Today I met with a printing business who had a cash flow problem. Printers are a little prone to cash flow glitches because of their large capital outlays (representing fixed costs) and the fact that people tend to pay printers slowly (an average of 60 days is often considered pretty good).
The thing is, I have had a number of enquiries from printers lately, so I asked this printer the question: is there something going on in the printing business to cause cash flow hiccups among printers?
The answer was quite fascinating. It seems that the paper suppliers are tightening up on their credit terms. Wait on, that's not the fascinating part. What I found fascinating was that the reason the paper suppliers are apparently giving for tightening up is that their credit insurers are apparently imposing tighter restrictions on the suppliers!
Credit insurance works like this: as a supplier, you take out insurance against your customers going broke. It is an excellent product, I think, for two reasons.
Firstly, the cost of insurance is a fixed, predetermined cost, that really is almost negligible. Compare this with the variable, unknown, and often devastating cost of bad debts.
Secondly, using a credit insurer imposes a discipline on suppliers to make sure they tick all the right boxes before extending credit to their customers. This is important, because often bad debts are really a result of slack internal processes on the part of the supplier.
My theory is that the credit insurers are watching the global credit markets, and the threat of a global economic slowdown very carefully, and that they see bad weather ahead. As a consequence, they are in effect, "battening down the hatches".
The Australian economy is showing many of the hallmarks of strength: growth, high levels of business investment, and low unemployment. On the other hand, credit markets are in crises. Talk in the paper includes previously foreign terminology such as as "credit rationing". The larger corporates (often suppliers to small business) must surely then be compelled to tap their own debtors (often small business) as sources of free cash flow, in an environment where bank credit is becoming scarcer and more expensive. And the credit insurers are also alive to the risks at play here.
My anecdote is only one tale, and one swallow does not make a summer, so I would be interested to hear more from others "on the ground".
The Cash Flow Ninjas
