Have you ever contemplated which company has been in business the longest? Research has suggested that it is a Japanese construction company dating back to the 6th century. This research conducted by folks much more intellectually gifted than I ever hope to be, suggests that the list of the Top 10 oldest companies in the world is made up of businesses associated with construction, Inn & restaurant, winery, foundry, plantation, firearms, publishing, and candle manufacturing. In contrast, this research was unable to provide a clue as to how many businesses were formed, failed, and liquidated since the 6th century. I suspect we can agree that the number has many zeroes behind it.
These century-old institutions are anomalies, rare exceptions to the natural life cycle of a business enterprise. Businesses are born from an idea or need. They begin to grow and require nourishment (capital and markets), structure, and management. As they mature, growth becomes more challenged as competition appears, operational deficiencies are exposed, and market needs change pressuring financial performance which ultimately plateaus. As the period of maturity ends, the inevitable period of decline sets in which leads to its ultimate demise and commercial mortality.
Not all businesses go through the orderly born-mature-die life cycle as many are affected by extraordinary events accelerating their demise. The year 2019 witnessed several events that reflected the full spectrum of causes leading to bankruptcy and/or liquidation. High profile names; Pacific Gas & Electric, Thomas Cook, Bumble Bee Tuna, Purdue Pharma, and Dean Foods provide a vast array of causes that accelerated the decline of these once high performing companies.
For those who might suggest that many of these unfortunate events could have and should have been avoided, and that size and market position provide insulation; I would suggest that some more famous commercial deaths dictate otherwise. Over the course of the past few decades, iconic names like Lehman Bros ($691b), Washington Mutual ($328b), WorldCom ($104b), GM ($91b), CIT Group ($80b), and Enron ($65b) experienced commercial mortality. An even bigger concern went beyond the immediate impact of these losses to the unsecured creditors; it was the ripple effect as it worked it’s way back through the supply chain.
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In the realm of commercial mortality, these mega-events steal headlines, but it’s the aggregate losses associated with the hundreds of thousand companies that fail each year which keep us awake at night. Commercial mortality regardless of cause has the same effect; a business has died and left a trail of unpaid bills impairing the supply chains working capital, earnings, and capital. In fact, research has suggested that beyond poor management, the most likely cause of a company’s bankruptcy is the default on payments for goods and services provided by its customer. Better known as the ripple effect….
Most of us typically carry life insurance to ensure that should we die, the financial protection of our family and benefactors will be cared for once the income we provide ends. It is a known fact that we are all going to die, and the same analogy exists with a commercial enterprise. However, what preparation has been taken to ensure that your business, it’s stakeholders, it’s cash flow, it’s capital and it’s earning have been protected?
The #1 reason provided from those who already utilize trade credit insurance regarding their decision remains “avoiding a catastrophic bad debt loss event.” While there are many other reasons to contemplate investing in a credit insurance policy, this one is basic. It defines credit insurance.
For all the “it could never happen to me”, “we’ll see it coming and avoid it before it happens”, “we know our customers”, “our sector is solid”, and the many other retorts I have heard over the past 50 years; it will happen to you as well.
To illustrate; the food industry has historically been considered one of the most stable sectors in the world. Yet already in 2019 beyond Bumble Bee Tuna and Dean Foods, names such as Houlihan’s, and Perkins, etc. have created a long list of unsecured creditors. No industry sector is immune as all businesses created will eventually die.
Two factors create risk- most business is conducted on open unsecured credit, and all businesses will eventually die.
Risk can be mitigated and transferred through various instruments; trade credit insurance is one of the most comprehensive and cost-effective investments a business can make. The proverbial life insurance policy for businesses.
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