If any proof were needed that the world economy has not yet fully emerged from recession, then the harsh austerity measures currently being imposed in many countries – and the often less than enthusiastic reaction to these measures of many of the citizens of those countries – clearly signal that the voyage to full recovery will be a stormy one.
Several countries – notably those known by the unfortunate acronym ‘PIIGS’ (Portugal, Ireland, Italy, Greece and Spain) together with the UK and the USA – have attracted much publicity as victims of the recession.
Many of their current fiscal problems can be traced back directly to an over extension of credit and investment in the housing market and a consequent bailing out of the financial sector. But the panic that ensued and the loss of both business and consumer confidence has led to contagion in many other sectors – particularly those that require the financing of expensive purchases, such as autos and consumer durables. Moreover, overseas banks, including those in France and Germany, have incurred a particularly high exposure to both public and private company debts in struggling countries such as Greece.
But it doesn’t end there. A sharp drop in demand in one country has an immediate impact on those other countries reliant on exports to that market. While the German economy appears to be rebounding faster than many of its European neighbours, the massive decline in world demand for its products, especially from the USA and China, and the increased volatility of financial markets resulting from public debt problems in the EU countries already mentioned, threaten to derail Germany’s recovery.
Across the water, the fate of the Mexican economy is so inextricably bound to the fluctuating performance of the US economy that projections for its recovery have been revised downward for the fourth time this year.
The Summer 2010 Atradius Payment Practices Barometer, published by Atradius Credit Insurance N.V., an extensive survey of the domestic and international accounts receivable experiences of around 4,000 businesses in 22 countries found that even those countries that escaped recession, such as China and Poland, have not escaped the impact of the global recession. These along with most other countries have experienced a severe blow to their international trade, as their exports to recession-hit countries have been affected by, at best, late payment, but in many cases, payment default. Though Days Sales Outstanding (DSO) is by no means the only measure of the health of a business’s receivables portfolio, the Payment Practices Barometer found that approximately 19 percent of the businesses surveyed had witnessed a rise in DSO, with Italy averaging the highest DSO at 83 days.
Possibly more important was confirmation of the domino effect that late payments have on businesses further up the supply chain. Many of those surveyed by Atradius had to delay payments to their suppliers as a consequence of their own late receipt of payments. More than half of the respondents to the Payment Practices Barometer reported that they had experienced late payments without prior agreement, while a similar percentage had been asked to extend their payment terms.
Not surprisingly, the survey found a substantial increase in the use of credit management techniques by many businesses, especially the use of ‘dunning’ – the process of methodically communicating with customers to ensure payment – and of regular credit checks on customers.
In fact, it is clear from the overall findings of the Payment Practices Barometer that, while no one credit management tool can guarantee that credit risks will be mitigated, the intelligent and strategic use of a combination of such measures, including the protection afforded by credit insurance, can greatly improve the chances of successful and profitable trade. And, while suppliers should always employ safeguards when offering credit terms, on the evidence of the survey, credit terms remain an essential element of national and international trade.
Simon Groves is a senior manager of corporate communications and marketing at Atradius Credit Insurance NV. The Atradius Payment Practices Barometer can be downloaded from www.atradius.com