The UK is streets ahead when it comes to retail e-commerce, with sales this year expected to top £60 billion, leaving Germany and France in its wake. Boosted during the recession, and further enhanced by the strengthening economy, e-commerce is on an exponential growth curve that runs in direct parallel with the rise in digital purchasing through smartphones and tablets.
John Lewis is currently investing half a billion pounds in its online shopping service as it aims for Internet sales to overtake high street sales within only four years. This perhaps sheds some light on the challenges that retailers are facing to maintain their bricks and mortar operations. Not only has the high street stalwart BHS slumped into administration, but Next has admitted it might be facing its toughest year since 2008 and sales at Poundland have dropped 4.9% year-on-year in what it describes as difficult market conditions.
Suppliers to the retail sector are practiced at looking out for the warning signs and in recent years have implemented a wide range of credit risk assessments and procedures to guard against payment defaults and bad debts. But this caution hasn’t necessarily been applied to the e-commerce sector, which is a costly mistake.
Selling online, even for established retailers, is expensive to initiate and tricky to get right. Among the bigger issues are the cost of site development and customer acquisition, which are not initially covered by revenue. Resulting cash flow problems can put the organisation under pressure. By comparison with the traditional retail model, e-commerce operators also have lower levels of fixed assets and higher levels of intangible assets such as customers, systems, content and of course, employees. The opportunities for revenue growth, however, are high.
Unsurprisingly in this context suppliers can feel unsure about entering into trade credit arrangements and are likely to want more reassurance if they see that the biggest asset on the books is their own stock.
So how can suppliers assess the risks and balance these against the opportunities? They can start by implementing a smart risk culture at the heart of their financial processes. In short this is about taking control of outstanding debts, getting organisational buy-in to reduce their risk of financial exposure, being more selective about their e-commerce customers and, where relevant, controlling export activities. Here are some guidelines for achieving a smart risk culture that start with improved practices:
- Manage debts – Monies owed, on average, amount to one third of the balance sheet. This is costly, in terms of the time spent chasing money and the effort to secure short-term financing. Look at adopting mechanisms that automate the credit management and control process with your e-commerce customers.
- Involve all levels of the organisation – The only way to effectively implement processes for identifying, analysing and managing your exposure to risk is by involving all staff connected to the process from credit controllers through to the sales team (in other words, the order-to-cash cycle). The information they can provide on customers will be essential.
- Be selective about e-commerce customers – Carry out detailed analysis to identify how long they have been established, whether they are part of a bigger retail operation and the markets they operate in. Work with the sales team to qualify prospects, then make thorough credit checks and implement robust financial negotiations. Create guidelines that enable you to decide between the benefits of a commercial relationship and the risks involved.
- Monitor customers – Ensure you track their financial health and implement a faster response to negative information to reduce exposure to risk. Equally, if your intelligence tells you that their financial situation and credit rating has improved, relax your credit terms.
- If appropriate, consider transferring risk to a credit insurer – By purchasing a credit insurance policy you will have access to data on your eCommerce clients that will outline your risk exposure and allow you to make informed business decisions. The recovery of past-due claims is in the hands of the credit insurer, and you receive compensation regardless of whether the debt is finally paid to the insurer or not.
- Control export activities – Outside factors, whether political, commercial, financial, logistical or legal add to the risk environment. A credit risk management policy is useful for automating a significant portion of the most important processes, such as monitoring changes to the customer’s commercial environment, or even tracking changes in Terms and Conditions.
The opportunities that the e-commerce sector offers are too good to ignore, but with a smart risk management culture in place, suppliers will be able to put control back into the organisation and increase their own tolerance to risk. It’s a balance worth achieving.
By Mike Feldwick, head of UK & Ireland at Tinubu Square