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Beware extending supplier credit terms

Rok , the building and social housing repairs company was placed into Administration on 8 November, just 10 weeks after Connaught suffered the same demise.

Both of these companies were dependent upon public sector contracts, employed a large workforce and relied upon numerous suppliers and subcontractors, who are likely to feel the knock on effect. According to KPMG, in Connaught’s case, claims from unsecured creditor’s are likely to exceed £46m, with a further 50,000 'lost' invoices still to be considered.

The Administrators have said that there is no single factor responsible for Rok’s failure and that accounting problems and a profit warning earlier in the year also contributed to its problems. Some analysts believe that Rok’s problems were unlikely to be related to its profitability but triggered by cash flow issues.

This would support the current reports appearing of large companies pressurising the supply chain for savings and extended credit terms.

So, how can smaller companies further down the chain protect themselves?

When extended credit terms are requested, at the very least, they should be querying the reasons behind the request and undertake some basic due diligence to check the viability of the contracting business.

It may also be a good time to review the credit management process from beginning to end and ensure the following safeguards are in place:

  • Account opening procedures are effective and provide a view on risk
  • Ensure that there is a process for monitoring accounts once they are set up
  • Make effective use of credit limits
  • Review the collections strategy and credit control process
  • Ensure policy is communicated and being adhered to

If potential problem accounts are highlighted that would have a devastating impact on the future viability of the business then early action should be taken and advice sought.

 

 

Date: 12th November, 2010
Author: Steve Smith

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