Legal: No more boom and bust?

Legal: No more boom and bust?

With some high profile insolvencies in recent months – Palmer & Harvey and, of course, Carillion among them – and the uncertainties of Brexit making life difficult for many in the food industry, now is a good time for caterers to review contracts with suppliers and customers and consider what would happen if they got into financial difficulties. Once a company has entered into an insolvency process (such as liquidation or administration) the rights of trade creditors can be limited, and it is worth thinking about this in advance in order to put your business in the best position.

Know who you are dealing with
The more you know, the easier it can be to anticipate – and take steps to avoid – problems before they arise. When was the last time you visited your customers and suppliers, or picked up the phone? There are often subtle clues about how a company is doing – are they becoming increasingly difficult to contact or avoiding requests for payment? Regular contact will also help you have those difficult conversations that might be necessary if you do become aware of any issues. At the very least, look online at accounts filed with Companies House, or do a credit check.

Review your contractual terms
Do you have signed agreements in place? The right terms can make a real difference. Some key points to consider are: Can you terminate (or suspend) your purchase or supply obligations if the other party misses payment or supply dates? Are you able to recover goods that have been supplied if payment is not made? This may not be practical for fresh produce, but it can be considered for packaged goods or items with a longer shelf life.
Also, is it appropriate to ask for a director’s guarantee or a guarantee from another group company? Do you charge interest (and costs) for late payment?

Diversify your customer and supply chain
What would happen if your main supplier or customer went bust? There may be very good business reasons for having one key supplier or a main customer, but do you have a contingency plan? How quickly would you run out of stock if the worst happened with your main supplier(s)?

Deadline for payment
Cash is king, so ensuring you get paid in full and on time is essential. Larger customers often insist on elongated payment terms, but could you incentivise early payment by offering a discount if it is made early? How resilient are your cash flow forecasts? Could you withstand the immediate shock caused if a customer became insolvent?

Can you minimise your own risk?
There are positives and negatives to invoice financing, but one of the positives is that this can help minimise the risk to your business in the event of non-payment. Insurance may also be available as an alternative.
As with food, the key to protecting your business is advance preparation, and taking steps to protect your position as soon as you become aware of any issues.

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