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Poor payment practices driving insolvency risk

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The latest barometers from Atradius, Coface, and Dun & Bradstreet are timely reminders for accountants to keep abreast of the factors affecting payment practices and cross-border challenges.

15th Dec 2021
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As the economic recovery continues, businesses trading internationally are calling on their accountants to advise on what they can expect as international payment practices, supply chain disruption and inflation headwinds continue to hamper business resilience.

Rising payment defaults is driving a heightened insolvency risk. Globally, insolvencies are forecast to rise 33% next year as insolvency courts begin reopening around the world and delayed insolvencies from 2020 and 2021, together with new cases, come to court.

According to the latest barometers from Atradius, Coface and Dun & Bradstreet all major regions are set to be affected, and businesses need to take steps to protect their accounts receivable now.

Global recovery has stalled

Signs that the global recovery is losing momentum are starting to emerge. Continued disruptions to supply chains (including the impact that the worldwide shortage of HGV drivers has on logistics) is hindering production, sales growth globally, and increases in freight rates has seen prices rise worldwide.

Adding to this is the shortage of semiconductors which is impacting a wide array of industries from the automotive through to information and communication technologies sectors both in advanced and emerging economies.

The effect of China

Another factor slowing the global recovery momentum is the slowdown in China, reports Coface. Given the importance of China’s role in international trade and in regional supply any slowdown in the region poses significant downside risks impacting many businesses worldwide. 

China’s policy tightening in credit growth – particularly in the real estate market, softening consumer consumption due to Covid variants, energy rationing for industries, and its “dual carbon” goals to hit peak emissions before 2030, with the aim achieving carbon neutrality by 2060 – are all factors behind the deceleration in Chinese economic activity.   

In addition, this is impacting emerging markets such as Latin America, Middle East and Africa.

Labour shortages

Elsewhere, labour shortages are continuing and as businesses offer higher compensations to fill job vacancies, the increase in labour costs has impacted on inflationary pressures and led to several banks hiking their benchmark policy rates in recent months.

“Rising inflation and a potential interest rate hike in the near future all unfortunately mean that 2022 is set to be painful,” says Douglas Grant, Group CEO, Manx Financial Group Plc.

“Raw material and labour costs are set to rise which will have to be passed on to the consumer. The demand for working capital in the UK is set to soar to unprecedented levels as more and more businesses desperately need capital to counteract supply chain issues and keep operating while adapting to life outside of the EU bloc.”

Invoices overdue

According to the Atradius Payment Practices Barometer for Western Europe, 53% of all B2B invoices were reported to be overdue (compared to 47% last year), and write-offs had increased from 7% in 2020 to 10% this year. 

As companies seek to protect their cashflow from late payments, 53% are said to have opted for trade credit insurance whilst 54% had chosen trade receivables securitisation.

To prop up their liquidity, 32% of companies had chosen external financing from banks and other financial institutions, whilst 70% had resorted to self-insurance setting aside bad debt reserves so that they could absorb any bad debts internally and mitigate the adverse impact of potential losses. This was particularly seen by companies in Belgium.

Days sales outstanding

With Days Sales Outstanding (DSO) deteriorating (reported by 47% of companies), businesses dealing with companies in Western Europe have needed to strength their internal credit control processes.

Some 70% of businesses in Italy and 64% in the wholesale sector, and 80% of companies in the textile and clothing industries across Western Europe report to offering discounts to aid cashflow – however, this comes at a cost, and particularly impacts on profit and operating expenditure. 

Nearly 50% of businesses say they are expecting their DSO to worsen over the coming months – reportedly to be the highest in Italy at 64%.

Overall, SMEs across the Western Europe say they expect DSO to deteriorate, and this is particularly being seen in the services sector (54%) and the chemical industry (63%).

Credit collection

Credit collection administration costs have increased, and 60% of businesses in the region say that their costs for managing customer defaults have risen in the past year. 

This was particularly seen for those dealing with the manufacturing (62%) and transport sectors (65%). 

Companies in Belgium report the highest impact of internal costs at 56%; whilst for the rest of the region: 48% of large enterprises, 44% manufacturing businesses; 49% of businesses in or servicing the transport and consumer durables sectors; and 48% of companies in electronics and ICT, all say internal credit control costs have increased.

Overall, 79% of companies in the region say they expect their customers’ payment practices to improve over the coming months as a result of allowing customers more time to pay invoices. 

This delay in invoice-to-cash turnaround is likely to trigger liquidity shortfalls for businesses, and a deterioration in their own payment practices – which is yet another reason why the risk of insolvency is expected to increase in 2022.

In our next article we will look at the payment practices of Eastern Europe, and whether trade credit insurance in Europe is a cost-effective alternative to retaining credit risk in-house.

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