Taking credit

It’s important to give credit where it’s due. The problems arise when it falls due and isn’t paid back.

Credit management is an evergreen issue in the industry, and never more relevant than now. Compare printers with banks: while the Big Four post record results despite the economic gloom, our companies in our industry survive on razor-thin margins and record low profits. But when it comes to lending, the print and paper sector takes far greater risks than a typical bank. Can this sector continue to turn a blind eye to credit risks or act as the lender of last resort for customers who wouldn’t get accounts elsewhere?

The industry faces two converging storm cells from the tumultuous economy and the rise of online communications. These forces are outside of anyone’s control. But while credit management should be within a company’s control, bad debts have become a third front in this perfect storm.

The printing industry is not alone. Kirk Cheesman, managing director of broking firm National Credit Insurance (NCI), said print and paper is in the “bronze medal position” in terms of the value of claims, after the building industry and the electrical sector (which relies heavily on construction).

This is not an award anyone wants to win. Third place makes print and paper one of the biggest credit risks in Australia.

NCI purports to broker 60-65% of the brokered credit insurance policies in Australia and New Zealand. It has represented many of the major paper merchants and larger print groups. In the 2011 calendar year, it received 29 claims from the print and paper industry, totalling $10.7 million of bad debt.

Credit insurance represents one way to lower the odds of a fateful exposure, but the running tally of failures is warning insurers to stay away from the industry.

“Over the past five years, credit insurance has not made money out of the print and paper industry,” said Cheesman.

“Overall, it has been a loss-making industry for insurers due to the ongoing number of bad debts, so insurers have been telling us that suppliers in print and paper have to take more risk themselves, share in the risk profile and pay higher premiums.”

He added that at least one insurer has told him it will not touch print and paper any more.

Unsurprisingly, these rivers of bad debt are flowing amid a downbeat economy where more companies are going bust than ever. Cheesman said: “I think it is tougher now than it was in the eye of the GFC. The government stimulus kept a lot of businesses going.”

Record casualties

According to the Australian Securities and Investments Commission (ASIC), February 2012 saw the highest number of external administrations since records began in 1999. Some 449 of these were wound up through the courts.

March wasn’t much better, with 1,014 external administrations. Across the March quarter, there were a whopping 2,655 administrations. Of these, 874 were court wind-ups: a 57.8% rise from the corresponding quarter in 2011. New South Wales, the worst hit state, comprised almost 40% of the total administrations.

Printers would be well represented in these numbers, which is why credit management – a topic that never goes out of fashion – is particularly in vogue at the moment. Print and paper firms are totally dependant on healthy credit relationships between trade partners. Company failures have been an all-too familiar reality in recent years, but the recent liquidation of Octopus Solutions caught the industry’s ire more than most. The fact the company in question was a print broker – already printers’ favourite punching bag – is part of the explanation for the outcry. But more worrying were the names among the $1.6 million of bad debt attached to Octopus when it was wound up.

There’s an expectation that the likes of Offset Alpine, SOS Print & Media and Blue Star should know better than to allow themselves to become so exposed, especially when all the warning signs were there. Hindsight is a beautiful thing, and
it was with a mixture of regret and embarrassment that many of the printers in question told ProPrint that they saw the red flags – and ignored them.

Cheesman said the old rules no longer apply. “You have businesses in this game who have been around 30 or 50 years falling over. There’s the old saying that ‘they’ve been around 50 years, they always pay on time’. Then you get a letter from the administrator.”

This is not new, but there’s no overarching body to provide quantitative data on whether credit terms are being stretched any worse now than in the past. The best judges are those firms that regularly provide credit, such as consumables suppliers.

Simon Doggett, managing director of KW Doggett Fine Papers, agrees that credit is under pressure, but this is just an accepted part of the structural change sweeping through print communications.

“I do not think the market and these pressures have got significantly worse in recent times. However, the ability to refinance and access funds has made it difficult for businesses to work their way through funding pressures. If the trend continues, there is a risk the industry will face further funding and insurance pressures,” he said.

Merchant bankers

Paper suppliers are regular casualties in this rapid-fire consolidation. They have long been the industry’s unofficial bank. Despite many voicing their desires to tighten up their credit policies, it’s a rare week that ProPrint doesn’t see a creditors list with a bad debt to at least one paper merchant.

Case in point is the creditors list from business process outsourcing giant SEMA. In this case, Doggetts is expected to take a haircut, as are Paperlinx divisions Dalton and Spicers. Meanwhile, BJ Ball’s debts could exceed $100,000. It’s a far cry from the $3.5 million of bad debt that its predecessor CPI Paper had to swallow when Sydney web printer Quality Press went belly up in mid 2010, but still a painful hit in a market where margins are already under intense pressure.

David Hunt, national credit manager at Fujifilm Australia, agrees with Simon Doggett that the situation is no worse than it was a year ago. “Unfortunately, it takes a major incident like Octopus to wake people up and make them realise the importance of the issue.”

Maybe, then, the printing industry’s approach to credit is not getting worse, but has simply been poorly managed from the start. ProPrint proposed this theory to readers in a recent online poll, asking ‘Is the industry’s credit control broken?’

Some 91% of the 150 votes said it was. There was a similar response back in April 2011, when ProPrint asked readers about their average debtor days, and found that almost 30% of readers had terms extending beyond 60 days.

Insurance broker Kirk Cheesman scratches his head at how businesses can operate in these conditions. In an industry where debtors can stretch payment out toward 120 days, the strain on cashflow is a serious impediment to trading.

“I can understand why [suppliers allow] 60-day terms, but doubling that, I don’t know how people can fund their business.

“If you have funds owing to you for 120 days, and you supplied 30 days before due date, to fund that time period must be costing a lot of margin, hence why people get into financial trouble,” said Cheesman.

As work dries up, the temptation to take an order from a risky customer can be too much to resist. This is where the problems start, said Colin Porter, managing director of CreditorWatch.

“Broadly speaking, in this climate where business owners are balancing on the edge, and their commercial and personal liability is significant if their business was to fail, they often believe they can’t afford not to accept the work, even if they can see a potential risk. Their concern is the short-term revenue and worry about the risk and effects of bad debt later,” said Porter.

But the motto should be “a sale is not a sales until it gets paid”, and unfortunately, even that short-term revenue gain can fail to materialise if the customer is slow to pay. More often than not, clients are trying to stretch out their payment terms, which puts great strain on a printer’s cashflow.

Point of reference

One industry contact told ProPrint that trade references were a must before his company would consider extending credit. If the customer doesn’t stack up, then the easy solution is to just say no to the work.

But this decision is made much harder due to industry overcapacity. Customers know that printers are desperate for work; ProPrint hears that buyers are increasingly playing one supplier off against another to secure extended terms.

Specialists warn printers not to play this game. Fujifilm’s Hunt said printers should demand guarantees before offering accounts. If customers won’t “put skin in the game”, Hunt said printers should ask why not. He added that the industry needs to join forces on this issue or risk being “divided and conquered”.

For Cheesman, extended terms are a value-add and should be charged accordingly. Just as banks charge 10-12% if customers ask for an overdraft, printers need to find ways to recoup the margin lost through extra debtor days, he said.

“If people want free credit from their suppliers, it has to be factored into some margins. I am happy to give you 60 days free credit but not if you are pushing me on margin. But when people are struggling for top line and want to keep their market share, they do some silly things,” said Cheesman.

Another possibility is cash on delivery (COD). This is usually the last resort when a customer has used up all of a supplier’s good graces. In some industries, COD is the norm; in printing, it is seen as the mark of a relationship teetering on the edge, sometimes the final option before a court appearance.

While some people suggest a move to COD could bring benefits, they also agree it is fanciful idea.

CreditorWatch’s Porter said: “In this economic climate, cashflow is one of the biggest challenges for most businesses, so to expect all your clients to switch to paying COD is just a dream.

“However, presenting a discount to a risky client if they pay COD is great way to get immediate cash in the door with little risk. Printers should strive to get payment at time of order, prior to putting ink on the paper, which keeps the control in their hands,” he added.

Scott Gavenlock is the financial controller of Avon Graphics. He said that in five years with the trade embellishing house, the state of credit and business confidence is as bad as he has seen it.

“It would be nice to think you could run on COD but I don’t think you could these days. If we tried to run on COD, our printers may not get paid for a couple of months so we would be asking them to pay before they get paid,” said Gavenlock.

The industry is one long line of dominos. Just as one bad debt can roll through the supply chain, so too would any positive action need to be applied from one end to the other.

Matthew Whitton, owner of south east Queensland’s Fast Proof Press, agreed with Cheesman and Porter than a way to solve the credit problem would be to provide incentives for clients to pay on time.

“With any form of credit, there is risk. The banks manage it well with interest and fees. Sellers of print could use the same mentality to reduce risk by increasing the cost of the credit,” he said.

Does he believe the industry could survive on COD? “I think it could, yes, [but] it would need an industry change and full support from everyone involved. Without that it would crumble.”

Going south

Many experts say the solution is tighter credit terms. Yet this poses problems. It’s easy to argue that suppliers who fail to stick to the letter of their credit policy are to blame when things go south, but the reality is not so simple. If every supplier put every account over 60 days on stop tomorrow, the industry might well implode.

One trade finisher told ProPrint he was responding to the market challenges with a more aggressive approach to credit control. This was why he asked not to be named, because this increasingly stringent application of the firm’s credit policy was causing friction with the customer base. He’s not alone.

Another story doing the rounds involves a print firm with a reputation as a good operation. The managing director told ProPrint that a key supplier recently put his firm on stop credit after a relationship stretching back a decade. The account had reached 65 days, which had been typical through more than 10 years of supply. Despite spending hundreds of thousands of dollars a year with this well-known supplier, the first the MD heard was a note through the accounts department.

Broken trust

Putting aside the lack of tact, it is a clear sign of the state of the market. The downward spiral is not just squeezing margins and volumes – it is destroying trust, the currency of any business relationship.

Avon Graphics’ Gavenlock said that no matter how tough it gets, companies have to work together. “We are getting strung out but we have to be supportive because we are all in the same boat.

“Companies can be getting out as far as 90 days and over. But we are reticent of putting our foot on jobs because we know how tough it is and we are trying to be as supportive. At this point, you have to be a little bit lax. I’d be reticent before I sent someone to legal because it could be enough to tip them over.”

Credit expert Kirk Cheesman agreed that now is not the time for a take-it-or-leave-it attitude. “In the current economic climate, it is very difficult to rein things in. You would be silly to do that at this point in time. You can cause more problems by making rash decisions.”

Additional reporting by Nick Bendel


Debt-laden: Year of living dangerously

A sample of printing industry companies that have collapsed over the past 12 months and their debts

May 2012

• Octopus Solutions: $1.6m

• SEMA: $7.2m

April 2012

• Sands Print: $5m

March 2012

• ABC Printing: $3.7m ($900,000 unsecured)

• Steve Parish: $2.9m ($1.5m unsecured)

• Good Impressions: $1.2m

September 2011

• JT Press: $2.1m (unsecured)

August 2011

•  Embassy Press: $2m ($729k unsecured)

• Supply One: $1.35m (unsecured)

June 2011

• Colourscan: $1.16m (unsecured)

• Australian Envelopes: $10.3m (unsecured)

May 2011

• Moore Australasia: $17m ($7m unsecured)

April 2011

• D&D Colour: $867,000 (unsecured)


Top tips: Extending credit

1. Know who you are dealing with

When opening new accounts, ensure you have the correct legal entity. If litigation is required and you have the wrong details, your chance of recovery is minimal. Ensure directors sign guarantees and don’t allow them to alter terms and conditions

2. Avoid extending terms

Particularly relevant to the printing industry where not so long ago, some suppliers were offering 105-day terms. The old adage of the longer the debt remains unpaid, the harder it is to collect is always relevant and in the current economic climate, it is critical to collect your debts promptly.

3. A new account is not always an opportunity

Your sales team may not be in sync with this but when opening a new account you need to consider why this customer is switching. 

It could be due to the skills of your salesperson, but is it because several of your competitors have stopped supply? On this point, the industry credit bureau is an excellent tool for identifying potential problems.

4. Watch out for the ‘first-purchase syndrome’

This is where a customer buys once and never pays. This pattern typically occurs around November and December and sometimes just before the end of financial year. Monitor these accounts to see if they make subsequent purchases. If not, that is your first clue. Consider making the customer pay cash until a regular buying pattern is established.

5. Stay informed

Whether it be online information, credit reporting agencies, credit bureaux or credit insurance, use whatever is necessary to obtain the facts. Always make decision on information you have gathered and do not be seduced by rumour.

Peter Kerlin is a director at Trade Bureaux Australia, with a focus on the printing industry. For more helpful tips, see the Guest Column from PKF Advisory .

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