Business Risk on the Increase – Debtors Books

Business Risk on the Increase – Debtors Books

By Paul Jooste, Director at Prestige Credit, a provider of credit insurance services


A lack of planning and failure to identify risk as well as the dynamic global environment in which businesses now operate are some of the major reasons that we are seeing a business fail. In today’s fast-paced environment, it is not only small businesses but also large and well-established business that are struggling to cope with the ever changing landscape of risk.  

Risk managers are employed with the full-time responsibility of identifying, managing and reducing the impacts that risk could have on a business. Identified Risk can be handled internally or externally. Risk dealt with internally is normally risk that poses low or marginal threat. 

Risk factors with medium to high risks are normally outsourced to an external party and most often are taken off the balance sheet. Examples of high-risk factors outsourced to a specialist are, for example, insured risk covered by large insurance companies or guarantees issued by a bank or financial institution.   

One of the risks generally overlooked is associated with the debtors book. Debtors are one of the largest assets a company can own and therefore one of the most critical functions needed to manage – namely, managing the risk in the debtor’s book in a manner that will create long-term value for stakeholders.
To evaluate risk, businesses should re-evaluate risk in their environment at least once a year. This includes looking at internal and external factors that could influence risk and categorise risks according to high, medium and low impact. Ask questions such as: “How will this risk impact my ability to operate in the short-term, medium-term and long-term?”.  

Businesses also need to look to their balance sheet and evaluate whether the business is able to absorb the potential losses from a financial point of view. If the risk is too large or impacts the business in a catastrophic way, look at ways to find an external partner than can help carry the risk. 

It is also important to evaluate the environment and to see how competitors are adapting to risks in your industry and across other industries. Are there partners or consultants that could assist planning better for these risks?  

Often when talking to CEOs and owners of businesses, we find they are familiar with the risks that potentially could have a major impact on their business and are aware of the steps needed to mitigate these risks, but they don’t always have the financial ability to address these issues.  

Regarding debtor book insurance, businesses have the ability to outsource non-payment or liquidation risks to a credit insurer, but sometimes they don’t have the financial ability to afford it. Unfortunately, in numerous cases they have been placed into financial difficulty due to a large debtor not paying an account or being liquidated. 
In 2019, we believe there will be a major increase in demand for risk mitigation specialists in global markets. Risk mitigation in brand and image risk, cyber security and access to personal information breaches will continue to drive the demand for these specialists across the world.

 As technology is advancing, we are seeing more traditional risk being replaced by new risk factors. For example, when car insurance is no longer required due to people using the growing number of Uber-like services. However, users then may want to take insurance against accidents or death caused while in transit. Similarly, the trend to move towards online shopping has reduced the cost of insurance required by brick and mortar shops. And with online shopping, a new class of risk has been identified that poses different problems to CEOs.