Changing the rules as times turn sour

JUST as suppliers were catching their breath after the demands of the boom, now comes the aftermath of the credit crisis and the global slowdown. Crosscut Clyde looks at the new test facing the supply sector and has a modest proposal for the industry.

Staff Reporter

Right now, suppliers out there preparing for – or in a number of cases, are already facing – the test of managing bad debt.

It’s a crazy world we live in with commodities. One minute all is well, and then there is a substantial plummet in certain metals, an erosion of margins, leading eventually to a decision to scale down a mining operation or worse, shut-up shop all together.

Pity the poor unfortunate managing director of a mining house who has had to put off a large number of his workforce. Pity the workforce, their families, and the shareholders of the company.

And of course, on the other side of the desk is a bleeding supplier.

Let us spare a moment for this less than fortunate supplier who has to contend with not only a bad debt but also has to find the money to pay for his or her own operation, which was forced to spend up to supply whatever item the mine or processing plant that closed shop needed before things went south.

The term “care and maintenance” unfortunately does not necessarily extend to paying for an outstanding debt or monies due to the suppliers. Some are lucky if they get a “sorry”

According to all the good business and accounting chronicles, it is sound practice to prepare for such events and either budget or provision to manage a credit risk.

But as we all know, it is all very well to print and preach this but generally in the real world it rarely happens in textbook fashion.

And there are so many other financial demands, fees, contingencies, etc, that plague a small to medium supplier that it can be hard to set aside money for a credit risk.

This isn’t so much a concern for the bigger boys in town but then again it can as easily happen to them and, when it does, it is usually in bigger chunks.

What is more, it is a risk that often lurks close to the surface.

Many mining customers don’t understand there are many, many small-to-medium enterprises that are so highly geared that once every while a customer’s demise can be just enough to topple them over as well.

Of course, the same can happen as easily on the other side of the desk – supplier goes broke, owes miner something that never turns up.

How does one manage this? It isn’t an easy one to simply be gung ho about and just tell people to “be aware”

For one, the supplier does what they do best and works hard to win the business.

But this can often occur at margins well below common sense which they hope to recover at some point down the road – you know, the old loss leader approach.

Unfortunately those recovery points can often get further away and are never reached. It is a major catch-22 situation.

Then factor in an unexpected collapse of a commodity and, wham, there goes any hope of recovering said margins.

Let alone the risk of not getting one’s money at all, or recovering any widgets that may already have been supplied.

No doubt many readers can relate to this scenario and are close to this situation.

But I have an idea that may help. It’s nothing new and needs transparency – a buzzword for the 21st century – on both sides of the desk, for it to work.

This is it: all companies should unequivocally respect and accept five days trading terms on both sides of the desk. Can it work? If so then why not – gasp – cash on delivery?

I honestly believe that such terms can have resounding benefits on both sides of the fence – it certainly can’t be worse than paying for everything by credit card.

I realise this may only shift the financial burden to another location but then again maybe that location is better situated to manage any blip.

Ask any major supplier of major pieces of mining or processing equipment. No 30-day trading terms for these items. More often than not it’s cash on delivery or progressive and post-commissioning payments.

So why for the small SMEs who are flogging anything from pencils to pumps, staples to steel supports, is there no reason for similar terms?

I would love to know when, where and who in the commercial business sector ever came up with the notion of 30-day terms.

I know it’s been around for a while but I still reckon that person has something to answer for – big time.

So the way I see it, there needs to be a new way of doing business. After all, we are faced with new ways of doing all sorts of things in this day and age, so why not challenge the way we charge and the way we get paid?

Maybe we will all then live through the commodity squeezes. And we need to, because these are going to be a fact of life.

The trouble is that no one wants to be first in the supplier game to change the rules in fear of losing a deal, but maybe it is better than losing a company or a job.

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