Economic growth this year is not likely to be much more than 1%, according to the bank of Scotland, speaking at the inaugural merchant industry Credit Crunch Forum last week.
The Forum was organised by the same team as THE Conference: NMBS, BMF, Unimer and Builders Merchants Journal, and was planned to enable merchants and suppliers to focus on the implications of today’s tough economic conditions.
“The credit crunch is tightening,” said BMF managing director Chris Pateman, opening the day. “We’re finding credit limits being pulled overnight, and merchants having difficulty getting supplies.”
Mark Miller, senior economist at the Bank of Scotland, told more than 70 delegates gathered at the National Motorcycle Museum in Birmingham on September 17: “We’re looking at not much more than 1% growth in the UK GDP this year and next year.”
“The consumer price index is now 4.7%, and a period of staglflation is quite possible – you’ll see a negative quarter or two in the short term which inflation continues to rise towards 5%.”
Weaker sterling exchange rates will add pressure to import prices, and the short-term inflation outlook is further price increases, but the outlook for next year is much weaker.
“Domestic demand is clearly the problem at the moment,” said Miller. “The combination of higher energy costs, higher inflation, and low wage rises, means a squeeze on consumer spending.” And he warned that consumer spending may be harder hit in the UK than in the Euro zone because we have fewer savings.
Domestic demand is likely to slow sharply, but the net export market is different: the Euro zone is our largest export market, and it hasn’t been affected as much as the UK or the US.
Unemployment will rise further, but not to the rates of the early 90s, he said. “And wages will not be pushed up aggressively because workers don’t feel they have the negotiating power in a falling labour market.”
“How many people really understand the value of receivables as a current asset on their balance sheets?” This was the question posed by Glen Bullivant, vice president of the Institute of Credit Management. And his answer: “It’s often the biggest item on the balance sheet – yet we often treat it as something someone else can deal with.”
Every business should have a credit policy – drawn up by everyone concerned in meeting customer requirements, backed by management, and published. “Too often we give people authority without them taking responsibility. If I have authority to change a credit limit or alter payment terms, I have that responsibility as well.”
He stressed the distinction between credit worth (ie whether the customer can pay) and credit risk (whether are likely to). “Make enquiries – never judge a book by its cover. Know the nature of the body you’re dealing with: is he a sole trader? A limited company? A partnership? And remember the customer’s customer – what kind of risk are they taking?”
Credit reports are used by many people, said Simon Howard of ICC. “But increasingly now they are being used by sales people. The message is: concentrate your sales efforts on the most creditworthy customers.”
Construction is an industry the credit industry is quite concerned about, he said. “There were 36,000 County Court Judgements in the construction sector in 2007, and we forecast a sharp rise in insolvencies in the construction industry.”
Lawyer Jeremy Marshall of Irwin Mitchell surprised delegates by actively encouraging them not to go to law when dealing with problem customers.
“Going legal is in effect too late,” he said. “You need to be planning your processes before that, because as soon as you enter the legal sphere you lose an element of control.”
Mediation is a better option, Marshall believed.. “I have seen a number of cases which I thought would never be resolved, being resolved,” he said. “You don’t need a lawyer – sometimes the best mediator is someone who is from the business that you’re in, because they can understand. You can do all sorts of things, the critical thing being the decisions are made there and then. Sometimes you find that both sides actually have the same concerns.”
Finally, he said, use common sense: “Manage the process from the beginning – involving lawyers doesn’t always make things better. And there are never any good surprises in litigation.”
The final speaker echoed Glen Bullivant’s comments earlier in the day. “The amount your customers owe you is probably the largest item on your balance sheet,” said Tim Lane of International Risk Consultants.
“Credit insurance protects you against customers defaulting – but it is more difficult now to obtain a proper credit insurance policy then at any time in the past 30 years.”
He stressed the need for companies to make sure they define between themselves and the underwriter or broker, exactly what cover is needed.
This led to an animated discussion, with numerous delegates citing personal experience with credit insurance – the most frequent complaint being of having credit limits arbitrarily reduced without warning.