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Safe Harbour for Cash in the Perfect Storm – A guest blog by Serrala

Managing Rising Levels of Customer Risk and Insolvencies due to Brexit

After several delays, the EU and the UK reached a compromise on Brexit in the very last-minute at the end of 2020 – only seven days before the estimated exit day. They agreed upon transition period that is about to end in June 2021, but many uncertainties remain. In addition to that, the British economy was among the most affected in terms of health and economy in 2020. While a successful vaccination programme is counterbalancing some negative effects from Brexit to a certain degree, an overall loss between GBP 12 bn and GPB 24 bn for 2021 is projected by global credit insurer Euler Hermes. After insolvencies have been falling in 2020 due to support measures and the impossibility for creditors to open proceedings, the number of insolvencies is expected to rise sharply in 2021. Average DSO has already increased to 53 days in the UK, which is perceived as a result of high value unpaid invoices.

What does that mean for finance organizations? Expect higher customer credit risk, more collection effort due to more late payments, and a higher dispute case volume because of late delivery. Finance organizations need to have the right credit strategies and measures in place to protect their cash as good as they can in the eye of something that could become a perfect storm.

How Insolvencies and Trade Disruptions Will Impact Credit Managers
In the current environment, many uncertainties remain, and organizations will be faced with several questions: Are there going to be tariffs? Will goods be delayed? What about additional costs, such as shipping and training staff on new regulations? Do we need additional documentation? All these costs will have to be factored into the overheads, having a direct impact on profitability.

All of this makes it even more important to determine credit risk as accurately as possible. Credit managers will have to look into their credit policy as a whole and the credit terms and limits per customer in detail. It might become necessary to extend credit terms and date of invoicing due to payment delays amongst your customers, which of course will erode profit margins.

In the face of rising insolvencies, credit managers will have to be even more thorough in their credit risk determination. You might want to factor in financial statement analysis into your scoring. Or protect your receivables with dedicated credit insurances, insuring specific trade losses. All of these additional credit management processes are complex and add more efforts to your existing work. However, the risk and uncertainty of the situation might make it a necessity to look beyond your existing credit and risk management practices.

How Technology Can Help
Credit managers cannot operate on a manual basis if they are expected to deliver solid and reliable decisions in time but complex business environment. This can only be done with intelligent automation, covering all of credit management operations in a Best-Practice manner. This includes an automated determination of credit limit, credit score and risk category as well as an efficient approval procedure.

Proactive, automated alerts need to be put in place that provide daily monitoring of customer status changes as well as process-based templates to ensure standards and consistency, for example regarding credit limit application and approval processing. Of course, an intelligent credit solution needs direct connection to external data sources, such as credit reports, credit insurance agencies and possible compliance databases to screen customers with regard to risks and anomalies. 

The fallout from Brexit will create a lot of additional highly complex work for credit managers. Therefore, anything currently binding resources should be taken off the table. This is where automation comes into play. Many organizations still run highly manual processes in their credit management, for which they will simply not have the time anymore if the impact of Brexit fully hits them – unless they want to lose a significant portion of their revenue. Simple, repetitive, and rule-based activities should be automated as fast as possible to give your experts the time and space to focus on much more complex and challenging tasks they will have to handle in the face of Brexit.

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