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The Overlooked Risk You Should Be Addressing: Your Suppliers

CREDITORWATCH | 5 MIN READ

Do you have a blind spot in your business that is hidden, waiting to make an appearance when you least expect it?

A car’s engine doesn’t run well or may even fail to work if one part goes wrong. For example, if the timing belt breaks, then your car is off of the road and it’s very expensive to fix. Often, the cost of repairs far outweighs the value of the car.

Your business could have the same risk and its called supplier risk.

What is supplier risk? 

Whilst the above analogy is helpful, it’s probably not helpful in understanding risk to your business in relation to one of your suppliers.

Let’s say the timing belt is your long-standing major supplier in your business. You are blissfully aware that they suddenly have either several court orders outstanding, judgements pending, or default notices issued.

As you are a major customer of theirs, they really cannot afford to lose you either or it’s game over.

So, they hope they can trade through it with little impact to both of you.

They are taking the future of your business into their hands at that point.

Even with new management, you might not be so sure they can trade through it successfully.

Everyone is very focused on customers (debtors) being able to pay you on time as it’s a key source of cash flow, but few are focused on suppliers given you owe them money.

The impact of a supplier being unable to manage their own cashflow could have a much greater impact on your business than one of your customers, especially when their credit terms and price are attractive compared to the rest of the market.

So what’s next?

If you’re not sure how to investigate this risk or discover whether your key supplier is potentially under stress, then you should consider some of the steps below.

Obtaining this information could save you from having to replace a supplier or worse avoid complete failure in your business.

Estimating the impact may also result in you making strategic plans to change suppliers over time.

Some questions will need to be answered when you start looking into this a little closer:

    1. What will the impact be on the profit and most importantly, cashflow of your business?
    2. What are your new suppliers credit terms, and can you afford to meet them?
    3. Can you wear the potential higher costs, or can you pass those onto your customers?
    4. Can you find other cost efficiencies in your business to offset this cost?

It certainly doesn’t sound pretty.

Would you rather know early and plan for it whilst the business is still operational?

Imagine for a second trying to answer the above questions when you are also having to deal with customer complaints for non-delivery of goods and severe cashflow shortages to pay your staff salaries.

Hopefully, you have not had to experience this.

Steps you could take today

  • Research all your major suppliers by contacting a company like CreditorWatch to find out whether they have any risks identified above and are silently deteriorating in the background without you knowing it.
  • Perform a portfolio risk assessment based on this information to find how widespread the impact might be. If you are not sure how to do this, contact a commercially savvy accountant (one who doesn’t just do tax) to help you.
  • Undertake some scenario and financial modelling on the impact of both potential impacts and remediation plans on the probability that your key supplier is not able to deliver your most profitable product. If you are not sure, that same commercially savvy accountant might be able to help.

If you are lying awake at night concerned that you might have a risky supplier, then be sure to contact CreditorWatch or send an email to a commercially savvy accountant.

About the author

Elan
Demonstrating a strong passion for cashflow and financial modelling, Lance Rubin is the Group CFO for Sequel CFO, a franchise business for premium bookkeeping. He also started his own financial modelling consultancy firm, Model Citizn, following over 20 years of Corporate experience moving from senior leader across Performance Management and Rates Validation at NAB. Lance has extensive modelling experience across financial and professional services.