact that the loss of any one customer has on your business.

Getting paid on time is a recurring issue that many businesses accept as par for the course. Being lenient over your stated payment terms, however, can lead customers to push credit days further and further until they begin to seriously impact on your cash flow.  To help encourage customers to pay promptly, you could consider using efficient credit control procedures to chase overdue payments, or offer discounts to customers for early payment.

To protect yourself against customers who go bust owing you money for goods, you can include an effective retention of title clause in your terms and conditions so that you can retrieve goods from an insolvent customer if they have not been paid for.

We can conduct a free, no obligation review of your terms and conditions to identify any areas of risk. For this, or any insolvency-related advice please email me at joanna.ford@crippspg.co.uk.