The risk none of us own: Protecting our businesses from third-party shock

When Sydney developer Bathla Group went into voluntary administration on 25 August, most of the coverage focused on the sheer size of it. And to be fair, the size is hard to ignore. Around $3.4 billion in liabilities, more than 540 related entities, roughly 2,000 homes under construction and many thousands more in the pipeline.

But there are other people at play here too - the subcontractors. With a business the size of Bathla there must be hundreds (if not thousands) of businesses that had already done the work, supplied the materials and paid their own people, and who are now unsecured creditors waiting to see what, if anything, comes back. One foundations contractor was reportedly owed close to $400,000. And, around 1,000 subcontractors were reported to be owed sums of up to $100,000 each.

So, although this is a story about property and the construction industry, for us, it's also a story about what happens when a business you depend on stops being able to pay you, and how quickly that becomes your problem too.

This is an ecosystem risk, not an industry one

We all, as businesses, sit inside a web of other businesses. Customers who owe you money, suppliers you rely on, a lender, a landlord, maybe one major partner that a big chunk of your revenue flows through. Most of the time that web is more or less invisible, because it works.

It becomes visible when one part of it gets into trouble. In the months before Bathla's administration, it had reportedly stopped paying some suppliers, and in some cases lenders stepped in to fund subcontractors directly. For the businesses further down the chain, the money they'd planned around (for loan repayments, the ATO, wages) simply froze.

And, you don't need a $3.4 billion collapse for this to hurt. A couple of weeks' pause in payments from a major customer can be enough to squeeze a business that is otherwise perfectly healthy. Profitable on paper, short of cash in the bank. This can happen across any industry, of course. Beyond construction, it could be a retailer whose key wholesale account starts paying late, a not-for-profit waiting on a delayed grant instalment, or a professional services firm whose biggest client starts paying in 60 days instead of 30. The mechanics are pretty much the same.

It's also worth saying that most industries work this way. Businesses supply work on credit and trust they'll be paid, because that's what's expected. That's partly what makes this kind of risk so tricky. There's no single bad decision to point to. The exposure is largely built into how the business trades.

The questions that tend to fall between the cracks

Most of the leadership teams we work with know their biggest customers by name. Fewer, we'd guess, could tell you off the top of their head what share of revenue those customers actually represent, how many weeks of cash they'd have if one of them stopped paying tomorrow, or which suppliers they genuinely couldn't replace inside a month.

None of these are particularly tricky questions but they just don't always sit neatly anywhere. They're not really part of the year-end accounts, and they're not quite day-to-day operations either. That gap is a big part of why we and others like us exist. A lot of what we do is simply making sure these questions get asked early and to the right people. 

Building financial firewalls

This isn't about predicting the next collapse because you can't, really, and trying to can be something of a trap. It's more about making sure that if someone in your network does get into difficulty, it's a hard month for you rather than an existential one.

A few of the things we work through with businesses we partner with:

Knowing where the concentration sits. 

Pull together a simple view of revenue by customer and spend by supplier, then look honestly at the top few names on each list. If one customer is 30 or 40 per cent of revenue, that isn't automatically a problem (plenty of good businesses are built that way), but it should be a position you've deliberately chosen rather than one that surprises you.

Diversifying where it's practical. 

Sometimes that means lining up a second supplier for a critical input, even if they're a little more expensive. Sometimes it's an intentional push to grow a secondary revenue line. We’re not talking about walking away from a big relationship (absolutely not). It's more about making sure the business isn't balanced on it.

Revisiting debtor terms. 

Payment terms have a habit of drifting, especially with long-standing customers you like and trust. Deposits, progress billing on larger jobs, credit limits that get checked regularly. Tightening these up is one of the more effective protections available, and it doesn't need to be a confrontational conversation.

Watching for the early signals. 

The warning signs usually show up in your debtor ledger well before they show up in the news. Delays on payment or part payments start appearing. Someone asks to change terms. A regular, proactive review of key accounts picks this up while there's still time to do something about it.

Stress-testing the cash flow forecast. 

It’s an obvious one but a good forecast shouldn't only show the expected case. It should be able to answer questions like: what happens if our biggest customer pays six weeks late? What if a key supplier can't deliver for a month? Working through those scenarios in advance means the leadership team isn't figuring it out under pressure.

Why it's so easy to miss

Part of the problem is that contagion risk doesn't really appear in standard reporting. The monthly P&L won't tell you your biggest customer has started paying a little later each month. And the balance sheet will keep showing those debtors as an asset, right up until the point they aren't.

So spotting it early means joining a few things up: what's happening in the debtor ledger, what the forecast says about the next few months, and what's being talked about around the board table. Each of those only gives you part of the picture on its own. For us, that joining-up is a big part of the job. It sits alongside whatever finance support a business already has. It's really just the forward-looking piece that people struggle to make time for when everyone's busy running the business.

A good place to start

If the Bathla news has prompted a few uncomfortable questions about your own exposure, that's probably a healthy thing. A good first step is simply to list your five largest customers and your five most critical suppliers, and ask what would happen if any one of them went quiet for a month.

And if you'd like a second set of eyes on the answers, we're always happy to have that conversation so feel free to get in touch.

Frequently asked questions

What is third party risk for a business?

Third party risk is the exposure a business has to the financial health of the customers, suppliers, lenders and partners it relies on. If one of them gets into difficulty, for example by paying late or entering administration, the impact can flow straight through to your own cash flow, even if your business is otherwise healthy.

What is third party supplier risk?

Third party supplier risk is the chance that a supplier your business depends on can't deliver, raises prices sharply or gets into financial difficulty, disrupting your operations and cash flow. Managing it usually means knowing which suppliers would be hard to replace, having back-up options for critical inputs, and building those scenarios into your cash flow forecast.

How can a business reduce customer concentration risk?

Start by looking at revenue by customer and spend by supplier, and identify how much depends on the top few names. From there, practical steps include diversifying suppliers for critical inputs, growing secondary revenue lines, reviewing payment terms and credit limits, and stress-testing your cash flow forecast against a major customer paying late.

What are the early warning signs that a key customer is in financial difficulty?

Warning signs often appear in the debtor ledger first: a customer who usually pays in 30 days changes to 60, part payments, or requests to change payment terms. A regular review of key accounts helps pick these up while there is still time to act.

Does this kind of risk only affect construction businesses?

No. While the Bathla Group collapse is a construction story, the same dynamic applies across industries, such as a retailer whose wholesale account pays late, a not-for-profit waiting on a delayed grant instalment, or a professional services firm whose biggest client stretches payment terms.

How can an outsourced finance team help manage third party risk?

A senior-led outsourced finance team connects the debtor ledger, the cash flow forecast and leadership discussions, so emerging risks are spotted early. It works alongside a business's existing finance support, adding the forward-looking analysis that busy leadership teams often struggle to make time for.

Photo credit: Ben Allan from Unsplash