Risk and Reward

 
There is an accepted wisdom in business that it is only by taking a considered risk that a company will grow and discover opportunities. Even the UK’s largest organisations such as Tesco and BT regularly assess risks for their business—from the relatively small, such as hiring new staff in a particular department, to larger strategic decisions such as opening in new territories or developing fresh products.

Seizing the day

Inspirational business leaders such as Virgin’s Sir Richard Branson and Ryanair’s Michael O’Leary have built large organisations by taking risks, while smaller, entrepreneurial companies take chances daily in terms of the orders they promise to fulfil and the suppliers with which they deal. But times are tough. The economy has contracted and risks, no matter how they’re measured, have an added element of danger.

John Price, head of direct sales at Atradius, reckons the result has been a general trend to remove all unnecessary risk. “As a society we are very risk-averse at the moment,” he says. “The desire to mitigate risk is stronger now than it has ever been. People want to be insulated and that pervades to commerce. Risk managers are becoming more prevalent in business and there are more controls to mitigate risk—not just credit risk.”

But business is all about taking chances. According to a survey on decision-making carried out by the Institute of Directors and Atradius, the desire among business owners to expand their companies is underpinned by a tacit understanding that it involves risk.

Some 70 per cent of respondents said the main objective was to grow their business. At the same time more than half (52 per cent) of those polled, the majority of whom were entrepreneurs and board directors, indicated that they were natural risk-takers. Some 42 per cent agreed they were prepared to take big risks to secure large rewards, while just 16 per cent said they would best describe their approach as “shoot first, ask questions later”. The findings suggest that a balanced attitude to risk exists among decision makers in business. More than half of those who responded to the IoD/Atradius survey said it was important to consider worst-case scenarios when making business decisions and that keeping existing customers happy was even more important than acquiring new ones.

Price says it is important to encourage businesses to take measured risk—after all, those who play things safe may be unlikely to suffer, but they are also less likely to thrive or to succeed and, in turn, generate growth in the economy and create jobs.

Putting in place sound credit management, for example researching both existing suppliers and new providers on an ongoing basis, is a sensible strategy in any market, but especially when the economy is faltering. “There is a new reality—just because something worked in the past doesn’t mean it will work today,” says Price. “You have to recognise that people you knew and have trusted for years may not be so bright these days.” Even High Street stalwarts are vulnerable in the current environment. Just look at Woolworths, which was forced into administration last year.

“Businesses that prosper have good management. Look at the top football teams—they all have good managers. It is the same for any business that flourishes. And good credit management is part of good management,” adds Price.

Protect and prosper

One way of putting in place good credit management is to use credit insurance to assess risks. Insurers give a measured and considered view of the risk that a company is about to take. “You have to look at the real value of a business and you have to look beyond the headline numbers,” explains Price. “You have to understand what market they are in and who they are selling to and who else is supplying them. It is about taking a more rigorous approach.”

There are many advantages of credit insurance, which protects suppliers against losses if their customers fail to pay the bills. For example, insurance can give a business a stronger balance sheet and—because the risk of bad debts is reduced—it can make finance through traditional overdrafts, factoring, or invoice discounting more readily available. It also enables companies to gain a far better grip on the risks in the economy than they might acquire elsewhere. For example, credit insurers do analysis on the back of figures that may show problems that are not apparent from raw data. The rigour that credit insurers use will also highlight areas such as the value of sales that have to be achieved to replace a bad debt. “In the market we are in now, unless you are getting cash in advance you need to find a better way than taking, rating and crossing your fingers,” Price argues. He believes companies need to insulate risk. “In a good market it enables you to grow your business with some certainty. In a bad market it might enable you to keep your business,” he says.

 

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Terms And Conditions –Top Tips

1 Protection in the small print. Your terms and conditions help provide protection to your business

when you trade. Always ensure they are up to date.

2 Stop the RoT. Always include a “Retention of Title” clause as they help simplify recovery of goods in the event of non payment or buyer insolvency.

3 The devil’s in the detail. Avoid “purchase agreements” where the buyer sets out its own purchasing terms. These can over-ride your T&Cs.

4 Pre-emptive strike. If the first time the buyer sees your T&Cs is on your invoice, it’s too late. Ensure the buyer has seen them before you send the goods and they are in the contract for supply.

5 Lost in translation. When trading overseas, ensure your T&Cs reflect legal practices for credit terms present in the buyer’s country as well as your own.

6 Credit policy policing. Establish a clear and robust credit policy, which is applied in line with your T&Cs.

7 Singing from the same hymn sheet. Ensure your sales team is aware of the T&Cs.

8 Credit where credit’s due. Always ensure your buyers are credit checked before trading.

9 Legal eagles. Your T&Cs should be verified or prepared by legal professionals. Don’t do it yourself.

10 Sign on the… Always obtain a signature from your buyers on any contract incorporating your T&Cs.

Further Reading  Click here