AR Domino Effect

One trend we are seeing that is steadily expanding is the domino effect that companies going out of business, or declaring bankruptcy, have on the accounts receivables of suppliers and creditors. The last 2 years has been challenging for companies as inflation, lock downs, supply shortages, changing buyer habits, labour shortages and other related factors have created an economy laden with uncertainty. When companies go out of business, they leave a lot of bad debt write offs for active companies to swallow.

To compound matters, when a major industry player goes out of business the financial damage to creditors and suppliers can be substantial. With some companies their slide into insolvency comes with many warning signs. However, we are seeing companies filing for bankruptcy that appeared to be solid and their default came as a complete surprise.

Whenever a company with large substantial payables pulls the pin, many smaller companies are sure to follow. A few years ago, it was easier to spot customers in trouble whereas now more customers are stretching their payments. Severe raw material shortages are now common which results in unpredictable fluctuations in customer?s purchase volumes. Unpredictable purchase fluctuations can also be a sign that a customer has failed to adjust to their customer?s new buying habits.

When it comes to extending large lines of unsecured credit always ask yourself what the financial impact on your company would be should you end up having to write it off. There are many ways to reduce risk when coming to an agreement, such as personal guarantees.

With the current economic environment, it is the companies that adapt or innovate to new market realities that will survive and prosper. For example: Some restauranters recognized a major increase in deliveries and the emergence of the home meal delivery market. They now have a steady revenue stream that offset their losses from the lock downs and will continue to grow as the home meal delivery industry matures. Another example is a landscape company that experienced a major drop in business during the mandates. Having the right equipment, they started up a home Christmas light service. Basically, a home or building owner can have their house lit up for the Christmas season and they take care of all the details. They are now enjoying their new revenue stream, which is sure to grow every year.

In order to protect yourself during these turbulent times it is essential to keep a tight rein on your accounts receivable. These days you can do everything right and still get burned. We have been operating for over 25 years and are seeing trends we have never seen before. It is hard to predict where the economy is going, as we are in uncharted waters.