According to ASIC’s latest figures, there were 1,318 insolvency appointments in May 2012 – up 9% on May 2011 and closely following the April 2012 figures which in case you didn’t know, were the worst ever on record.

What’s the technical definition of insolvency? Well, quite simply, it is when a company is unable to pay its debt. What usually follows is administration, which in not-so-fancy terms means the running of the business is taken over for the creditors to share the spoils equally.

Now, hot on the heels of the ASIC figures, the latest Dun & Bradstreet Trade Payment Analysis adds a few more brush strokes to this gloomy painting.

The D&B Trade Payment Analysis is a quarterly report which provides sector and state-based analysis of payment trends and their impacts on business. The latest shows a sharp rise in payment terms to 53.2 days for small businesses – up from 51 days three months earlier.

Huh? So what? That means even more cash strapped companies are likely to become insolvent.

What are the experts saying about insolvency?

With all the indicators suggesting life is only going to get tougher for struggling businesses, a leading insolvency expert is urging them to act now if they are to have any chance of avoiding administration. According to the Head of Corporate & Commercial at TurksLegal Pieter Oomens, companies have to act earlier to mitigate risks that could drive them into administration.

Don’t wait until it’s too little, too late.

“You cannot run a business in these volatile conditions without keeping a close eye on all the potential risks that customers pose,” he says.

“There are a host of common-sense risk-mitigation strategies that suppliers can adopt. These range from more involved measures – like registering their interests in the new securities register or heading directly to the customer coalface and having their sales staff gather intelligence as to how the customers are traveling – to adopting simple due diligence steps and broadening their customer base.”

“With the new Personal Property Securities Act (PPSA) now in force, businesses should carefully review their retention of title (ROT) clauses and register their interests in the PPSA register – otherwise their ROT clauses may not be enforceable.  For example, if you have an insolvent customer and you are competing with other creditors for payment, a registered ROT clause will give you priority over an administrator or liquidator and creditors with a general security interest (like a bank holding a charge) – a valuable leg up.   Businesses should also review their terms of trade, which should be adjusted to reflect today’s riskier trading environment”

“Businesses also need to get smarter about dealing with high-risk customers or suppliers.  Sales staff can be a great source of information which can be used to assess the risk profile of customers and suppliers.  Is a customer or supplier letting staff go?  What’s morale like at their office?  Is a supplier aggressively cutting prices to maintain rather than grow market share? Are there worrying changes to the customer’s buying patterns? Very often this intelligence, coupled with profiles developed by your credit department, can tell you in who is ‘high-risk’,” Mr Oomens says.

“In addition, high-risk customers can often be identified by undertaking searches on the public record.  With ASIC company searches, any changes at board level, or registration of new charges against the company, could be a warning sign for potential financial instability.  Similarly, with asset searches of directors, records that show any recent movements of property into the names of spouses, property sales or new mortgages, should ring alarm bells,” he adds.

You heard the man, now more than ever is the time for some well-executed corporate espionage so you better get your James Bond on otherwise it is you who will get ‘neutralised’.

Oomens suggests that businesses can adopt other measures too, including diversifying their client base and obtaining trade credit insurance.

“As business confidence continues to deteriorate, businesses need to focus on avoiding being left out of pocket if their customers go under.  Simple measures adopted now, can ensure survival in the long-term,” Oomens said.

How can you protect your business from insolvency?

Update all your ROT (retention of title) clauses and make sure you register these securities on the new Personal Property Securities Register. Otherwise, they will not be legally enforceable.

Review your terms of trade and ensure they reflect the increased risk during this current volatile period. You cannot afford to leave your doors not bolted in this jungle. So tighten up a bit for your own sake.

Identify high-risk customers through ASIC or other public record searches.  Consider substantial changes in directors or major new charges on the company as ‘warning signs’ for financial instability.

An African proverb goes, “When you see the toad hopping at midday, you know the swamp is on fire”. So, learn who not to play with in the sandpit, lest you end up with scraped knees.

Diversify your client base. You know what they say, do not put all your eggs in one basket.

Obtain trade credit insurance. Don’t be such a miser, insure! It always pays to have a solid plan B to fall back on.

Well there you have it, forewarned is forearmed, so don’t get caught offside… here, you don’t get a scrum, it is always a straight red card!

Image by danielmoyle