One significant consequence of the coronavirus pandemic is the impact it will have on business risk, particularly as the economy starts to recover as we move out of lockdown. It will then become apparent to many creditors that the companies they have been dealing with which can be classified as “zombies” or “phoenix”. Currently, this may not be immediately apparent due to the lack of financial transparency.
This has arisen due to the relaxation of certain statutory filing requirements introduced during the pandemic as a means of lightening some of the administrative burdens faced by companies during the crisis. In addition, insolvencies are expected to increase once government financial support schemes begin to taper off and the current moratorium on liquidation petitions comes to an end. Indeed, some commentators are predicting a tidal wave of insolvencies.
Broadly speaking this can be broken down to:
Know your customer’s financial payment trends past and present. What type of business are they in? For example, is it seasonal, or do you perhaps have customers in the restaurant trade? If so, their risk is likely to be greater.
Have you had sight of their management accounts? Do they use invoice financing? Some of this information can be gleaned from your own account opening application forms, reports from credit reference agencies (who can monitor changes in directors or whether judgments have been registered – often a sign that a company is in financial difficulty) or from Companies House.
Have you actually spoken to your customers to ask how business is and whether they are experiencing payment issues? Customer retention is extremely important. Dealing sympathetically with a slow paying customer from whom you are comfortable you will be paid may be more sensible than suing them immediately. Such loss of goodwill could mean you will need to needlessly harvest for new customers.
Take the right decisions at the correct time and be mindful of the challenges you face. For example, if your customer can evidence that they just need a little more time to pay you, it will probably be inappropriate to start legal proceedings to collect the debt. In contrast, if your customer is being evasive and simply refuses to answer your calls and e-mails, it may be appropriate to instruct a pre-sue letter or even legal action.
Your credit policy should provide you with a solid framework to make the necessary credit decisions including payment terms, your collections policy and how disputes are addressed.
Of course, from a credit control perspective, there are many different times in the customer journey when the information should be reviewed. It may appear obvious, but a review should be carried out at the pre-sales stage when credit checks should be carried out, references taken and account opening applications completed. And, of course, the information should be reviewed regularly and annual reviews should certainly be mandatory.
In addition, customers’ accounts should be segmented into industry types thus assigning credit risk to the various groups. So, for example, accountants may be a lesser risk than those in the hospitality industry.
This has already been “touched on” above. However, you should keep in regular contact with your customers by the various means available whether it be by phone, e-mail or even personal visit (whilst, of course, being mindful of and adhering to current Government guidance around travel, social distancing etc.).
If your customer is experiencing difficulty but is still trading reasonably well, you may be even be persuaded to extend credit terms in exchange for an undertaking for increased orders once the economic environment starts to improve. You should contrast this approach if you are dealing with a totally uncooperative customer who will not even speak to you over the phone. In this scenario, you may wish to instruct a pre-sue letter or even go straight to court action.
“4D Contact” produced their UK Debt Collection Industry report in March 2021. They highlighted that “one thing is certain – there is going to be an abundance of debt and a wealth of work for those in credit management and debt collection”.
They emphasise that, for many debtors, prioritising those who will pay will be a daunting task, and correctly say that it will be for creditors to ensure that they are at the front of the queue to get paid. For those creditors who have a large debtor portfolio covering varied business sectors, the adoption of sophisticated IT credit control and recovery systems will be the order of the day. For example, if, by using such innovative software, a creditor determines that certain industry types nearly always pay within credit terms, then why use precious credit resources to phone these customers who are within the credit period when these resources could be used to chase those in more precarious industry sectors? Therefore, segmenting debtors may be important for you.
As 4D point out, automation will be the future, with it likely that it will be inappropriate for all debtors beyond credit terms to receive the same treatment. Smart software should be able to “capture data on customer payment behaviours”. As such, there should be a differentiation between debtors in varied industry groups, driving recovery techniques which will be most effective for each particular group. Accordingly, “targeted collections activity can be delivered where the data analytics suggest it will deliver the strongest results, whilst avoiding unnecessary contact with good payers”. This should improve a company’s financial results as well as deploying their credit team both more effectively and efficiently.
The pandemic has thrust new challenges on businesses with cash collections and credit control being a major source of concern. The adoption of new smart software should be able to segment a company’s debtor book by designing credit control measures for debtors within these groups. In particular, it should be able to separate the slow payers who may only need a gentle nudge (in our case, a letter before legal action) from bad payers – in our example, those debtors against whom court action should be taken immediately.
Things will not go back to what they were. It is likely that these changes would have happened anyway, it is just that with the pandemic they are all happening quicker. That’s technology for you.
But remember that, when you do need help, Yuill + Kyle will always be on your side offering best advice and assistance at all times.
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