Prepare your business for 2013

Money locked away behind combination lock

Despite continued global economic volatility and a slowdown in China, the Australian economy is performing relatively well compared to other developed nations.

Australia is forecast to record GDP growth of 2.9 percent for the year, falling to 2.1 percent in 2013. If achieved, it will be an impressive result at a time when advanced economies are expected to record growth of 1.3 and 1.7 percent respectively this year and next. Yet despite our relative strength, there is a range of complexities and challenges on the horizon for the business community.

Business-to-business payment data is highlighting those challenges, with cash flow pressures remaining a significant issue. D&B’s analysis of the more than eight million trade payment references on the Dun & Bradstreet database shows that while payment days for the September quarter are flat year-on-year, they are yet to return to pre-GFC levels.

Lagging payments can be a key driver of business failures, as an inability to effectively manage incomings and outgoings can force businesses into administration. The primary challenge in this mix is the incomings, and the latest business-to-business payment data shows that this pressure isn’t going away. Firms are being forced to wait more than 22 days beyond standard terms to receive payment for their goods or services. In fact, depending on the sector in which a firm’s customers operate, they could be waiting as long as 56 days.

From these figures it is clear that in 2013, businesses will require a diligent focus on the fundamentals if they are to deliver on the growth expectations outlined earlier. But what exactly does that mean?

Essentially, it means Australian businesses need to focus on four key areas:

1.     Intelligent customer acquisition
This brings together the expertise of the sales and credit departments to on-board profitable customers, which includes ensuring that legal details for every business to which credit is extended are appropriately captured and verified. In particular, the exact name and trading style of the firm should be verified.

This consequently minimises disputes and exposure to fraud. Independent credit evaluation offers an unbiased analysis of a firm’s credit history, including its payment record and risk scores. Checks should be conducted on the business itself and similarly upon any directors or owners.

2.     Outsource collections to maintain client relations
Understanding when to seek outsourced recovery services is critical to avoiding bad debt write-off. Furthermore, firms intent on maintaining productive client relationships will often outsource to ensure the client relationship is separated from the collections process.

3.     Meticulous risk assessment
Continual, routine portfolio health checks on your customer and supplier base are recommended and should capture all active, linked entities on the corporate family tree. This can help to negate a situation where a business is not forewarned of cash flow distress following a parent or sibling company insolvency.

4.     Daily scrutiny of company cash flow

The first three factors ultimately feed into this fourth. If the ball drops on any one factor, a business runs the risk of entering negative cash flow territory. This leaves businesses increasingly reliant on external sources of funding, which at times can be both difficult to come by and expensive.

We don’t know how bad the Euro-zone crisis could get, nor do we know just how serious the contagion effects could be across the globe. We do know that China, our most important trading partner and the world’s second largest economy, is slowing more rapidly than initially anticipated and, if this trend continues, it is likely to create heightened pressure locally.

While there is no doubt that Australia is faring well compared to other developed nations, businesses must move forward with caution and with a clear focus on tight management of those things that they can control, ensuring they are in the  best possible position in 2013 to sustain any shockwaves that may come their way.

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