Supply Chain Risk: Managing Problematic Receivables

by From the Top on 2013-01-23 13:26:44

Michael FrigoAs the amount of late payments increased and payment defaults climbed in 2012, it became clear that managing trade risks to protect cash flow and financial stability is vital. 2013 marks a new year and yet the challenge remains, how does a company successfully manage problematic receivables?

According to Atradius’ recently released Economic Outlook report, the global economy is facing two major potential risks: an escalation of the crisis in the Eurozone and a further slowdown in the growth of emerging markets. Indications that these risks affect global economic growth include a decrease in global consumer demand and tight credit conditions within the Eurozone. These factors have led to restrictive lending from banks and increased the cost of conducting business.

Asian companies continue to feel the impact of the aforementioned factors. According to Atradius’ Payment Practices Barometer, the average level of uncollectable receivables for both domestic and international trade has risen to 1.3%. Payment delays have increased significantly, with around 30% of all business-to-business invoices paid beyond the due date and more than 10% remaining unpaid after 90 days. The economic growth prospects of emerging Asian markets have deteriorated as demand for exports has decreased due to the economic troubles experienced by more mature markets.

Uncollected invoices may put the supply chain in jeopardy. When a customer does not pay its supplier, that supplier may fail to settle its invoices with its other business partners. An increase in bad debts may stop the company from investing in new technologies and infrastructure that will ensure the supply chain continues to work efficiently. The threat of uncollected invoices to the supply chain can be stopped though trade credit insurance and collections services.

3 Tips to Mitigating Risk in Supply Chain Management
Maintaining a steady cash flow amidst an uncertain economic climate will remain a challenge for business leaders and supply chain managers throughout 2013. Good credit management and risk assessment plays a significant role in protecting businesses from payment default by flagging risks before a transaction has yet to be conducted.  
The following tips are aimed at promoting proactive risk management and cash flow protection:

A.Credit Vetting
The potential for payment default or cumbersome debt due to insolvency is always a risk when trading on credit, thus the process of assessing the creditworthiness of customers is vital. Armed with this information, suppliers have the distinct advantage of making informed decisions when it comes to how much credit customers should be allowed as well as the credit period.

Although credit vetting agencies offer the above information, it is recommended that supply chain workers undertake their own research using publicly available information or through direct contact with customers. Important information includes company name, registration details, principal activities, directors and shareholder details, legal civil judgments or cases pending, internet news and information, company accounts, etc.

Payment collection is a crucial element of credit management. According to an article published in The Business Times, the amount of cash being held by companies recently reached an all-time high of USD $1 trillion, 65 per cent more than five years ago. While this is the case, the fact remains that many companies are still struggling to pay their suppliers or business partners.

In order to tackle overdue debts head-on, accounts can be segmented by size and amount owned. In addition, early payment notices provide amicable yet firm reminders. Furthermore, riskier accounts can be placed on ‘watch lists’ and constant follow-up with customers can help ensure timely payments.

C.Protection From Political Risks
Political risk insurance protects balance sheets against financial loss due to payment defaults caused by political events, such as strikes, riots, civil commotion, terrorism, civil war, embargo, currency inconvertibility. Political risk insurance protects companies from unforeseen risks that could impede the company’s financial operations and overall financial growth.

Political risk insurance is especially needed in emerging markets where opportunities are abundant but political unrest remains common.

While there may not be a foolproof strategy that shields companies from problematic receivables, credit management tools such as credit vetting, collections, and protection from payment defaults due to political risks can help facilitate a steady cash flow and financial stability, especially in challenging economic climates.

About Atradius
The Atradius Group provides trade credit insurance, surety and collections services worldwide, and has a presence through 160 offices in 45 countries. Atradius has access to credit information on 100 million companies worldwide and makes more than 20,000 trade credit limit decisions daily. Its products help to protect companies throughout the world from payment default risks associated with selling products and services on credit.

Contributed by: Mr. Michael Frigo, Country Manager Singapore, Atradius.