April 11, 2023 Recession-Proof Your Business

Protecting your company against financial, legal and compliance risks is an important part of recession-proofing your business in 2023.

By Matthew Debbage, CEO of the Americas and Asia, Creditsafe

Nearly everywhere I look these days, the word ‘recession’ pops up. And if it’s not discussions around the looming recession, then it’s the talk of economic uncertainty caused by rising inflation, energy prices and interest rates. And then when you add in the ongoing supply chain disruptions, increased operating costs and labor shortage, the outlook for business growth in 2023 doesn’t look that great.

ARR growth isn’t the end all and be all for weathering the storm

But whenever the economy takes a dive as it is now, most people and businesses become somewhat obsessed with revenue growth. It’s as if it’s the one thing that will safeguard growth and prevent your business from going under.

Well, I’m going to say something controversial here – it’s not the only thing and it’s not the most important thing. Yes, revenue growth is necessary to grow a business. I won’t deny that. But I’d argue that protecting your company against financial, legal and compliance risks is far more important. Before you gasp in shock, let me explain.

Let’s use a metric of growth used by most companies today – annual recurring revenue (ARR) growth rate. To put it simply, ARR growth rate is the change in annual recurring revenue over a given period, typically represented in a percentage. This metric offers insights into how well your business is growing, while also helping you identify and address declines in growth.

Imagine your company is bringing in consistent revenue growth and has an ARR growth rate of over 40%. That’s certainly a step in the right direction and on par with industry standards for a good ARR growth rate. When your ARR increases, that usually indicates that you have a strong product-market fit and your capital efficiency has improved. All sounds great, right? Not necessarily.

Let’s say 35% of your total customers pay their invoices late (sometimes over 90 days past terms). If those customers and their invoices are each worth large sums of money, your ARR growth isn’t going to do much good when the economy dips. While you’re waiting for those past due payments, you still have financial expenses that need to go out for operational costs, employees’ wages and suppliers. And what about if some of your customers just don’t pay at all because of their own financial issues, you probably won’t see that money again.

What point am I trying to make here? It’s simple. Don’t just focus on revenue growth. Get ahead of economic problems that could arise before they happen by tapping into financial health and credit risk data.

Run the numbers and create a credit risk profile on all your customers

To start, do a full audit of your customers and create a risk profile – ranking them from ‘very low risk’ to ‘low risk’ to ‘moderate risk’ to ‘high risk’ to ‘very high risk.’ Then, look at the data in their business credit reports (i.e. credit score, credit limit, percentage of late payments, total amount past due, total legal filings, bankruptcies, etc.) and slot each of your customers into one of the risk categories.

This is where you need to have a clearly defined and enforceable credit risk strategy and policy in place. Any customers that fall into the ‘high risk’ and ‘very high risk’ categories should warrant immediate attention from your finance, sales and leadership teams.

To do this, you’ll need to ask yourself some key questions, including:

• Is it worth keeping a customer that’s been with you for years if they pay late regularly?
• Can you have a conversation with certain late paying customers to get their payments back on track – or at least put them on a repayment plan?
• Are some customers depleting your cash flow and just not worth the trouble?

The credit risk data in your customers’ business credit reports should act as your baseline for making the right decision on which customers to stick with and which customers it makes better sense to part ways with. No one likes ending a relationship – even in business. But if a customer is doing more harm than good for your business and putting you into serious financial trouble, you need to do what’s right for your business.

But the reality is that even when companies have a credit risk policy in place, a good majority of their teams are clueless about it. For instance, our ‘Sales vs. Credit Control Battle’ research study found that 42% of sales managers have little to no understanding of their company’s credit policy. To make matters worse, 52% of the respondents said they lose up to $200,000 a month because the finance team rejects their deals for being too risky.

Just consider these stats for a minute. If you have a 10-person sales team and roughly half of your sales team (5 sales reps) lose $200,000 a month because they’re rejected by your finance team, that could amount to $12 million in lost revenue for your business. Of course, this figure will vary depending on the size of your sales team and the amount lost each month. But any lost revenue is too much, isn’t it?

Guesswork is the enemy of business growth

You can’t leave your business decisions to guesswork. Sorry, but that’s just not going to cut it, especially with the current state of the economy. You need to have the right data in front of you before signing a contract with a customer so you’re not surprised when they fail to pay their invoices on time. If you look at their average DBT (days beyond terms) and the percentage of payments that are past due, these two stats alone will tell you a lot about how reliable and ‘credit worthy’ they are. Don’t ignore it; use it to your advantage. And make sure your sales team understands why this data matters and how using it early in the sales process will increase the amount of deals closed (and revenue generated), while also increasing their own commissions.

I can’t stress enough that you can’t just look at this type of data once and be done. You need to be reviewing their financial health and credit risk data regularly – I’m talking weekly. Circumstances change frequently and economies take downturns more often than we’d like. On top of that, your customers may have their own challenges with their customers, which could cause their credit limits to go down and damage their credit score. Whatever the reasons or causes, not paying attention to the credit risk of your customers could be the thing that kills your business growth.

About the Author:
Matthew Debbage is the CEO of the Americas and Asia for Creditsafe. As a longtime veteran of Creditsafe, he has held various leadership roles including COO of Creditsafe Group and CEO of the Americas and Asia since 2012. Over the last 10 years, he led the expansion of the business in the United States, where he has built a high-performing team, driven impressive revenue growth and worked with thousands of American businesses across various industries.

With extensive global experience in finance, data, sales and business development, Matthew is known for being a master of global business data who can effortlessly identify the most prevalent credit risks, major players and competitors in each market.

Subscribe to Industry Today