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Although many businesses become insolvent every month, it often takes the failure of a household brand to attract public attention, writes Simon Streat of Experian.
Although many businesses become insolvent and cease trading every single month, it often takes the failure of a household brand to emphasis the full extent to which a specific sector may be struggling, writes Simon Streat, managing director of SME at credit reference agency Experian UK&I.
In retail, it took the news of Habitat and Jane Norman entering administration to escalate media and government interest in problems that had been ongoing for many months.
The failure of a large business will always be a significant news story, with the reasons behind the insolvency subject to close scrutiny. Is it indicative of broader challenges within a sector? Was it due to mismanagement or an outdated business model? Has the firm struggled to deal with competition from overseas?
The direct consequences of the failure will also be analysed. How many jobs will be lost? Will its assets or intellectual property be acquired? How will the failure impact on the sales of its biggest rivals?
However, the indirect consequences for other businesses – which could potentially span many different sectors – will not necessarily receive the same level of attention.
All businesses operate within a wider network. The failure of one company may leave many others with unpaid bills or with a significant hole in their revenue streams, a situation that can be extremely risky for growing companies.
Connaught and Woolworths are two great examples of recent high profile failures that had a significant knock-on effect throughout the business world, due to the large number of smaller suppliers both had taken on.
For many, supplying these firms represented a significant chunk of their business, so the loss of one major customer would have had a devastating impact on them. The blow is likely to have been a nasty surprise, too, since it is natural to put faith in a household name.
Growing businesses already face a constant battle to hang on to their customers and ensure they don’t lose them to competitors.
In challenging economic times, the problem is exacerbated and businesses are exposed to higher levels of risk as their customers struggle to stay afloat and pay the bills. It’s not always easy to predict when a customer may go under, yet this can have an immediate impact on a business’s short-term financing.
The impact of a major customer collapse can be immediate, and typically occurs because smaller firms, having secured a major customer, tend to put all of their eggs in one basket and allow the customer to become the major source of revenue.
Of course, you might expect me to say this, but all businesses should take the time to investigate the credit rating and financial performance of customers, and continue to monitor this on an ongoing basis. That way, if a customer shows signs of struggling, the firm can consider its options well in advance – whether it’s a frank discussion with the customer, or if there is real concern, scaling back the level of business conducted with them.
It is also advisable for all businesses find ways of diversifying and growing their customer base, avoiding reliance on a handful of relationships and ensuring that any losses can be more easily absorbed by their business.
This is of course a challenge for many due to the time and resources required to identify new leads. But it does not have to be difficult. Good quality marketing lists can help a business to identify the best prospects.
If companies are proactive in identifying and mitigating potential problems well in advance, then losing a customer – while always painful – need not deliver a knock-out blow.