Survive & Thrive

As key indicators show that the start of a recovery, however fragile, is now underway, we take a look at what key changes have taken place in business practices as a direct result of the global downturn and how companies can use their experience in adapting from a focus on ‘surviving’ to ‘thriving’.

As the wide reaching effects of global recession deepened, there were no guarantees that any business would survive unscathed. The sweeping pace and severity of change placed unprecedented levels of pressure on all businesses to adapt to the new conditions or fail. Unfortunately for many, they couldn’t change quickly enough and the cumulative effects of poor credit availability, market decline and increasing debt burdens, among other factors, conspired to create the largest and sustained rise in insolvencies, experienced for decades.

Even for those businesses that have made it through to 2010, the pressure is still on to ensure they can navigate the unpredictable and volatile conditions that still prevail in most countries, even though, statistically at least, it is evident that many wont make it though the next 12 months. Few, if any, economic forecasters are making any long-term predictions about what the future will hold and when the global economy will recover to reach pre-crisis levels of confidence and commerce. However, it is becoming increasingly apparent that the experiences of the past two years have probably changed the face of good business practice permanently and when things do return to ‘normal’ it’s unlikely to resemble the ‘normal’ we knew before.

Like every business, we have had to adapt to the change also, yet as the nature of our business demands that we have close relationships with our customers, as well as closely monitoring a range of factors that can influence financial markets, business sector performance and risk, it is possible for us to identify where positive changes in business practice have taken place and been adopted in the global business community.

Of these, we’ve identified five of the most important improvements in business practice that have been adopted as standard procedures by many recession ‘survivors’, which are listed below.

By launching new products or moving into new geographical areas, businesses have sought to combat shrinking markets and low demand for existing products. Consequently, companies were exposed to increased risk as they often had very little hard information on their new customers’ trading performance and background. Historically, annually filed reports and accounts provided satisfactory information on which to base a decision, but with the rapid change caused by the recession, this is no longer sufficient. 

To help overcome this, businesses have increasingly sought additional data on their trading partners, such as checks on the reporting section of their website along with their public information, half yearly and quarterly results together with shareholder information, if they’re a listed company. Alongside this, our advice is to supplement your knowledge of your trading partner wherever possible – subscribe to news feeds, monitor trading performance and information from relevant financial markets and take note of the regular updates from Atradius.

In early 2009, we forecast that the provision of up-to-date 'live' data was going become the norm in establishing any kind of business deal. To reflect the increased uncertainty, volatility and risks, the credit insurance industry began requesting much more up to date management accounts from customers’ buyers to enable credit limit decisions to be based on current financial data rather than out-of-date annual reports. As predicted, this practice has become increasingly regarded as the ‘business norm’ and has also prompted many organisations to re-evaluate how they develop business partnerships.

Smarter businesses are already producing solid monthly management accounts and requesting this information from their trading partners. This new discipline has not only helped identify and secure new business opportunities, but also provide an additional ‘early warning’ to potential risks. It is said that ‘information is power’ and that has never been truer than with the discipline of monthly reporting.

Cash is the life-blood of business, so when the arteries were cut and liquidity dried up, even businesses with full order books failed, as they were unable to maintain a viable trading position without a sustainable cash flow. The survivors have been those who have been rigorous in their approach to credit management, cash flow and assets. By taking care of the basics to ensure sufficient cash is available and contingency finance plans are in place, then in general, the rest will take care of itself.  Of vital importance is the need to maintain an open ongoing dialogue with trading partners about acceptable and unacceptable terms as it’s better to establish a mutually agreed payment plan over an extended period than to risk non-payment due to the failure of one or both businesses. 

Subtle shifts in payment behaviour can indicate difficult times ahead and the increased payment default risk from customers. These are the indicators that ‘survivor’ businesses have been monitoring:

• Changes in trading patterns – are they ordering less or erratically?
• Changes in people – old contacts disappear
• Complaints – on the increase for no apparent reason – are they stalling a payment they can’t afford?
• Deteriorating payment patterns – terms, regularity
• Credit lines are exceeded – are your customers asking for extensions?
• Customers changing banks
• Industry decline – keep an eye on the latest business news
• Invisible man syndrome – is your regular contact suddenly “in meetings” or “away” every time you call?
• Debt alert – a customer hit by bad debts can be the start of a domino effect

In general, very few risks involve throwing caution to the wind as most are rational decisions based o a range of information. Risk taking is an inherent part of business life but blatant risks are more likely to take place at moments of panic, as a last resort or when insufficient information has been sought and the management team is under-prepared to make a rational informed decision.

It’s easy to forget that some of the most significant business successes have been a by-product of risk-taking. Intelligent risks are those where the potential downside is limited, but the potential upside is virtually unlimited.  Those are the risks businesses should embrace – so ensure your contingency planning is in place and robust, source good partners to help with your risk management, and make informed decisions based on robust data. Manage the risks, don’t let them manage you.