By Michael Feldwick, Head of UK and Ireland at Tinubu Square, developer of credit risk intelligence
For corporate treasurers, CFO’s and CEO’s of B2B organisations, stablising customer debts is an increasingly important factor in lowering operating costs, generating higher working capital and engendering more confidence in shareholders.
In Europe more than a quarter of business failures are as a result of customer defaults and rates relating to bad debts have risen from on average .6% to 1%, depending on the industry and location. Only last month research from the insolvency trade body R3 showed that in the UK there are now 160,000 businesses that are only paying the interest on their debt, but not the debt itself. This has given rise to what are being termed ‘zombie’ companies, and includes organisations that are so over-exposed that they are never likely to pay their debts – technically insolvent.
This makes protecting customer receivables every B2B company’s greatest priority —and biggest risk. And it puts credit risk management at the top of the strategic agenda for CFOs and CEOs of small and large businesses, whether or not these businesses carry credit insurance.
The key to navigating a safe course is by identifying and analysing risk wherever and whenever it’s possible to do so. Managers should be seeking proactive credit risk management, that provides detailed intelligence on the financial health and credit worthiness of all customers or clients —and appropriate tools for assessing their individual and collective impact on the balance sheet.
So the CFO can easily assess the relative security of a debt, he or she needs answers to key questions such as what are our outstanding per risk categories and what is the cover rate of total outstanding customer debts? Being risk-aware will require knowing how secure trade debts are and whether they can be leveraged to guarantee bank credit and reduce borrowing costs.
Single source reporting will not be enough. It can take days or weeks to collect information and make thorough credit assessments manually, by which time, the information is already outdated. An effective risk-aware assessment process takes into account industry risk, country risk and customers’ financial health and credit history—all of this information gathered, integrated and analysed from various sources around the world. If your credit management is not integrated properly throughout the organisation you will be left vulnerable to risk and lacking the real intelligence needed with which to make strategic business decisions.
Companies need to be alert to changes in credit status. Today’s economic climate can impact even customers with a strong credit history and historically good financial health. Every B2B, no matter what their size, needs timely visibility into current or potential customers’ businesses. They need to know, and be able to track, customers’ supply chains, the nature and source of their debts and what factors make them able to pay or likely to default on credit. Visibility into the always current financial health of customers lets companies understand their exposure instantly as “very good risk” “low risk” “average risk” or “high risk.”
For companies looking to expand into new markets the question is what level of risk can be tolerated. As more European based companies look for growth in new, unfamiliar markets in Asia, South America and Russia, risk increases. Companies have to be able to determine the credit risk of potential buyers operating in these areas based on “on the ground” intelligence.
Risk-aware credit intelligence improves corporate performance by providing superior control over customer credit exposures in existing and new markets. Companies secure their trade debts and improve liquidity, working capital, credit management processes and growth position.For these companies, the pay-offs are strategic, operational and financial.
Immediate visibility into the current financial health of customers lets B2B businesses understand their exposure instantly—so if one customer slips from low or average risk to high risk, businesses can adjust credit limits until the customer’s financial position improves. And when companies can accurately qualify, assess and monitor the credit worthiness of customers and prospects, they are able to grow safely and pursue export markets.
With real-time intelligence about trade debts and improved decision making about credit, enterprises can manage risk according to their risk appetite—for each account and aggregate risk on their entire Accounts Receivable (A/R) portfolios. They are then better able to hold the value of customer debts, sustain cash flow, and improve the accuracy of forecasting. Ultimately, when receivables are strong—fewer days outstanding and fewer customer defaults—they’re worth more to banks and credit insurers.
Bridging the gaps between back-office financial (ERP, A/R) and front-line CRM systems ensures that everyone involved with customer acquisition and management works with the same information—from lead generation, to closing a sale, to follow up throughout the entire order-to-cash cycle.
With an integrated credit risk management process in place, businesses can control and enforce credit authority levels, customers’ credit-worthiness and credit limits, workflows for credit approvals and ongoing monitoring of customers’ orders, payments and credit status.
According to a 2011 report by Aberdeen Group, companies that have implemented just a common repository for customer risk information lowered past due A/R by 10% and are 31% less likely to cite customer non-payment as a top pressure affecting their business. Companies that regularly score their A/R portfolio, experience 28% lower past due trade debts than companies not scoring their entire A/R portfolio.
With strategic risk awareness, marketing can purge high-risk companies from campaign lists—saving money on campaigns, eliminating follow-up to responses from high-risk companies, and earning a higher ROI from marketing initiatives.
Sales can focus their efforts on the strongest, high-value opportunities that will actually deliver fast, full revenue recognition. This will show up on the company’s balance sheet not only as higher assets(revenue and low-risk accounts receivable), but possibly a lower debit (cost of sales) because sales teams will be tangibly more productive.
Michael Feldwick is Head of UK and Ireland at Tinubu Square, the developer of credit risk intelligence solutions.He has spent over 25 years as a highly successful credit management specialist with experience in domestic, export and international credit insurance within a commercial and risk environment. Prior to Tinubu Square, Feldwick was Head of Foreign Risk Underwriting at Euler Hermes UK plc.
The Impact of Covid-19 on Planning
By Nilly Essaides, Sherri Liao and Gilles Bonelli, The Hackett Group
The economic consequences of the coronavirus outbreak vary by country and company, but one common factor is that most financial planning and analysis (FP&A) teams have had to go back to the drawing board to revise their forecasting process and update scenario plans. The unprecedented level of disruption in business conditions compels FP&A to abandon their traditional, tedious, bottom-up forecasting processes to produce forward-looking insights faster and more frequently. To accomplish this, FP&A should deploy high-level, cross-functional teams that, by working with a small number of KPIs, can assess how different scenarios are playing out in the market and recalibrate the business outlook.
Forecasting at the speed of change
The human and economic devastation caused by the rapid spread of Covid-19 upended budgets and rendered performance targets obsolete. At most companies, even worst-case scenarios did not account for an event of this magnitude – and for some, their very survival is on the line.
Under normal conditions, forecasting and scenario planning are distinct activities. Forecasting is about understanding where the business is landing compared to expectations (monthly, quarterly or on a rolling basis); scenario planning considers what could happen to the organization given one or more material changes in the business environment. At present, the line between the two is blurring as circumstances can change so fast that it is no longer possible to create a forecast based on past data. In addition, scenario plans must be reviewed frequently to ascertain which are becoming more likely.
Consequently, FP&A teams must exchange their traditional bottom-up, granular approach with a top-down, high-level methodology and conduct the forecast more frequently – but few are set up to accommodate this new process. More often, forecasting involves an all-consuming effort to collect data from business units and functions. To enable a more rapid response, FP&A should assemble a senior-level, cross-functional “SWAT” team with the mandate to review a limited number of KPIs (five to six, at most) in order to build a forecast that can be altered quickly as trigger events validate or disprove scenario plans.
This small team of experts can triage activities effectively while assigning specific areas of responsibility to more junior staff, such as forecasting working capital or discretionary spending. These specialists should work with a set of more granular KPIs. So, while the SWAT team may use a single cash metric, the working-capital team would dive deeper into DSO, DPO and inventory levels.
The first step is to alter the forecasting process, and the next is to adjust the feedback loop created through the management review meeting. Typically, these meetings focus mostly on BU-by-BU, actual-to-forecast and actual-to-budget variance analysis, using historical data. However, for many organizations – particularly those that have experienced a major reset of market demand and ongoing operations – spending time looking back at low-level comparative narratives is unproductive.
Instead, management should spend the bulk of its time reviewing the company’s best-case, minimum-viability and worst-case scenarios to determine which one seems to be playing out. To make sure planners target the right activities, management must ask the right questions: not how the company performed versus budget, but how conditions have changed and how that affects the forecast for emerging supply and demand scenarios.
A revised approach to identifying scenarios
For planning purposes, most companies develop three scenarios: base, best and worst. Given the nature of the Covid-19 crisis, a revised set of scenarios is needed:
- Best-case scenario: The best-case scenario should be anchored within tested hypotheses and initially focus on an assessment of demand conditions and capacity constraints. Current data may be mostly qualitative, but it should include insights gleaned from other countries and regions, particularly those exhibiting early signs of recovery.
- Minimum-viability scenario: This is the “new” base for companies hard-hit by the crisis or the scenario with minimum acceptable results to key stakeholders while remaining in business. This scenario must include a set of potential cost-reduction options in case conditions deteriorate rapidly. For instance, a minimum-viability scenario may include an X% reduction in workforce based on demand and supply projections.
- Worst-case scenario: The coronavirus pandemic may pose an existential risk to some organizations, so FP&A teams must also develop a scenario based on the worst possible conditions, including circumstances that may put the company out of business. In this case, FP&A should identify and monitor indicators that pose the greatest threat to the company’s status as a going concern.
Digging deeper into each scenario
Each key market or country or region should be categorized according to a variety of possible GDP growth scenarios.
A U-shaped recovery assumes the fastest rebound in key countries where GDP quickly reaches or nears pre-Covid-19 levels. These will be geographies where evidence of fast, effective control of the virus’s spread is combined with a strong policy response to prevent structural damage to the area’s economy.
A W-shaped recovery assumes a quick, partial recovery followed by a second wave decline in GDP in key countries or regions. These will be cases where evidence of fast, effective control of the virus’s spread is not accompanied by a strong policy response to prevent structural damage to the national economy.
An L-shaped recovery assumes that there will be no rebound in GDP. These will be countries or regions where there is no evidence of effective control of the virus’s spread.
The team should identify specific actions to be taken under each scenario so that management can act as economic conditions unfold. Additionally, FP&A must determine how changes in the environment may affect the company’s commercial and SG&A functions. Further, the trajectory of GDP will vary, driven by the public health and economic response of each country or region. Both inputs will be critical as companies determine how to proceed.
Due to the interdependence of different markets, it is important to consider elements of each in the entire strategic portfolio’s value chain. If a component of the value chain in any strategic portfolio is reliant on activities taking place in countries where a U-shape recovery is expected, then this component should attract more investment compared to those in countries where a slower recovery is likely.
If a component of the value chain in any strategic portfolio is reliant on activities taking place in countries where a W-shape recovery is expected, then investment in this component should be maintained. Accordingly, if a component of the value chain is directed to markets in countries where an L-shape recovery is expected, consider gradually divesting from the portfolio and phasing out related activities.
A catalyst for change
Covid-19 has underscored the discrepancy in planning and analytics capability between top-performing and typical peer-group FP&A organizations. The Hackett Group’s 2018 EPM Performance Study revealed that top-performing FP&A organizations have invested more in technology, which has enabled them to run more analysis and deliver reporting faster and more efficiently. Of top performers, 67% have implemented a primary financial planning and forecasting system to consolidate corporate and country, region or BU information.
Consequently, top-performing teams complete the forecast 3.5 times faster than the peer group and are twice as accurate. These capabilities are essential, as FP&A must provide information more quickly to help make operational decisions. Further, top performers have automated more of their data collection processes and use a standard set of data definitions across categories 92% of the time. This means their staff spend 44% more time analyzing data than collecting it, meaning that the team can redirect capacity to focus on Covid-19-driven demands for information and analysis.
While adoption of rolling forecasts remains generally low, top performers are 55% more likely to have done so than the peer group. Consequently, they can transition more easily from a fixed budget to planning based on a dynamic forecast. Additionally, one-third of forecasts among this group already rely on cross-functional collaboration, almost double the rate of the peer group.
Planning in the age of Covid-19
The coronavirus pandemic’s immediate and long-term repercussions will have a lasting effect on the way organizations plan and forecast, as well as how they approach scenario analysis. Early in the crisis, most FP&A teams had to scramble to adjust forecasting cadence, redraw scenarios, identify new KPIs and establish cross-functional emergency action teams. In contrast, FP&A top performers were able to adjust their existing processes relatively easily.
As companies start to shift from crisis mode to operationalizing changes required by the pandemic, post-crisis scenarios are starting to take shape. Expectations are for a prolonged period of uncertainty and a second wave of infections this fall, however, which makes it imperative that FP&A organizations update their approach to scenario planning immediately.
Covid-19 can reboot belt and road initiative towards a sustainable future
- A new CMS report reveals that Covid-19 has boosted Chinese enthusiasm for adopting the principles of BRI 2.0, leading to an increased focus on sustainable and environmentally friendly projects such as smart cities and renewables & hydro
- The appetite for an improved ‘Health Silk Road’ has significantly increased among the majority of both international and Chinese senior executives involved in BRI
- Meanwhile, the research uncovers a clear mismatch in sentiment between Chinese and non-Chinese towards BRI and the success of projects
As global economies strive to build back better and greener from the global pandemic, global law firm CMS’s 2020 Belt and Road Initiative report reveals that the pandemic has boosted Chinese enthusiasm for adopting the principles of BRI 2.0, which will pivot it towards an environmentally friendly future.
BRI 2.0 is a new phase of BRI intended to encourage international involvement, which was announced in April 2019 by President Xi Jinping at the second Belt and Road Forum for International Cooperation in Beijing.
The study was conducted in partnership with global research firm Acuris and TianTong Law Firm and included a major survey of 500 senior executives from both Chinese and international participants in BRI projects. Their views were sought on a range of issues around BRI, including likely future involvement and obstacles they have encountered to date.
Increased enthusiasm for sustainable projects
The research found that nearly two-thirds of both Chinese (63%) and international (62%) executives agree that it is important that their BRI projects should be sustainable and environmentally friendly. Furthermore, the majority (84%) of Chinese respondents believe that sustainability and environmental considerations will be given greater importance when planning and completing BRI 2.0 projects.
Enthusiasm remains for traditional sectors like logistics, roads and rail, and now, particularly among Chinese executives, there is growing interest in relatively new sectors like energy networks and power grids, smart cities and renewables & hydro. For international respondents, the emphasis on sustainable projects is also increasing, with only a handful (13%) previously involved in renewables and hydro but nearly three times as many (34%) planning to target the sector for future opportunities.
Importantly, CMS’s research reveals that Covid-19 has given a boost to the ‘Health Silk Road’, which aims to increase medical infrastructure and public health in BRI countries. Nearly all the international executives (93%) and 85% of Chinese respondents see Covid-19 as a major catalyst for it.
Munir Hassan, Head of CMS Energy Group, said: “It’s clear that interest in more ‘modern’ and sustainable sectors, such as smart cities, healthcare and renewables has increased in significance. Renewables projects typically require less capital commitment, are quicker to complete and are likely to be judged at lower risk, which will be attractive to international and Chinese participants. As efforts to limit climate change intensify, there will be a major role for BRI investments to play.”
Mismatch between Chinese and non-Chinese views
The research reveals that general sentiment towards BRI has declined in the last 12 months and one reason for this is geopolitical uncertainty, particularly among international participants. The survey has also uncovered a clear mismatch between views of Chinese and international executives that are involved in BRI projects.
Over two-thirds (69%) of international respondents said they found the process of participating in BRI related projects more challenging than they had expected, compared to just 40% of Chinese respondents. Likewise, only 37% of international participants said they were satisfied with the process and outcome of their involvement, compared to the majority (75%) of Chinese equivalents.
International participants have experienced difficulty with transparency, information flow and equality in partnerships and for many, this had impacted their view of BRI. But there are signs that more projects are now being structured to accommodate these concerns providing attractive opportunities for those international participants still keen on BRI involvement.
Regarding future partnerships / JVs, Chinese respondents are more enthusiastic than non-Chinese, with 77% likely to consider them, compared to just under half of non-Chinese (48%).
Munir Hassan added: “A key area of growth is likely to lie in projects that meet the trends of the future. Affordable projects, embracing modern technologies and methods, as well as the “open, green and clean” approach of BRI 2.0, will be those that stand the greatest chance of success.”
Two-thirds of finance professionals are now more efficient due to the Covid-19 crisis
The Covid-19 crisis is making a big impact on the efficiency of the UK’s finance departments, with 66% of financial professionals reporting that they are working more efficiently since the onset of the pandemic in March of this year. The results from a recent survey into the impact of the pandemic on the sector by fintech company Onguard revealed that this increased efficiency is primarily due to the obligation to work from home and rapid digitisation during this period.
Changing attitudes to digital transformation
71% of financial professionals agree that their department was able to rapidly adjust to home working within just a few days, with 21% reporting that their organisation has invested in specialist software in order to do so. This has resulted in just under three quarters of those surveyed believing that they are able to perform their work well from home, with only 35% still in need of specialist software to collaborative effectively.
Alongside the implementation of new technology, changing attitudes to digital transformation have played a role in the successful move to remote working. Research conducted earlier this year prior to the Covid-19 outbreak in the UK highlighted employees’ resistance to digital transformation as a major challenge, however now only 11% of organisations view employee attitudes as a barrier to change.
Working from home is the new norm
Looking ahead, 61% of financial professionals would like the flexibility to keep working from home permanently, thanks to the benefits provided by new technology.
Marieke Saeij, CEO of Onguard: “It is certainly admirable how English businesses have adapted during the Covid-19 pandemic. Pre-pandemic, digital transformation initiatives within many organisations was a multi-year plan, but the events of this year meant that businesses could not wait to implement further strategies. Almost exclusively, colleagues now update each other digitally. Because of this, its crucial that organisations have the right software in place to keep everything running effectively.
Due to the challenge of finance professionals communicating via digital tools, it is important that data is kept up-to-date and contains real-time insights so professionals can make the correct remote decisions in an efficient and collaborative way. With the help of the right software, the finance professional can be sure they always have the correct data to do their job and assist both the organisation and customer moving forward.”
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