Credit risk disciplines

The Coronavirus crisis has not so much moved the goal posts for credit management professionals as relocated the game to another stadium and changed half the rules. Nothing is what it was, so while the old basic credit risk disciplines remain vital, there is a whole new range of techniques that must be applied.

In this mini-series we look at the issues that need to be at the forefront of re-designing credit management functions as we pass through the twilight of the pandemic and into whatever turns out to be the new normal.

Unreliable financial data

Information is king in credit risk, much of the most important consisting of a mix of historical, current and forecast financials. Right now, accounts pre-dating Covid could be largely irrelevant, relating as they do to a bygone era. Management information may be compromised by a host of non-recurring one-offs, not least the tsunami of government support measures. Looking forward, what underlying assumptions are credible for forecasts? Credit managers must analyse, run sensitivities and challenge the numbers they are given as never before.

Global factors magnifying risk

Suddenly, the commercial landscape is full of scary beasts, threatening business models, disrupting operations and slashing profitability. Credit managers must identify which of their customers have serious exposure in these areas. Then comes the tough part: deciding how the interaction between this triple menagerie of potential negative impacts on each and every significant risk, specifically their profitability, viability and cash flows.

Supply chain disruption

An unholy combination of Coronavirus, Brexit, economic nationalism and unusual demand surges for products such as microchips, as well chaos in international shipping have severely disrupted supply chains. Margins will inevitably be affected.

Labour supply

All round the world, the pandemic has disrupted labour resources, spawning its own phenomena of ‘The Great Resignation’ as significant numbers opted for a change of job or career and ‘the Great Retirement’ as others left the labour market altogether. ‘Pingdemics’ have had major, but shorter-term impacts. In the UK, these effects have been magnified by Brexit, which may have caused up to a million or more EU citizens to return to the mainland. Productivity has been compromised in many industries and even levels of activity and therefore revenues have been trimmed in those worst affected, like hospitality. Sharp labour rate increases driven by competition for scarce resources are also slashing margins.

Inflation

After a year of fruitless denial, central banks all over the world have owned up that inflation is at levels not seen for decades, going higher still and worse still, that it is far from a temporary blip. The headline figures for consumer inflation at over 5% and rising inexorably towards higher single digits hide an uglier truth for businesses, where cost input rises are running far hotter in low double figures. Raising prices to compensate will not be possible for all, which will drive gross profit margins lower still.

Uncontrolled growth

Few entrepreneurs can resist the chance to grow their business, either organically or by acquisition after a recession. Opportunities abound as competitors have been crippled or left the market altogether. Sadly, too few have the discipline to raise the extra working capital required to support expansion before they set the wheels in motion for growth. By the time they do, it can often be too late. Ill-considered growth kills more businesses than any recession will ever do, even this wicked pandemic.

This is a time for credit managers to watch trends in their trading with customers and ask those awkward questions about customer growth is to be funded if it clear that expansion is taking place. They will need to keep their ears to the ground within the market concerned to see who else is being asked to supply more and on what terms.

Get in touch

In our next article on Credit Management Issues, we will turn to some of the softer issues, involving fraud, resourcing, process automation and the problem of bulging liabilities in your customers’ balance sheets.

If you are facing any challenges featured in this article and its successor piece, Opus is here to help. We has extensive experience of difficult situations like theses. You can contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.