Successful wholesalers face many challenges, but one key problem is managing bad debt. Because they are usually paid after they’ve delivered products, wholesalers are particularly vulnerable to the risk of bad debt – a risk that needs to be managed.
When clients don’t pay on time, because of negligence or financial problems, wholesalers may find themselves forced to do significantly more business to cope with small margins and make up for the losses. This is a particular problem in sectors with expensive goods where bad debts can be more damaging.
The best way to deal with debt is to prevent it in the first place. In this article, we take a look at the risk of debt that wholesalers face and discover the best strategies to deal with it before it becomes a problem.
The risk of debt affects both small wholesalers and big players. Wholesalers selling into struggling sectors are exposed to greater risks.
The recent UK restaurant insolvencies are an unfortunate example. In 2018, restaurant insolvencies in the UK jumped by a quarter compared to the previous year. A total of 1,219 restaurants became insolvent, including fast-food chains and luxury restaurants.
Blamed on diminished consumer spending and sprawling chains that operate in too many locations, these insolvencies have not been surprising considering the very tight profit margins that many restaurants have been operating on for years.
We took a look at the casual dining sector in a recent article, and this group of restaurants, which makes up a large portion of the market, is struggling considerably. Over 35% of these businesses have a negative net worth, and 60% are undercapitalised.
For wholesalers selling to restaurants, the risks continue to be high, but most at risk are wholesalers with a small or less diversified customer base, such as those catering only to restaurants in a particular area. This risk increases further for wholesalers that sell more expensive products: their debt can be significantly higher and, in many cases, more difficult to collect.
Bad debt for a single client – the result, for example, of a restaurant becoming insolvent – can have a destabilising effect on a small local wholesale business and may also affect larger wholesales as well. As clients with bad debt add up, the situation can become critical.
Bad debt is a constant risk that adverse market conditions only increase. Having a system in place for proactively managing the risk of debt is the only effective way to prevent debt before it becomes a problem. Many wholesalers don’t have a system in place for ascertaining risks in a systematic and effective way.
While a serious issue, bad debt is manageable and doesn’t have to affect the financial stability of a wholesaler. Using the right strategies, a wholesaler can mitigate the risk of bad debt and establish better relations with its clients. The following strategies enable you to manage risks effectively in the long term:
Ensure these terms are clear and that every client understands them. Have a clear policy that defines when credit can be extended. Balance the advantage of longer credit terms with the risks these involve to make sure all clients pay on time. It’s easy to get caught out with payment terms like ‘payment at month end’ or ‘month or invoice plus 30 or 60 days’ as these terms can extend the time until cash is received considerably and are hard to change once set.
Accurate data is crucial to enforcing a credit control policy and making the right decisions at the right time. To protect your wholesale business, you need to apply your credit control policy both proactively and reactively.
o Proactive approach – This involves flagging up problems with clients before they become an issue. A detailed financial health rating of a business will help to assess the viability of clients and flags those experiencing financial problems.
o Reactive approach – It’s important to chase payments effectively. Having a watch list, sending reminders and enforcing sanctions for late payments helps. Also important is to have a conversation with debtors to understand their circumstances and work out a solution.
Raise prices or decrease costs to mitigate the risks with a client, especially when you see a red flag. Also, consider credit insurance, which is especially important if you work with a small group of clients. Note that credit insurers will take into account your customers’ health rating.
Use up-to-date business intelligence to monitor the financial health of current and prospective clients. Insight into the financial performance of your clients can help consolidate your decisions.
With Red Flag Alert monitoring, wholesale clients takes on a new dimension and yields valuable insights. Red Flag Alert’s predictive detailed rating system integrates into your CRM and makes it easy for you to check the financial health of every UK business, whether it is a current or prospective client.
Red Flag Alert uses an advanced monitoring system that receives over 50,000 updates every day. Financial health ratings for every business are validated and fine-tuned by a set of experienced human analysts to ensure accuracy.
Red Flag Alert brings wholesale businesses the following:
Learn more about how Red Flag Alert can reduce risks and increase margins for your wholesale business, click here for a free trial.