Preparing for the post-pandemic catch-up effect to trade with confidence

Preparing for the Post-pandemic Catch-up Effect to Trade With Confidence

27 September 2021

The global economy growth is expected to remain strong in 2021 – with worldwide GDP expected to grow by +5.5% in 2021 – and in 2022, even if the recovery will be uneven. In this context, significant risks remain for companies eager to capitalise on new growth opportunities and bounce back after the pandemic.

Businesses will be buoyed by the presence of excess consumer savings which will boost demand and trigger an economic catch-up effect. However, they also face a dynamic environment in which rising demand leads to rising prices, while cash flows and inventories are likely to be seriously constrained.

In order to trade with confidence, companies are advised to exercise caution, prepare to overcome these challenges and ensure they are fully protected against insolvency risk as state support is gradually withdrawn by the end of 2022.

If safeguarding business liquidity was a key goal for businesses during the pandemic, the recovery is all about cash flow management to seize growth opportunities, despite almost constant increases in commodity prices. Maintaining cash flow will be particularly challenging for companies that have had revenues wiped out during the crisis and want to prepare for the removal of state assistance.

Without adequate cash flow, however, business will struggle to restock the inventory required to return turnover and sales to pre-pandemic levels. This problem is likely to be exacerbated by valuable cash tied up in work-in-progress, finished goods and the need to set aside funds to pay suppliers. There will also be an almost inevitable financing gap as companies await client payment, with delays creating a knock-on effect which will undermine their ability to pay suppliers.

The answer to this cash flow challenge is to be as proactive as possible when chasing receivables, taking steps to address unpaid invoice the moment that an invoice becomes overdue payment, sending notices of late payments to highlight the issue and timestamping all client interactions.

Throughout this process businesses are well advised to ensure a clear timeline for repayment is communicated with their customer and a detailed paper trail is maintained outlining the attempts made at recovery and client responses.

If these efforts to secure cash flow do not prove successful, organisations can explain possible next steps to their debtor’s trading partners; the option to escalate the issue within the debtor’s company, to cease trading with their debtor, and ultimately to instruct a third party such as a debt collection agency (if a small sum is involved), or legal representatives with a view to taking legal action if a larger amount is involved.

Trade credit insurers can help throughout the debt recovery process. They don’t just indemnify when clients fail to pay. Market-leading insurers can also help businesses to avoid bad debt in the first place. Allianz Trade, for instance, offers a range of services. We conduct customer health checks of the creditworthiness and financial stability of trading partners, set a maximum amount that will be indemnified if a customer fails to pay, provide trading limit updates, check the creditworthiness of new prospects as well as investigating and indemnifying upon non-payment.

The global insolvency rate dropped dramatically to around 50% of 2019 levels during the pandemic, thanks to an unprecedented wave of state support, and this reduced level of risk is expected to persist in the coming months. This is positive news for businesses with their sights set on expansion, giving them greater confidence to trade and get paid during uncertain times.

There are two fundamental forms of growth: natural evolution (capitalising on pent-up demand among existing clients) and expansion, which involves working with new clients and venturing into new markets.

Natural evolution concentrates risk among key third parties. In the event of a trading partner’s failure to pay, businesses face a greater exceptional loss. However, this non-payment risk can be covered by trade credit insurance (or called accounts receivable insurance), giving businesses the confidence to target elevated demand among existing customers.

In the case of expansion, a business could have limited experience of trading in a new market or with a new client and this lack of knowledge could significantly increase risk. Ways to mitigate this include starting trade volumes small and building up, or partnering with a trade credit insurance provider that has experience of the counter-party and target market through dealings with other clients. In this scenario, trade credit insurers are likely to advance a higher starting credit limit to fuel their client’s expansion and to help them seize growth opportunities with more agility.

Whatever form of growth a business is attempting to capture, it’s necessary to secure strong working capital. It makes good business sense, then, to carefully forecast cash flow (adding a contingency for further lockdowns) and access the liquidity in advance, if it is not already in place. One aspect of working capital management is determining payment terms with suppliers and customers. This is another area in which market-leading trade credit insurers can offer support thanks to their significant knowledge and experience.

Ledger-matching exercises are a particularly effective way to assess credit risk among prospective clients. This gives an overview of the financial health of companies and an idea of their ability to repay credit. Assessing the risk of new markets can be achieved by analysing region-specific macro data and creating country or sector risk maps: check our Country Risk Reports or view our Sector Risk Reports

In such a dynamic trading environment, reliance on standard full-year accounts is simply not enough. By the time Covid-19 period accounts are published, revealing the scale of downturn, economies will have already switched to a growth cycle. Companies need the latest assessment of their clients’ financial health that uses the most up-to-date information, either gathered by themselves or in conjunction with a trade credit insurer. Allianz Trade, for example, has a network of credit analysts dedicated to obtaining primary data from companies to generate current information, which is not reliant on year-end accounts.

As governments begin the phased withdrawal of state support, companies are well advised to prepare against insolvency risk by monitoring their trading partners for signs of financial distress. This risk category includes supply chain customers already struggling with high debt or those saddled with high interest costs. It also covers businesses with thin operating margins and those experiencing difficulty meeting their financial obligations. Many companies may have already had weakened balance sheets prior to the pandemic. Here are some key warning signs that your customer might pose a risk of non-payment:

  • Your customer has recently lost a major client/supplier.
  • They are taking longer to deliver goods and/or settling invoices.
  • Your customer asks to renegotiate a contract.
  • Their funders are refusing to renew facility agreements.
  • They have attempted to switch to alternative funding sources.
  • Their stocks are under-performing or they are being shorted. 
  • Credit default swaps (CDS) prices have increased.
  • There is discontent among their C-suite. 
  • The company is attracting negative press coverage.
  • They have been unable to pay salaries/social charges.
  • Restructuring advisors have been appointed.

The pandemic has helped expose the risks and weaknesses in extended, just-in-time supply chains. Where once businesses – large and small – placed faith in lean supply models, the need for diversification and additional capacity is now widely accepted, even if it means sacrificing margin.

Organisations are well advised to review their tier-one, -two and -three suppliers as a matter of urgency, so they can identify and better understand this supply chain risk. This analysis can help businesses hedge against new pandemic restrictions and future crises and act as a springboard for longer-term transformation.

To conduct an effective risk assessment, it’s important to access as much critical supply chain data as possible, across all supply chain tiers. This information is then used in scenario planning exercises to evaluate the impact of supply chain shortages on critical functions. Once weaknesses are identified, businesses can devise strategies for alternative sourcing, while factoring in the impact of tariffs and costs. 

The economic fallout from the pandemic has been unprecedented in its scale and speed. State support, however, has ensured that the feared widescale redundancies have not materialised, households have accrued savings and the stage has been set for a broad-based and rapid global economic recovery. The companies that prosper in this environment will be those capable of mitigating risk so they can trade with confidence.

Trade credit insurance is a highly effective way to help you achieve this. Market-leading trade credit insurers, such as Allianz Trade, compensate your company in the event of a bad debt but they also help you avoid bad debt in the first place by providing comprehensive insight about the constantly changing risk environment, enabling you to identify vulnerable customers, de-risk your supply chains and protect your business from insolvencies. Additionnally, they can also help you collect debts and secure precious cash flow.

Allianz Trade is the worldwide leader of credit insurer in trade credit insurance and offers expert solutions such as accounts receivable insurance, business debt collection, bad debt, trade credit, trade credit management, cash flow management, xol, debtor insurance, collect overdue payments, late payments and unpaid invoices. Our mission is to help customers globally to avoid trade risk, trade wisely and develop their business safely.
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