Lockton Monthly Macro Series: Economic risks and response

In short:

  • As macro forces pose ever-growing risks, businesses must respond to build resilience and protect their bottom-line.

  • In the first edition of Lockton’s Monthly Macro Series, our trade credit insurance and risk experts explore economic risks in the short-term; inflation and the impacts on businesses.

  • Learn some key risk management actions to take, including outsourcing your collections.

  • See why businesses are using trade credit insurance.

As macro forces pose ever-growing risks, businesses must respond to build resilience and protect their bottom-line.

In the first edition of Lockton’s Monthly Macro Series, our trade credit insurance and risk experts explore economic risks; inflation and the impacts on businesses.

Inflation is creating profound economic risks which have a significant impact on businesses. Inflation needs attention and for some businesses, a rapid risk response.

A decline in consumer purchasing power and confidence (Consumer Confidence Index fell from 104 points in January 2022 to 86 points in June 2022), a decline of real wage growth and the costs of good and services increasing unproportionally to wage growth are all key drivers.

What are the impacts on inflation?

Here we outline some of the key impacts of inflation on businesses:

1. Accounts receivable

Businesses enjoyed a two-year period with far lower levels of bad-debts, and past due accounts receivable, due to government intervention. According to the latest ASIC data, Australian insolvency figures for the last 3 months to June 2022 are, on average, 30% higher than the same period in 2020.

2. Inflationary pressures

Inflationary pressures facing the economy will not be resolved quickly. State and federal actions will help reduce demand but do little to alleviate increasing business expenses and supply disruptions.

Businesses will not only need to think about the impacts to their own business, but also consider how their own customers might be impacted.

3. Rising costs

According to the June ABS data, 46% of businesses experienced increases in their operating expenses over the previous month compared to 21% of businesses in June 2021. The rising costs are attributed to increasing costs in wages, materials, products, and general expenses.

Key risk management actions to take

So how can businesses respond? Here are three risk actions which businesses can consider:

1. Prepare for an economic downturn

Prepare for the possibility of an economic downturn and its credit implications. If the economy slows, concerns about liquidity and credit will return and the number of companies entering administration will likely grow.

2. Review your credit risk management

Review your credit risk management (CRM) procedures and consider the viability of transferring risk to the insurance market to reduce the risks associated with customer non-payment or default.

3. Outsource your collections

Regular reviews of your accounts receivable and collections process is critical in successfully recovering overdue invoices. Outsourcing is an affordable and effective option for time poor businesses.

Trade credit insurance

Increasingly, businesses are using trade credit insurance to respond to:

1. Access real-time insights that allow them to understand the credit strength of current and potential customers.

2. Access to trade credit insurers’ comprehensive databases, monitoring systems, collections services, credit checks.

3. Get claims paid quickly, enabling them to confidently continue to trade and pay their employees and suppliers.

This is the first edition of Lockton’s Lockton Monthly Macro Series with a spotlight on economic risks and how businesses can respond. If you have any feedback, you can contact our experts:

Liam Berry - M: +61 481 438 374 E: Liam.Berry@lockton.com

Maha Awada - M: +61 466 559 904 E: Maha.Awada@lockton.com

Sam Rodda - M: +61 478 976 648 E: Sam.Rodda@lockton.com

Liam  Berry

by  Liam Berry

National Manager, Trade Credit, Surety and Political Risk

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