Managing debt collection for positive cashflow results

It’s important for organisations to carefully review and select which companies they do business with, otherwise they risk facing cashflow problems. Companies that do business internationally must understand the payment practices and collection behaviour of customers in the countries they operate in.

There is strong evidence to suggest that, while the tendency to trade on credit is a common practice for domestic and international business-to-business transactions, companies can be exposed to poor payment behaviour due to the volume of their transactions on deferred payments.

In a Global Collections Review, Atradius interviewed more than 6400 companies across 30 countries, including 200 respondents from Australia.

The report revealed most exporters in the Asia Pacific (APAC) region are concerned about the complexity of payment procedures, which is the main reason for delay, as opposed to the payment behaviour of their buyers.

Delayed payments can affect a business because the longer the debts remain unpaid, the lower the likelihood that the outstanding amount will be fully recovered. In addition, late payments put pressure on the days sales outstanding (DSO) level. Most companies, including those in Australia, forecast a slight increase in their average DSO in the next 12 months.

Collecting overdue invoices is an important element of a credit management strategy, especially to avoid unnecessary pressure on cashflow. In fact, the presence of overdue invoices is the main reason behind companies postponing their own payments, with companies in the APAC region forced to take specific measures to correct their cashflow.

To protect their cashflow, companies should evaluate the payment terms and enforce payment discipline with a strong collection system, looking not only at the over 90 days’ overdue receivables but also at between 30 and 60 days’ overdue receivables. It is also important to be on the lookout for any change in payment behaviour.

During the 12 months covered by the survey, companies tried to recover their unpaid commercial debts mainly using internal resources as well as partners such as debt collection agencies and law offices, for improved handling of overdue receivables. Cooperation with debt collection agencies is more common among businesses in the Americas and APAC regions, where around 40 per cent of the companies chose external collections.

In general, the outcome of a debt recovery action is more affected by the age of the debts that are being collected. The survey highlights the strong tendency for companies in the APAC region to submit mainly debts not older than 60 days to debt collection agencies.

In APAC and the Americas, companies appear to be more aggressive than European companies in trying to recover their money and are willing to use a number of methods to achieve results.

APAC companies were willing to use internal resources to deal with delays (61.5 per cent), to initiate legal action against their non-paying buyers (41.5 per cent), and to cooperate with debt collection agencies (38.9 per cent). It is also common for companies to sell their debts (14.4 per cent).

The attitude of all companies towards the collections market is strongly focused on internal management, and there is no difference among the regions. An in-house collection process is the most frequently chosen option to recover unpaid invoices.

When weighing up using an internal approach versus an external approach, companies need to consider how much money they spend daily to run the business, staff salaries and time they spend on chasing payments, plus any additional costs to recover debt, such as postal costs for overdue reminders.

Mark Hoppe, Managing Director ANZ, Atradius

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