Risk Management Through an Economic Downturn

read time: 4 mins

As we start to emerge from the initial emergency measures required as a result of Coronavirus, businesses are starting to look forward and address the reality of trading through what is likely to be a significant economic downturn.  Views vary widely as to the length and extent of a likely recession with a great deal of speculation as to whether it will be a ‘V’ shaped dip, ‘U’ shaped or even a ’W’ shaped double dip.  What does seem certain is that there is going to be a period of economic difficulty and Chancellor Rishi Sunak confirmed as much in his address this week.

As we enter such a phase there is a great deal that trading businesses can do to manage their exposure to risk and to best place themselves to trade through a period of challenging economic conditions.  We set out a few of them below:

  • Review terms and conditions or standard contracts – what was ‘fit for purpose’ previously, may not be now and some simple ‘tweaks’ to contracts and T&Cs can hugely improve a business’ commercial position if things go wrong, for example:
    • Time is of the essence – If you are supplying goods or services and are likely to be subject to supply chain ‘drift’, alter your T&Cs so that missing target delivery dates is not a breach of contract.
    • Retention of Title – Use ROT clauses to seek to limit the passing of title in goods supplied to a customer until such time as they are paid for – in the event of failure to make payment, or worse still insolvency, this may be a useful tool in recovering those goods.
    • PGs/Parent Co guarantees – If dealing with parties who you have concerns about, or with whom you haven’t had previous dealings, consider seeking guarantees from directors or parent companies or bank bonds. If the customer is not prepared to provide these, ask yourself “why?”.  If they don’t have confidence in their own financial position, should you?
    • Force majeure clauses – These clauses identify events that release (or delay) contractual performance and set out the consequences of them. Check if you have them and how they might be altered to suit the new landscape – for example what if your own supplier fails, or COVID-19 issues cause delays?
    • Breach events and effect – Consider adding into contracts what event(s) will and will not be a breach, or end the contract – perhaps go a stage further and provide for what the effect of those circumstances will be.

  • Carefully check the status of new (and existing) customers:
    • Take references – From other suppliers or credit reference agencies – perhaps ask to see evidence of financial position.
    • Say ‘no’ – Sometimes the best risk management of all can be to decline to take an order or to say ‘no’ to a new customer. If you have doubts it’s often too easy to overrule your instincts, particularly when you’re keen to secure business – more often than not instincts prove well founded.  Bear in mind that if a new customer approached you as a supplier, it might be because their existing supplier won’t give them further credit, or is in dispute with them.
    • Large deposits and pro-forma invoices – Consider taking large deposits on orders, or even issuing pro-form invoices. If the customer fails this can significantly reduce your exposure – customers are also less likely to walk away from contracts where a significant down payment has already been made.

  • Step back and review the business – in busy times it’s easy to be so focussed on ‘doing business’ that you forget to look at the structure of the business. Take the opportunity in these quieter times to step back and look at your procedures, structures and protocols.  Are there different ways of processing work?  Can risk be managed more effectively?  Are there further efficiencies that can be introduced?  Discuss issues with colleagues and peers – sometimes a detached view is more objective.  In these challenging times many businesses have been forced to reinvent themselves – in some cases with spectacular and surprising results. Time spent analysing the business is usually time well spent.

For more information on the article above please contact Andrew Perkins.

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