With America introducing new tariffs on China and vice versa, tariffs on Canada and Mexico due to come in in a month and messages sent to the EU and maybe even the UK if President Trump gets out of the wrong side of bed on a morning that we’re next.
What can business owners and directors do to protect themselves and their companies against sudden financial threats appearing? And how can they best insulate themselves against the contagion of their suppliers or clients falling to unforeseen financial headwinds?
Insolvency numbers fell slightly last year from the total in 2023 but both are higher than in 2022 and on average are about 10,000 a year more now than they were during and before the Covid-19 pandemic.
Rises in interest rates and wider economic difficulties for companies including higher energy costs and the ongoing cost of living crisis and lower consumer confidence are continuing to see businesses go into insolvency to restructure and protect themselves or close in an orderly manner if their debts prove to be insurmountable.
No organisation, no matter how resilient and well run, is immune to sudden financial distress. Especially if the event is the insolvency of a customer or supplier and out of their control.
Insolvency contagion is when one company’s insolvency event becomes a domino effect that ends up rippling up and down supply chains.
In modern interconnected economies, supply chains are as long as they have even been and frequently span international borders. While this brings benefits in terms of production costs, efficiency and market reach, the longer the chain, the greater the risk of disruption.
Signs of supply chain disruption
Most directors will know what to look for when assessing their own businesses financial health but what should they look for when it comes to their partners and fellow members of a supply chain?
- Consistently late payments, delays or requests for extended or longer payment terms can be a sign of cash flow difficulties
- Problems obtaining credit or increased borrowing
- Frequent staffing changes in key management positions or job losses
- Sudden operational changes such as cuts in production, facility closures or significant layoffs could indicate urgent cost-cutting measures
- Poor communication or evasiveness when discussing business relevant financial details when asked
- Late, inconsistent or inaccurate deliveries including missed deadlines and problematic order fulfillments
- Declining product or service quality
The earlier you identify any signs of negative financial impacts on your suppliers or chain, the more strategic options you’ll have to mitigate the risks.
What options do you have to protect yourself
- Closely monitor suppliers for any indication – this includes keeping track of payment patterns or any other potential indicators
- Look to diversify your supply chain – try not to rely on one supplier or customer. Even if you don’t immediately set up an agreement with them, try to build relationships before they’re needed
- Renegotiate terms and conditions – while it’s always beneficial for businesses to lower their costs, it could be advantageous to negotiate shorter payment terms or smaller order quantities to mitigate risks
Business failure is a typical part of the business cycle and can happen to anybody’s suppliers so it’s important to be prepared, especially in an economically volatile connected global system.
Being agile is the best tool to avoid any domino effect and part of this preparation includes getting impartial professional advice before it’s essential.
Get in touch with us today and start building your business resilience.