Monday 7 July 2014

Connecting the credit insurance dots around your Co-op business

News in this weekend's Grocer that some suppliers are taking out trade credit insurance against the Co-op Group should have come as no surprise, given recent issues re debt, etc....

However, as retail trade credit insurance may represent uncharted territory for some suppliers, and bearing in mind that the Co-op is unlikely - or would not be allowed - to fail, understanding the potential financial impact on trade dealings may benefit from a little dot connecting as follows:

As you know, credit insurance premiums tend to cost between 0.3% - 0.7% of a supplier's annual turnover (or turnover of their top customers if say they insure only their mults' business*). However, given that the top 5 can represent 80+% of the business, the cost of credit insurance remains a major issue.

Moreover, as the actual exposure at any time for a supplier on 45 days credit is 12.5% of their turnover, the actual rate of the premium is 5.6% of average amount outstanding i.e.

Say sales = £100,000,000
Premium = 0.7% per annum = £700,000
45 days = 8 times / annum
Actual premium is 5.6% of average amount outstanding.... i.e. ( £700,000/£12,500,000 ) x 100

However, given the current economic climate - and your risk-profile - you may decide that insuring Co-op credit is not necessary...

Again, some numbers may help in assessing your resulting level of exposure, and why some suppliers have run for cover:

Say your Co-op annual turnover is £5m, and your net profit before tax is 9%, with an average 45 days sales outstanding:

Average amount outstanding = £625k  i.e. £5m/8

Therefore,  incremental sales required to cover £625k = £6.9m  i.e. (£625k/9) x 100

It is unlikely that the Co-op will fail, but pro-active NAMs tend to feel better operating within known levels of exposure...

Why not run the numbers for your business, and see how it feels...? 

2 comments:

Anonymous said...

Some very strange assumtions in this piece Brian. Average current premium rate in the credit insurance market is 0.18%. Should you wish to insure your top 5 "mults business" at c£100m turnover, you would expect a rate nearer 0.1% if not lower.

Brian Moore said...

Hi Anonymous
Many thanks for taking the trouble to add a comment and for the information provided. I accept that the reduced risk represented by the major mults would likely be a basis for reaching agreement on lower cover
In preparing the blog-post I googled 'trade credit insurance' and found only two sites that detailed average costs i.e. 0.2% - 0.5%, and 0.3% -0.7% of sales turnover.
Thanks again
Brian