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Credit risk managers must remain vigilant

Forecasts that have to be corrected a short time later, and a policy that follows the course of infection with its measures. This means for affected companies: There is no long-term planning possibility.
Blog post
10.03.2021

Uncertainty for credit managers

It is still not possible to predict the economic consequences of the pandemic with any certainty. Prognoses often appear in the news, which then have to be corrected a short time later, and with their measures for restricting the spreading of the virus politicians are still focusing on the infection statistics. This will continue to be the case until the vaccination figures rise considerably and a well-thought-out testing strategy is put into place. For many of the affected companies this means there is no chance of long-term planning.

As has been the case throughout the entire crisis, particular industries and regions are badly affected - and others far less so. In addition, a lot depends on how future-orientated the business models of individual companies are. For credit managers this means: look very closely and include these aspects when making decisions.

Wave of bankruptcies - when then?

Early last year a wave of bankruptcies was already being predicted for autumn 2020. In the late summer reports in the media were talking about the insolvency wave being delayed until the winter or the first two quarters of 2021. Now it looks like the whole thing will be postponed until after the German federal elections - or maybe there will be no "wave" of bankruptcies but only "an increased number of company insolvencies". At least this is what it said in a recent government answer to an official question from the FDP political party, as reported in the "Wirtschaftswoche" on 7th March 2021.

The reason for this situation is the government support measures, which have helped companies to get through the crisis, especially the postponement of the obligation to register insolvency. These measures, some of which have been extended several times (albeit in modified versions), have resulted in the number of insolvencies sinking from 18,830 in 2019 to 16,300 in 2020 according to Creditreform. This is the lowest figure since the introduction of the insolvency legislation in 1999.

At the end of February, Spiegel Online, referring to a study by the "Centre for European Economic Research" (ZEW), reported that the number of insolvencies that have been suppressed by the government support measures is around 25,000. These companies would have had to register insolvency by 31st December 2020 due to inability to service liabilities or excessive indebtedness. For comparison: since 2017 the total number of insolvencies has been below 20,000 per year.

The number of registered insolvencies therefore does not present a reliable picture of the real economic situation.

Will the emergency brake need to be applied soon?

The results of the recent Minister Conference at the beginning of March have met with a lot of criticism from economists, as the "Handelsblatt" reported on 4th March. According to the newspaper, in their opinion it will not be possible to either speed up vaccinations or increase the availability of quick-tests sufficiently fast enough, so that the emergency brake in the form of a new, immediate lockdown at an incidence of 100 will need to be applied much sooner than the Ministers would like to admit. This is hardly likely to help the economy.

The planning situation for entrepreneurs therefore remains extremely uncertain.

A discerning eye is needed in credit management

For credit managers this means: as throughout the pandemic, a high level of alertness is necessary. It is important to look precisely and individually at the situation of one's own business partners. Which industry does the company belong to? What is the financial situation and how will the liquidity develop? For export-orientated companies it is also important to take a look at the country risk. And last but not least there is also the question as to whether the business model of the customer (or supplier) is suitable for the future at all.

Industry ratings are an important criterion in the pandemic

The consideration of the industry when evaluating companies provides direct starting points for measures in credit risk management such as the adjustment of limits or the adaptation of ratings. But there are also advantages across different departments. For the Sales Department, for example, there are interesting evaluation possibilities for organizing the acquisition of customers, for designing pricing policy or for negotiating suitable payment conditions. On the supplier side, companies have the possibility of a better overview of the supply chain, making it easier to predict supply problems.

Liquidity prognoses with the help of financial statement analysis

The restrictive measures introduced to limit the spread of the coronavirus have an influence on the individual balance sheet positions of companies. For example companies suffer from reductions in turnover because shops are closed, reduce their personnel costs by applying for short-time working allowance or are unable to fulfil orders due to a lack of raw materials or goods.

The effect of the restrictive measures on the liquidity and the balance sheet rating can be simulated using appropriate financial statement analysis tools and balance sheets from previous years or current business assessments can be extrapolated forward. This allows a forecast of the future development of business partners to be made and companies can react immediately to the threat of default on payments or supply bottlenecks.

Efficient receivables management secures your own liquidity

Receivables management that is automated as far as possible but is nevertheless flexible is an important building block for well-functioning credit management in companies - and not only since the pandemic. But currently, and especially against the background of the wave of insolvencies that may be approaching, the handling of unpaid invoices is of particular importance.

Efficient, successful and at the same time customer-orientated receivables management can only be achieved through the digitization of processes. Flexible receivables management software provides support in looking after customers individually whilst at the same time reducing the workload and therefore releasing time for dealing with especially complex cases.

Best practice

For many years, Semcoglas Holding GmbH have been using the software solution CAM Industry & Trade, which has enabled the company to perform its credit and receivables management centrally and digitally for all its locations. This has resulted in a significant reduction in defaults on payments and a shortening of the days sales outstanding (DSO) by 50%.

Successful automation at Semcoglas Holding GmbH