Business failures are becoming increasingly prevalent throughout the Australian economy.
Insolvency data released by the Australian Securities and Investments Commission (ASIC) shows 831 companies had administrators appointed in March 2023, compared with an average of 720 for the same month between the 2016-17 and 2018-2019 financial years.
ASIC’s data and analysis further identified the construction, accommodation, food services, retail, trade and manufacturing industries combined made up about half the 5,689 corporate collapses recorded in the first nine months to the end of March 2023.
As the number of insolvencies continues to rise, it's becoming increasingly clear that mitigating customer and supplier failure is critical for the success and longevity of your business.
What are the consequences of customer or supplier failure?
If a key customer or supplier were to fail, it could have far-reaching consequences for your business.
Key negative consequences include:
- Loss of revenue and profit: A key customer failing can result in a significant loss of revenue. Similarly, if a key supplier fails, it can disrupt your supply chain, resulting in production delays or product shortages.
- Bad debts: Customer failure may result in unpaid invoices or outstanding debts and an unsecured claim in a liquidation resulting in a “cents in the dollar” recovery. This can have a detrimental impact on your cash flow and liquidity.
- Damage to reputation: The failure of a key customer or supplier can damage the reputation of a business. Customers, investors, and other stakeholders may question the business's ability to manage its relationships or assess its overall stability. This loss of confidence can have long-term effects on the company's reputation, making it harder to attract new customers or secure partnerships in the future.
- Reduced customer loyalty: If other customers perceive that a key customer or supplier has failed, they may question the business's ability to deliver on its promises. Existing customers might hesitate to continue doing business, seeking alternatives, or exploring competitors. The business may need to invest more resources in customer retention strategies to mitigate the impact.
- Operational disruptions: A key supplier's failure can disrupt the business's operations, especially if the supplier provides critical inputs or components for the products or services. The business might face challenges in finding alternative suppliers quickly, leading to production delays, increased costs, or even temporary shutdowns.
How to mitigate the impact of customer or supplier failure
To mitigate the impact of customer failure, businesses need to take a proactive approach. This involves two phases: Prevention and Action.
Phase 1: Prevention
Identifying potential risks and implementing strategies to prevent being exposed to a failure and de-risk the possible consequences of a failure.
Tools our clients utilise to prevent and limit the risk of customer or supplier failure include:
- Pre-lend review
- Company health checks
- Debtor review
- Supplier viability review.
Case study:
A NSW local council engaged BDO to conduct an independent viability assessment of a contractor as part of a process to appoint a contractor to manage the development of the town swimming pool facility.
The scope of the viability assessment included:
- Analysis of the contractor’s current financial position (including creditors, working capital, and financial performance)
- Analysis of the contractor’s forecast (including assumptions underpinning the forecast and the working capital impact of entering the pool redevelopment contract)
- Identification of material risks and red flags which may impact the viability of the contractor.
Client Outcome:
“Our review and findings gave the local council the comfort it required to proceed with their chosen contractor, as we provided them with a thorough understanding of the contractor’s financial position and ability to complete the project on time and on budget.”
Phase 2: Action
Should a business be exposed to the failure of a customer or supplier, we assist and support in maximising the recovery of debts during formal insolvency proceedings. Our services include:
- Advising our clients on insolvency-related matters, including providing technical advice and support where appropriate
- Negotiating with an appointed insolvency practitioner when our clients are asked to continue to provide services during the insolvency appointment
- Supporting secured creditors enforcing security under Purchase Money Security Interests (PMSI) and General Security Agreements (GSA) and supporting them in understanding priorities and the Fair Entitlement Guarantee (FEG) issues
- Reviewing documentation produced by other Insolvency Practitioners relating to decision procedures and meetings, and advising our clients on their options to maximise recoveries
- Lodging our clients’ claims and voting forms in formal insolvencies
- Representing our clients at creditors’ meetings, on creditors’ committees, and advocating in their best interests
- Monitoring and collecting dividends for our client.
Case study:
BDO was recently engaged to assist a financier in circumstances where another financier had appointed a receiver, and the directors had appointed voluntary administrators. Our client financed and held first-ranking security over a specific asset class.
Our role included:
- Assistance with a strategy regarding the approach to realisation of assets that were the subject of our client’s security
- Attending financiers steering committee meetings to provide input and guidance regarding the Administration/Receivership process
- Advice and guidance in relation to the various positions of the secured lenders
- Advice and guidance on the risk-sharing associated with ongoing support during the insolvency process
- Assistance in liaising with the Receivers, the Administrators, and other key stakeholders as appropriate.
Client Outcome:
“Following swift action by our client, we were able to assist in the insolvency process effectively from day one. Our client was able to successfully realise their security in a timely and cost-effective manner, overcoming complex issues and hurdles with multiple stakeholders, including gaining access to employees of the failed company to assist with asset realisations.”
We can help
BDO’s Special Situations Advisory team works closely with businesses, borrowers, lenders, and stakeholders to provide tailored advisory solutions to prevent and navigate financial distress.
Mitigating the risk of exposure to business failure is essential for the success of businesses. By implementing proactive strategies to prevent and manage customer and supply failure, businesses can reduce the negative impact on their bottom line, reputation, and future revenue. If your business could be or has been impacted by customer failure, contact our team today.