Surviving 'corporate adolescence' - transitioning from an SME to a larger business

A 2007 study by credit checking firm Veda Advantage has debunked the myth that the majority of companies close in their first year. The study, which analysed the age of companies entering financial administration during the last financial year, demonstrated that only 1.5% of businesses closed during this period.

Veda Advantage facilitates credit reference checks for Australia's major banks and lenders. The vast bulk of applications for consumer credit in Australia are checked against more than 14 million personal credit history files held by Veda Advantage.

The study showed that of the companies entering into external administration in 2007, the highest rate of business closures actually occurred in the third (9.2%) or fourth (9%) year of operation. Almost a third (32.3%) of the company closures occurred in their second to fifth year from start-up. A further 21% of businesses entering into external administration in 2007 were between the age of six and nine.

"The transition from an SME operation to a larger business is like a period of corporate adolescence," says Erica Hughes, Veda Advantage general manager of Information Services and Solutions. "It may seem like an effort at the time, but once a business reaches a certain point in its development, it's time to take on a more mature style of financial operation - or risk losing all the upside of the establishment period. This is the critical time for business to pay attention to their cash flow and credit systems. While it's widely believed that most business fail in their first 12 months, our study demonstrates teething problems actually occur a lot further on down the track - most in the third to fifth year. This is the crucial time to implement an efficient credit system."

"Many businesses expand quickly, without making a deliberate decision to outgrow their SME status. This can mean owners and directors can often feel overwhelmed by the growing pains associated with middle business and can become distracted from core management issues such as managing cash flow. The experiences of our customers points to some of the causes of these ailments including factors such as business directors being unwilling to relinquish control, inexperienced and untrustworthy staff and not having adequate training systems in place to keep abreast of technology."

"One of the most important systems growing businesses should consider is having effective credit-checking policies in place. It only takes one or two bad debts and a business's fate can quickly change from a prosperous entity to a company under the control of an external administrator. With all the effort and investment that goes into establishing a successful SME operation, that's a really disappointing and unnecessary outcome for many otherwise successful companies."

Hughes said many business owners have little knowledge of the credit management tools available to them that can help them avoid risky customers and risky financial transactions. Veda Advantage has formulated the following five tips to help businesses through corporate adolescence and to survive the early years when most businesses enter external administration.

1. Develop and implement a credit policy. It's important to take the time to write out a clear and concise credit policy that applies to all of your customers and clients. Run credit checks on all clients.
2. Check your existing customer base. Don't forget this existing client base as they may be going through changes - directors may have resigned and defaults may have been lodged. Veda's eAlert service allows you to monitor and manage any changes in your customers' credit situation, so you are alerted to the changing circumstances of clients who can't pay their bills - before it's too late.
3. Incorporate a credit-risk approval system. This increases business efficiency by ensuring the credit worthiness of customers quickly and reliably. Products are available which can assess credit risk, based on the rules tailored to individual businesses; removing any guesswork associated with credit management.
4. Clean up data. There are services available which can identify, verify and add further key information, enabling better credit and debt recovery management. This gives an up-to-date snapshot of the health of the ledger and cleans a business's debtors and ledgers.
5. Put a policy in place for recovering bad debts. To recover debts, some take legal action; however, you should always weigh up the advantages and disadvantages of legal action for the recovery of bad debts. With an effective credit policy in place, bad debt will be minimal.

"Having effective credit systems in place can help businesses through the pain associated with corporate adolescence. It can also save growing businesses from thousands of dollars in unpaid invoices and debt collection fees. An effective credit policy is essential to the survival and growth of any company," concludes Hughes.