Risk tends to be in the eye of the beholder. Everyone uses a mix of instinct and personal experience to decide whether to take a risk or defer major decisions until a better time. Sometimes our risky decisions pay off but there’s always a chance we’ll fall back to earth with a bump.
A buccaneering high-flyer who makes tough financial calls based on gut-feeling should be the stuff of fiction when it comes to business. Such reckless decision-making has potentially devastating repercussions for a company’s shareholders, staff and suppliers. Rather than impulse and wishful thinking, business owners must consider all relevant risk factors so they have the complete picture. That means taking a clear look at sectoral, global and geopolitical risks and adapt to them.
The most obvious concern for any business will usually be what is happening in their own and allied sectors. However, sectoral risk tends to fluctuate in line with factors such as the cost of raw materials, consumer demand, production capacity and confidence.
Sectoral risk also needs to be seen in conjunction with global economic trends, the domestic political situation and even geopolitical developments – all of which can have a positive or negative impact on payment default or insolvencies in a particular sector or market.
Coface’s, the credit insurance specialist, latest analysis of country and sector risk predicts global economic growth to slow to 3% in 2019 because of a number of factors, including volatile commodity prices, supply constraints in advanced economies and the drag-effect of the continues slowdown in China, where household consumption is faltering. While this may sound like a modest downturn, it will still have an impact on business credit risk. Coface forecasts that corporate insolvencies will increase in 24 of the 39 countries for which this data is available – including the UK.
Another continuing concern is the trend towards protectionist policies. In the first three quarters of 2018, trade restrictions were placed on 12% of US imports, while 8% of US exports were hit by retaliatory measures. An all-out trade war between the US and China may yet be averted by a trade deal but the protectionist rhetoric from the White House is still having an impact on business confidence, particularly in Europe where there has been a decline in orders. And closer to home, leading figures within the manufacturing and services sectors have voiced concern about the uncertainty surrounding Britain’s post-Brexit trading relationships.
Although many British businesses are preoccupied with the never-ending saga of Brexit, this isn’t the only cause for concern in Europe. Tensions over the impact of the gilets jaunes movement in France, the fragile coalition in Italy and the prospect of further political turmoil surrounding the EU parliamentary elections this May.
Adapting to Risk
There are always a number of interplaying risk factors to take into account when making big decisions and a better understanding of wider risks is critical to trading safely as it enables financial decision-makers to be proactive and measured in reducing exposure to payment default and customer insolvency. This is likely to include practical steps such as beefing-up due diligence checks on prospects, reviewing customer credit limits and could also extend to obtaining credit insurance protection.
A reputable credit insurance specialist – such as Coface – will provide insight into the financial health of individual customers and a broader perspective on sectoral and global risk. In addition to this an insured business is better able to withstand and recover from an unexpected financial shockwave, as a policy enables a company to claim back the money lost if a customer defaults or delays payment.
Even when the risk environment is challenging, businesses that get the bigger picture are best placed to target the most promising markets and grow sustainable.This article was brought to you by Coface, a world leading credit insurance specialist