News & Insights

10% of Australian manufacturers face closure if they lose one customer

Published 26 April 2018

While the Australian manufacturing sector is enjoying an unprecedented boom, the industry remains highly volatile, with many businesses facing closure if they were to lose a single customer.

Australia’s Performance of Manufacturing Index (PMI) jumped to 63.1 in March, surpassing the previous record of 62.1 (set in May 2002), but in a recent report industry body the Advanced Manufacturing Growth Centre (AMGC) warns that businesses need to diversify their customer bases and product offerings in order to build resilience to market fluctuations.

The AMGC attributes recent expansion to new business in Asia, New Zealand and PNG, and urges the sector to leverage other free trade agreements Australia has in place with countries such as Thailand, Japan, the United States and Chile.

The report recommends that manufacturers take steps “to buffer against external shocks” such as losing an account, increased costs of imported parts or global trade prices and weather events, in the case of primary industry products.

Buffering tools

Many small businesses fail after an unexpected event because they are inadequately insured. Insurance Council of Australia research shows that 70% of uninsured or under-insured businesses that incur a major insurable loss close within the following year.

Trade credit

“Virtually any business that sells goods or provides services on credit terms to their customer is exposed to the risk of non-payment,” warns Gallagher’s National Head of Credit, Surety & Political Risks Racheal Tumelty. “Even businesses with the most sound credit procedures cannot avoid the risk of a customer defaulting on payment.

She says that overall sector performance in Australia should be closely monitored, given its volatility, and that manufacturing is among the many industries exposed to losses. “Non-payment notifications remain high,” she cautions.

non-payment balance sheetsWithout the protection of trade credit insurance, businesses with a large single exposure, or where their business is concentrated with one or two major customers, run the risk of non-payment decimating their balance sheets, but Gallagher can offer cover for eligible businesses for which key customer accounts comprise most of the value of outstanding receivables. 

Trade credit insurance allows businesses to stay viable by securing cashflow through covering accounts receivable and providing important third-party information on the solvency and reliability of customers,” Tumelty says.

“It allows companies to mitigate their credit risk exposure by transferring the risk of non-payment to Standard & Poor-rated credit insurers. This preserves profits and protects liquidity and cashflow, the lifeblood of a business.”

Business interruption

Business interruption insurance provides a safety net for businesses experiencing crisis events,” says Gallagher’s BI insurance expert Jamie Mackenzie. “It provides businesses with the funds to pay their continuing expenses and allow them to remain in business while they recover.”

Traditionally thought of as responding to events such as a fire or storm, BI can also apply to other risks, for example: if a manufacturing business has a high reliance on a particular customer or supplier, an insurable event in the customer or supplier’s business that impacts their trade significantly could threaten the manufacturing businesses survival.

Business interruption policies can be tailored to cover these risks so that the manufacturer’s business is protected from the effect,” Mackenzie says.

business interruption as a result of ocean shipping timesSince BI policies protect a business for a set period of time after an insured event, it is important for the insured to consider how long their business would take to return to normal trading. A manufacturer that utilises specialised equipment sourced from overseas should take into account factors such as:

  • distribution by limited suppliers
  • lead times for fabrication to bespoke specifications
  • ocean shipping times

...and ensure their BI policy covers them for that length of time.

As your insurance broker, Gallagher can help to mitigate your risks and minimise the impact of what could close down your business, should the unexpected happen. If you would like to know more about how we can help you, please contact one of our experts

 

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