Why do you need to manage your receivables?

A well-oiled programme of credit management can help to weather difficult times

Trade credit has meanwhile become one of the most important sources of liquidity for companies, especially SMEs. Buyers in Germany owe their suppliers up to 320 billion euros: that is more than the sum of short-term lending by all the banks in the country. On the other hand the number of insolvencies is set to reach a high level in 2011 according to a forecast by Euler Hermes (see "Euler Hermes' Global Insolvencies Index” (PDF).

Apart from this, the payment behaviour of large companies too leaves a lot to be desired in more and more cases, as emerged in a poll carried out by Euler Hermes Kreditversicherungs-AG. Thus 51% of respondents stated that the payment behaviour of their customers had deteriorated. A full quarter of these suspect that this is deliberate refusal to pay, especially on the part of large corporations. The balance sheet item “trade receivables” is the biggest asset position on many balance sheets, accounting for more than 30% of results.

According to consultants KPMG, experience shows that every fourth insolvency can be attributed to poor payment behaviour by customers. The danger of sudden insolvency also threatens thriving businesses if their customers cannot pay – or don’t want to. 

Chartered accountants, insolvency administrators and collection managers, who were also polled, agree in their view that bad debt losses have their origin above all in insufficiently rigorous credit management and lack of awareness of the need to take precautions. Against the background of these developments in recent years, having good credit managers has become a matter of ever more vital importance. 

Accounts receivable are the biggest credit risk item in most companies. But receivables can also be a valuable asset, to be used as collateral or sold on. For this reason they must be actively managed. 

Credit management has first and foremost the task of mitigating or preventing credit counterparty risks, maintaining the optimal balance between sales promotion and counterparty risk, and reducing the costs of capital by increasing cashflow. Well-organized credit management therefore has three priority goals:

• speeding up receipt of payments and reducing bad debt losses,


• actively promoting the realization of sales and profit targets


• reducing the risks of trade credit.

Successful receivables management means knowing all you need to know about your buyer. Of course, this means first of all seeing their financial statements, but in most cases that is not enough. What is needed is to look backstage and find the answers to a few more questions:

• how is your customer’s payment behaviour towards other suppliers?


• how good is his management?


• how good is his marketing strategy?


• what role do the banks play?

For instance, if the banks demand repayment of credit lines at short notice, you as a supplier may have a problem. 

All this information feeds into an assessment, but this must remain flexible. Customers can change their payment behaviour - perhaps their business is subject to wide seasonal fluctuations. There is a range of software solutions for assessing creditworthiness. They are always the basic tool of the credit manager. He can adapt the level of limits for trade credit to actual payment behaviour and reward a good payment record by granting more favourable terms. In this way the credit manager can also help to increase sales.

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You can find more on this topic in Wirtschaft Konkret No. 105 - The right kind of protection against bad debts