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Exposure a sign of poor practice: survey

AUSTRALIA’S top companies are using poor financial risk management practices and have a dangerously heavy exposure to bad debts and late payments, according to a new survey of the nation’s top 500 companies.

In a climate characterised by high-profile corporate collapses such as Enron, One.Tel and Ansett, the survey, released by risk management firm Lincoln Indicators, shows companies lack proactive credit risk management practices and have an inability to read the early warning signs of corporate failure.

The survey of chief financial officers, credit managers, financial controllers and accountants showed that Australia’s big businesses were operating under severe working capital restrictions.

Approximately 90 per cent of debtors are paying late and 56 per cent are paying between 30 and 90 days past due date.

The survey revealed a lack of knowledge among respondents in the debtor ledgers that they managed. About 32 per cent of respondents did not know approximately what proportion of their organisation’s assets were made up by trade debtors, while 30 per cent did not know how many days their customers took to pay their bills (on average) as measured by day sales outstanding (DSO).

Of the 23 per cent of companies whose exposure to bad debts decreased over the past two years, 56 per cent said this was due to more proactive credit management and 28 per cent said it was due to tougher credit policies.

Lincoln Indicators business development manager Tony Lincoln said the survey demonstrated that the benefits of proactive credit management were not well understood by most large Australian companies.

“Credit management in most cases is misinformed and under-resourced, with little apparent knowledge of how important financial risk analysis is as a performance measure,” he said.

“Companies are not using fundamental techniques to protect their investment in their debtors, and are entering deals with no real knowledge of the customer’s ability to pay.

“Given the string of recent corporate collapses, proactive credit management is essential to reduce exposure to late payment and bad debts.”

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