Ending insolvent customers

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By Damien ROUSSEAU. Payment terms, splitting, delay, insolvent customers… So many daily difficulties that the Business Manager must face in the processing of due deadlines. Today, to ensure the sustainability of your business, it is imperative to develop a win-win strategy to protect yourself from insolvent customers. And thus develop your business with confidence.

Economic growth and detailed knowledge of country risks

Today, global growth is moving quite well. There is a very significant resurgence of confidence among companies, despite political uncertainties in Europe, particularly in Spain. And at the local level, 77% of business leaders said they were confident about the future of their structure.

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The solvency of customers is at the heart of good cash management of the company.

In emerging markets, the slight recovery in commodity prices is positive. The economies of these countries are growing and financial conditions are becoming very incentive to revive private investment on the ground. Especially in the oil or mining industry, which in turn fuels growth. But the indebtedness of local companies raises concerns because they have accumulated a considerable stock of debt over the past decade. The continued rise in interest rates, particularly in the United States, could penalize their investment capacity.

In addition, current growth is below pre-crisis rates. Between 2010 and 2016, the pace in emerging markets halved. Added to this are the still too low commodity prices. As a result, some commodity-exporting countries are still experiencing difficulties despite the rise in commodity prices. Especially in Latin America, the Middle East or Africa.

Credit insurance to help entrepreneurs

In this context still fragile in France and uncertain for export, the role of a business leader is to lead his employees in the development of his company. This is in order to win new customers in order to pay its expenses and the salaries of its employees, and to generate the profits essential to the sustainability of its activity.

But it is not enough to sell goods or services. It is still necessary to select a solvent customer who settles his claims on time, immediately or on the due date set by the credit that the selling company has granted him.

To be convinced, it is enough to refer to the statistics on business insolvencies in France: a quarter (nearly 15,000 insolvencies) is directly due to the arrival of an unpaid customer.

From managing insolvent clients to good cash management

As much as by its products or know-how, a company will “make the difference” with its competitors by managing its cash flow. It is by ensuring that it has a sufficient liquidity cushion to cope with possible cash flow stresses that a company will preserve its solvency, and therefore its credit or reputation with its suppliers as well as its customers.

A company must therefore check that its customers are not insolvent, pay it regularly. It must identify and isolate the risks of unpaid or delayed payments as well as identify the events that may cause them. And this, in order to prevent them from recurring.

Because their consequences can be complicated to compensate: for example, for a company with a margin of 5%, 5,000 euros of unpaid bills require 100,000 euros of additional turnover…

Credit insurance allows business leaders to protect themselves from their customers’ defaults and focus without ulterior motives on their development. It clarifies roles, enriches the entrepreneur’s visibility on the risks taken and strengthens the quality of trade receivables.

Today, three main players (COFACE, a French player, EULER HERMES, a German player and Atradius, a Spanish player) share most of the credit insurance market. They have a global view of the economy and the financial risk generated by insolvent clients.

In this sense, credit insurance is a foundation for obtaining financing under good conditions. It is a heritage, managerial and commercial aid.

Stop unpaid debts and planned failures

Inter-company credit, consisting of contractual payment deadlines, amounts to 600 billion euros in France, or about 30% of GDP. It naturally leads to a risk of delay (on average 12 days in France in addition to the 60 regulatory days) and unpaid. However, 25% of business bankruptcies are due to late payments by their customers. Statistics show that nearly 2/3 of French companies pay their bill late.

Moreover, the subject is even highly topical since the Minister of the Economy Bruno Lemaire absolutely wants to change this bad habit of insolvent customers “voluntarily”. There is no doubt that he will have a lot to do since at the forefront of the bad payers is the French State…

Added to this is the large number of business failures (58,600 today in France). But not all sectors of activity are housed in the same brand, since their numbers have increased for the transport, computer and software publishing sectors or agriculture, to name but a few.

While we can welcome the downward trend in the number of failures over the last two years, it is still a worrying volume, as it is 24% higher than the level seen before the 2007-08 crisis.

 

Damien ROUSSEAU

www.gallien-conseil.fr

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