How often do you go to bed worrying about your company’s business operations because your defaulted obligors are making you sink into the red? Many undertakings are finding themselves in the clutches of throat-grabbing defaulted obligors.
Even though you may think that companies around you are more successful, you certainly are not the only one fighting defaulted obligors. Every company wishes and expects to receive payment for the delivered work or products and desperately needs it in order to cover labour cost and wages.
Most Slovenian entrepreneurs believe that clients that are not settling their obligations are one of the greatest obstacle on the way toward growth and development. The lack of payment discipline we refer to when customers are late with their payments or do not settle their obligations at all could have broader consequences than just a shortfall on your bank account.
Lack of payment discipline can cause a long avalanche of disasters
Declaration of bankruptcy is the most common circumstance that leads a customer into the inability to settle their outstanding obligations. The consequences of one business going bankrupt can be felt by other undertakings too—it is not simply the collapse of one company that seemingly leaves room for competition. Company failure can have a strong influence on its suppliers. Suppliers are usually unable to settle their expenses because they have not and will never receive the agreed payment. Bankruptcy therefore doesn’t only affect business owners and their employees, but it also jeopardizes the entire supplier and customer chain.
The number of bankruptcies in Slovenia has been increasing over the past 10 years
The data from the Slovenian Business Register clearly demonstrate that the number of bankruptcies has been growing exponentially over the past few years, and even though the situation in the last two years has been more stable, the data are nevertheless worrying.
What happens when a company goes bankrupt – CASE STUDY
Take, for example, company A (the supplier) and company B (the customer). Company A is a yoghurt manufacturer and company B is a retail chain and company A’s largest client.
The yoghurt manufacturer has been supplying its products to the retail chain for a number of years. This deal allows company A an ongoing operation, production upkeeping, as well as payment of the supplies and monthly labour costs. This means that the yogurt manufacturer largely depends on the retailer’s viability because the chain is its biggest source of income.
The business-to-business transaction is very simple: the manufacturer supplies the retail chain with the agreed quantities and then issues an open invoice with a payment period of 30 days. The retailer settles the invoices either on time or with a very short delay.
For certain reasons the retail chain encounters problems and its chances to settle open accounts within the agreed due dates decrease. Over time, its open accounts start to accumulate and the retail chain with a longstanding tradition is unable to continue settling its obligations. This situation leads to bankruptcy.
The court appoints a Receiver that attempts to settle all obligations the retailer has to its employees, suppliers and creditors. The yoghurt manufacturer only manages (if it manages at all) to receive a smaller amount of the receivables from the retailer. Let us suppose that it is merely 5% of the entire amount the yoghurt manufacturer should have received.
The retailer’s declaration of bankruptcy undermines the manufacturer’s business operation because it lost its largest client.
How could the yoghurt manufacturer have prevented the occurred damage?
The supplier (manufacturer) could have implemented several different ways to avoid the ‘jaws of insolvency’ and prevented the damage caused due to the client’s bankruptcy. This includes insuring the receivables with an insurance undertaking (like SID - First Credit Insurance Company) which could have provided the manufacturer with a compensation for damage that would have enabled the company to safely continue with its operations. Receiving indemnity would provide the yoghurt manufacturer with the financial means it requires to stay solvent and to calmly plan its next business steps.