Tony Pullen, managing director of Experian's business information division, examines what IT businesses should be doing to manage risk.
So far this year more than 590 firms in the IT sector have failed, and 60 businesses failed in November alone. This is a 13% increase on the number of failures in October.
That said, these figures compare favourably with the UK as a whole, which has seen more than 22,000 insolvencies to date. This underlines the need for those in the IT sector to be vigilant about who they do business with.
More than ever, good commercial practice dictates that organisations choose their business customers carefully based on insights into their risk profile, how promptly they pay and, with small businesses, by gaining a better understanding of the people behind the business.
The best approach is for IT companies to continually monitor business customers' and suppliers' commercial integrity against financial performance, credit risk information and payment behaviours.
That means checking all new customers against business credit reports and new business prospects from marketing databases against pre-screened credit risk data sets. This will help ensure that credit is not extended to high-risk businesses and you don't waste resources pursuing customers who will later be declined credit.
It is becoming increasingly important to check the payment trends of potential and existing customers before extending them credit. Risk management tools here include The Risk Report and Ledger360. Bills being settled later and later each month is a clear indicator of a deteriorating cash position within a business. Experian's payment performance information, derived from a database that tracks 20 million transactions per month - the equivalent of £12bn of transactions, helps to identify good and poor payment trends.
As well as being aware of poor payers, to avoid becoming a late payment casualty, IT businesses need to address quickly any issues with otherwise creditworthy and sound businesses that simply have a culture of late payment. That means identifying slow payers, taking steps to encourage faster payment, such as moving customers on to direct payment methods, or developing more creative collection strategies.
Businesses should also be looking out for other adverse indicators within business credit reports, such as late filing of annual returns and financial accounts and the incidence and number of County Court Judgements against a business. Our statistical analysis shows that businesses with poor trading results tend to delay submitting their accounts as long as possible, hence late filing of accounts is often a sign of bad news to come.
The analysis also indicates that late filing of the Annual Return, which is a statutorily required list of directors and shareholders, is a characteristic of failing companies. At the very least, late filing of accounts and returns can indicate a level of management inefficiency within the business. Meanwhile, County Court Judgements registered against a business should be a trigger to exercise some caution and look into the business further before extending credit.
Finally, when assessing smaller and newly formed companies, use blended information. This cross references consumer and business information and is vital to show the personal and wider business interests and the track records of those running a company. Where financial data is scarce, this cross-reference can often be the best indicator of the business's likely commercial integrity. It also casts a wider net when looking for signs of financial distress.
These are tough times for businesses, but the message is clear. Make risk assessment a priority - know your customers and know who you're doing business with. That will help ensure your business survives the downturn.
This was first published in December 2008