While it is a relief to start trading once again after months of enforced inactivity, this isn’t business as usual. 

Five risks of emerging from lockdown

Compounding the tragic loss of life and the impact on our physical and mental health, the coronavirus has exacted a painful toll on livelihoods and the economy.

The business community is counting the cost of lost sales opportunities, reversals in formerly healthy cashflow positions and disrupted supply chains. But as the Government starts to ease lockdown restrictions, there is at least a chink of light ahead.

Of course, most of us recognise that this cannot be a return to business as usual. The Government has said that it won’t hesitate to tighten restrictions if there is an increase in the transmission rate. However, it is also important to be mindful of predictable trading risks that are within your control.

Here are five pitfalls to guard against during the months ahead.

1 – Over-trading

In Coface’s experience, a common danger after any downturn is the temptation to make-up for lost time by taking on more orders than your business can deliver.

A bulging order book may be comforting but if your cash reserves are already low, it will be difficult to ramp-up production quickly without heavy borrowing. And bear in mind that you might not receive payment for many weeks, leaving your business with a serious liquidity problem.

While it is frustrating to turn down opportunities, it is better to ensure that your business is sustainable. Before accepting an order, consider issuing a pro-forma invoice so that you receive payment in advance or mitigate the risk by obtaining a letter of credit or credit insurance so it is easier to secure the necessary funding from lenders.     

2 – Timidity

On the other hand, an over-cautious approach towards prospective customers is equally damaging. Although there is currently a higher risk of customer insolvency and bad debt, it is important to balance this against the significant opportunity costs of hibernating until the situation improves.

Bear in mind that some established customers may not have survived the lockdown, while others will have been forced to cut back their spending. You have to be proactive about new business if you are to replace these lost sales and build for the future but your choices should not be a matter of guesswork if you are to trade with confidence.

Instead, your new business strategy should be informed by accurate and up-to-date business intelligence about the weaknesses and strengths in your target markets: from levels of corporate debt and insolvency risk, to the size of the potential customer base and the level of political stability. It makes sense to choose a reputable information partner with detailed knowledge of your own sector, a global network of experts and access to the latest corporate payment data trends. 

3 – Fraud

It’s sad but predictable that the coronavirus emergency has created bumper opportunities for fraudsters. By 15 May, losses of more than £3.5m have been reported by victims of coronavirus-related scams in the UK, according to ActionFraud, including phishing and invoice scams.

In response, National Trading Standards have launched Business Against Scams which provides free training resources on the most common types of business frauds, while the Government has published new guidance for businesses on coronavirus fraud and cybercrime.

One of the most effective ways to protect your business is by conducting thorough due diligence on prospective customers and suppliers. This includes following-up trade references, verifying the names and addresses of company directors and checking trading history. Coface’s global database of more than 80million companies means we are well-placed to help you obtain this crucial information and determine who you can trust.

4 – Late payment

Most of your time and energy will be focused on getting your business up and running again but if you allow credit control to drift, you will imperil your own cashflow position at a critical time.

To prevent this, it’s important to watch your DSO (days sales outstanding) for worrying trends and monitor customers’ payment behaviour, particularly requests for more generous credit terms. In challenging economic times, businesses are more likely to pay their priority creditors first. You therefore need to take prompt and firm action on outstanding invoices to recover the money and show that you are serious about late payment.

There is no escaping the fact that chasing invoices in-house takes time, money and effort. If you don’t have the resources, consider outsourcing debt collection to a commercial collections agency who you trust to represent you professionally and get results.

5 – Supply chain shocks

One of the lessons of the last few years has been the severe impact that a shock or disruption to the supply chain can have on every business, whether it is the failure of a major customer such as Carillion or a shutdown in production, as we have just seen in China.

Supply chain risk is a fact of life in a global economy but you can limit your exposure by being alert and responding to developments within your sector rather than being dependent on a single source. Coface’s economic reports and resources provide a free insight into country and sector risks so you can evaluate the threat to your suppliers and find possible alternatives to your existing trading routes. 

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