Sales are usually pretty straightforward. Once the order has been filled, the sale may seem as if it is complete. But on the back end, managing and collecting payments can be tricky. Failing to manage business debt collection and protect accounts receivable can have serious consequences on your cash flow management and your ability to grow your business. Consider this: if you have a customer that defaults on a debt of EUR 100k, and your net margin is 5%, you will need to generate additional revenues of EUR 2m to make up for the lost cash flow. 

Working in trade credit insurance in the Middle East, I see many small and medium-sized enterprises (SMEs) that have opportunities to expand their business but lack the necessary visibility on their order-to-cash cycles and securely manage credit. Taking the time to draw up a solid credit management strategy can help these companies seize more opportunities. 

In my experience, the main priorities of SMEs in almost any market are growth and obtaining funds. I often speak with our clients’ customers in the SME segment about their operations and figures, including cash and working capital management. During these conversations, I’ve discovered that an overwhelming majority are not structuring their internal procedures to manage and protect their receivables, which are a key asset on a balance sheet. Weak management of accounts receivable, high ageing and bad debt are all issues that affect the risk profile of a company. This can result in lenders taking a more restrictive stance, especially towards SMEs.

Lenders are often criticised for not significantly supporting SMEs. But while there are certainly improvements to be made by financial institutions, many SMEs could improve their overall trade risk profile by investing in qualitative financial reporting in general, and credit management specifically. 

B2B trade credit  is becoming a crucial business tool for growth and sustaining relationships, especially for competitive market segments in which suppliers have limited leverage on their customers. However, mis-managed trade credit can cause delayed payments or defaults that result in devastating consequences for SMEs, or even for large corporations. In recent years, I’ve seen many insolvencies occur that were accelerated or triggered by the default of a large customer, as well as receivables-concentration issues. This resulted in a domino effect that impacted different levels of the supply chain and could have been avoided (or been less severe) through sound credit management.

It all boils down to monitoring a set of KPIs such as days sales outstanding (DSO)—the average number of days that it takes your company to receive payment for a sale—and setting clear credit guidelines. These guidelines need to strike the balance of not being too strict (which may result in missed business opportunities), nor too lenient (running the risk of missing red flags, or leaving the company vulnerable to fraud). 

A company’s trade credit policy stands as a pillar on which the company’s credit management function is structured. This is, essentially, a set of protocols dedicated to detail trade credit activity at every stage of the order-to-cash journey. It is a critical document, especially when a business is growing and becoming more complex (in terms of employees, geographies and funds at stake). As a company grows, unwritten rules are no longer efficient and become an operational risk factor. Your credit policy ensures everyone in the company is aligned with its strategy, and lessens tensions between sales and finance departments caused by different views on risk perception. 

The credit policy is not a static document, but must ideally be reviewed once a year to amend certain procedures and reflect the updated risk appetite across a company’s portfolio. Key components include:

• Know your customer (KYC), detailed requirements on legal documents, information on management and customer setup. Clustering domestic and export markets.

• Defining how to assess the risk profile of your customers with or without financials

• How to set credit limit for new customers and payment terms, how to convert existing one from cash to credit or increase exposure on current active one.

• Listing approved payment methods, and risk mitigators.

• Defining the authority matrix and responsibilities of all associates involved in the credit cycle.

• Outlining how the company manages overdues, disputes and bad debt

• Collection processes and KPIs (such as the Collection Effectiveness Index)

Remember, a sale is not a sale until it is paid for! And to make sure your goods and services are paid in due time, that you have visibility and protect your cash flow, you need to carefully consider your credit management processes—no matter the size of your company. 

One supportive tool that can help companies with limited resources assess and mitigate risk is a trade credit insurance policy. At Allianz Trade, we not only help our clients transfer risk and reduce or prevent loss. We also provide accounts receivable insurance guidelines to help structure and support organisations’ credit management systems, so they can continue to safely trade and grow their business. 

Mehdi Mourad

Head of Credit Risk, Allianz Trade 
Allianz Trade Middle East

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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