Protecting Your Most Valuable Asset

Contributing Author: Suzanne Sabharwal of Euler Hermes

We all know CASH IS KING.

And now more than ever in these unprecedented times, we need to be protecting our company’s most valuable asset – our accounts receivable.

AR typically makes up 40% of a company’s balance sheet – it is the lifeblood of an organization as a business’ cash flow and profitability depend on it.  And yet, day in and day out, we have very little control on our volatile AR.  When you think about it, we are essentially giving our buyers a 0% loan for 10, 30, maybe even 60+ days.

With such volatility on top of an incredibly unstable economic environment, you need to exert as much control as possible on your accounts receivable in order to protect your bottom line.

It is understandable that many of you are focusing on the basics – how to keep operations going and ensuring payroll is met, among other critical items during this crisis.  Throughout all the turmoil, cash flow throughout this time is going to be a huge key to stability.

Establishing and/or improving your credit management practices will a very important tool in your strategy – determining who to sell to, navigating how much credit to extend and what payment terms to offer in order to protect your company.  And as we come out of this slowdown, consider how you will evaluate the strength of your buyers going forward.

Don’t assume any company is too big to fail right now.  Even Costco or Amazon could have supply chain issues that might cause cash flow issues, which could then lead to a slow pay scenario for your organization.  The biggest issue facing every supplier and buyer right now is liquidity.  US bankruptcies are expected to increase by a minimum of 25% this year. Some of these will be companies in affected industries (travel, retail, automotive); some will be suppliers, like you, that are not getting paid by these companies.  Do not allow your company to fail by being a victim of this cash flow domino effect.

So how can you make the most informed decisions to minimize risk and maximize growth?

Verify the Entity, Request Proper Credit Information, Do Your Research, and Establish Evaluation and Monitoring Procedures.

Verifying the Entity:

• Confirm Legal Name, Entity Address, Corporate Tax ID, Phone Number
• Check Registration with the Secretary of State
• Gather financial/accounting contact information

Credit Information to Request:

• Bank Reference/Releases:
  • Specifically identifying their average deposit balance, are there any overdrafts, is there availability on a line of credit?
• Trade References:
  • Of companies with similar credit limits and recent activity
  • Find out the length and nature of the relationship
• Financial Information – if the limit is substantial in size for your organization
  • Including Revenue and Accounts Receivables Totals
  • Ideally, Income Statement, Balance Sheet, and Cash Flow Statements would be provided
    • In today’s environment, you want not only CY 2019 figures but YTD 2020, as well as future forecasts and projections.
      • (If there is true concern – what are they doing in the face of the COVID-19 crisis?)
    • Consider requesting securities, some form of deposit/prepayment, establish liens, or request personal/parent guarantees for risky buyers.

Credit Information to Research:

• Recent Mercantile Reports (D&B, Experian, Graydon, Seafax, etc.): ideally from last 6-12 months
  • Look for liens, judgments/suits, late payment and collections activity as potential red flags.
• Industry-Specific Reports (NACM, NCCA, Tarnell, etc.)
• Industry-Specific Credit Groups – consider participating, if relevant

Establish Evaluation and Monitoring Procedures:

• Determine criteria for who you will and will not extend terms to and under what circumstances
  • Have policies in place for domestic vs. export.
  • Ensure the sales team is aware and on board with procedures to ensure checks and balances are established.
  • Investigate whether accounts receivable insurance would be a wise investment to assist with/outsource credit management procedures.
• Identify how you will establish credit limits – as opposed to just matching sales requests
  • Establish a risk scale for buyers that determines payment terms and credit limits
  • Have decisions be based on cash flow and not assets.
  • Consider starting off with smaller orders or prepayment requirements and grow in size as payment history is establish
• Have policies in place to prevent sales above and beyond the credit limit.
  • Any required increases should trigger a review.
• Create an outlined series of action in the event of late payment:
  • How many days past the due date will you contact buyer?
  • When will you send demand letters?
  • When will you stop shipment?
    • Or how will you manage go-forward orders?
  • When will you send to collections?
• Monitor Buyers:
  • Annually, revisit your strongest/least risky buyers.
  • Consider re-checking riskier buyers every 3-6 months.

It would be unrealistic to expect you can do each and every one of these items.  Most companies do not have a designated credit team, let alone a specific individual that solely would monitor and be in charge of this risk mitigation.  We are all wearing many hats nowadays.  Use this list as guidance to improve procedures that you currently have in place (or know you should).  With the bandwidth and resources you have, make adjustments so that you protect your company’s bottom line and ensure safe sales growth for the future.

Suzanne Sabharwal

Consultant – Euler Hermes

Suzanne has spent her entire career in the financial services industry.  She started off working for two fleet management companies, where she was responsible for managing and growing a portfolio of clients – delivering strategic guidance and recommendations largely focused on cost savings and risk management opportunities.

Three years ago, she transitioned to selling trade credit insurance at Euler Hermes because she saw the value in educating and consulting C-level professionals on the importance of protecting their accounts receivables, so they could mitigate risk and safely grow their business.  Working for a risk information company, every day she is helping companies make better-informed business decisions about their buyers and credit management processes.

Suzanne Sabharwal obtained her undergraduate degree from the University of Maryland, College Park in Finance and an MBA from Loyola University in Chicago.

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EH has more than 125 years of experience with an unrivalled global business intelligence. Employing more than 6000 people in 52 countries, insuring nearly $1 trillion in global business transactions, they can help you be prepared both home and abroad by predicting trade and credit risks and protecting your cash flow.

EH experts use technology-driven processes to generate insights and present actionable information to businesses of all sizes and in all sectors.  Providing a wide range of bonding, guarantees and collections services for the management of business-to-business trade receivables.  Helping customers of all sizes to trade wisely and grow their businesses safely.