Payment Terms

New Year Credit Considerations | New Zealand business magazine

Keith McLaughlin discusses the credit lessons Kiwi businesses should learn from the past few years – and what they should do to manage their credit scores in the future.

After nearly two years of recurring restrictions due to the pandemic, business owners need as much certainty as possible. A crucial part of business sustainability is protecting cash flow and ensuring the financial reliability of customers and suppliers.

It was a difficult time for businesses in all sectors and regions of Aotearoa. As we begin to contemplate Omicron’s promising slowdown and a return to relative normality, it will be necessary to step back and review what the future holds.

With the new fiscal year fast approaching, now is the time for companies to do just that – take stock of their operations and audit their customers and the companies they work with to ensure that they work in the most cost effective manner.

Our latest Credit Indicators report showed a decline in corporate credit ratings across all sectors in 2021, underscoring the importance of protecting your own cash flow. One way to reduce your risk is to limit your exposure to companies with low credit ratings (see chart below).

What this means is twofold. First, maintaining a strong credit rating – both personally and in business – is crucial when it comes to borrowing in the future. It acts as a barometer of the reliability of you and your business in making full and timely repayments.

For a business, this is likely to impact how suppliers dictate their payment terms with you, not to mention better access to credit and capital from lenders for business improvement or expansion. ‘business.

In the same way, understanding the caliber of your customers and suppliers helps mitigate potential bad results that could have been avoided.

For example, businesses with high credit ratings are 15 times more likely to pay their bills on time than businesses with low credit ratings.

This makes taking inventory of suppliers, customers and other businesses you regularly work with an important part of predicting future cash flow – you want to make sure you’re not putting yourself under undue financial stress working with potentially unreliable parts.

The end of the fiscal year is a good time to reassess your current business relationships, identify any lingering issues you are having with late payments, and make decisions on how to change those results for the coming year.

How can you manage your own credit rating?

The number one thing you can do to maintain or improve your business credit rating is to make sure you pay your bills on time.

Having good accounting and compliance practices as part of your bookkeeping will go a long way to making this as painless as possible.

However, if you’re having trouble paying your bills, it’s important to seek help. Getting your obligations under control and working out a repayment system, for example, will be better for your credit score in the long run.

Of course, adhering to your own repayment terms is often intrinsically linked to your cash flow and the reliability of your customers in their repayments.

How can you assess the credit ratings of other companies?

Before you begin a relationship with a new customer or supplier, knowing their credit score will help you decide how you will approach credit risk management.

You can do this by ordering a credit report from a credit bureau like Centrix, which can give your business an overview of credit rating, defaults, insolvencies, and a general picture of the health of your business. his credit.

If your customer, potential customer or supplier has a low credit rating, it means they are at a higher risk of future default.

Of course, you don’t need to turn down business from those with lower credit scores. By structuring your terms and conditions differently and carefully, you can protect yourself.

For example, limiting the amount of credit you extend to them by setting shorter repayment windows will protect your business without being overpaid.

With the challenges we’ve all faced over the past few years, it’s clear that many businesses are struggling to make ends meet.

Now is the time to take stock of your existing customer and supplier base and, for those who consistently default on their repayment obligations, investigate their credit score to understand why.

Armed with this information, you can make informed decisions about your supply chain and cash flow reliability to ensure you and your business are ready for the new fiscal year.

Keith McLaughlin (pictured above) is CEO of Centrix.