Expect the Unexpected

Risk management is not only about those risks that are readily identifiable, to quote Donald Rumsfeld, former US Secretary of Defence, the “known knowns” or the things we know that we know, but more importantly, companies also need to plan for the “known

Let’s take, for example, the current largest liquidation in South Africa’s history; that of the First Strut Group. This is probably a perfect example of a “known unknown”! On the face of it, First Strut was the ‘darling’ of the construction industry; a large number of financiers were happy to accept their paper; it was rated BBB; it was the epitome of a successful group ...... and yet no one could have foreseen what was actually going on behind the scenes. Dealings with the group were seemingly beyond reproach, but what we know now is that this was all an incredibly elaborate smokescreen at best and, at worst, the most intricately woven deliberate fraud ever conceived. Only time will tell.

The shock that has rippled though the business sector is palpable; the financial sector is reeling while countless employees are pondering a very uncertain future! Suppliers et al, who may have believed they were dealing with a ‘sure bet’, are licking their wounds and wondering how this could have gone so wrong. The question for every shareholder, stakeholder, director or company executive now to ask is what can be done to ensure that this does not happen again; and happen again it will – that is in fact the only guarantee!

Never before has there been stronger proof offered that insuring against the payment default of even the most significant of debtor companies, is the most prudent of risk management considerations.

“I have witnessed the dire straits that too many uninsured suppliers are facing following the demise of many other companies in liquidation,” says Gideon Bochedi, General Manager Salvages at Credit Guarantee Insurance Corporation. “Suppliers vary in size; some can absorb partial losses while others simply cannot! It is extremely painful to look into the eyes of directors who are patently aware that their own companies may face closure in the very near future. They are unable to replace lost turnover and are faced with attempting to repair very damaged cash flows on diminished profit margins due to the magnitude of some of the very large business dealings a la First Strut.”

The recent spike in Business Rescue applications, significantly up on last year, is testament to the strain in the economy and unfortunately, many of those companies have already been liquidated.

“Windfall orders, big name companies and the potential cost of counting irrecoverable losses are part of doing business, but all could have been avoided had the risk been assessed and a credit insurance policy been put in place,” concludes Bochedi.