Credit management: why preventive supervision is important

In order to avoid risk situations, past prevention activities implemented through credit risk transfer but also through increased preventive 'micro-surveillance' activities are crucial.

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enterprise credit

by Fulvio Marcandelli | Senior Credit Manager of Avnet EC Emea

In the area of credit management, it is not easy to propose solutions that can easily position our companies 'safely'. In order to avoid risky situations, it is nevertheless essential to have carried out prior prevention work.

If, however, one has not structured one's own credit assets in the past, following the basic concept of Risk Management - i.e. the "transfer of credit risk" to other parties, such as credit insurance companies rather than Factors with non-recourse factoring operations, or other - one is already late: if I cannot eliminate the risk (and with "credit" sales this is not possible) I must find other parties who will take it on, and transfer it to them, minimising the effects.

In the short term, it is not even possible to restructure one's credit policies or the structures of one's credit departments to deal with the new start-up phase, with all that this will bring. What can certainly be done is to look for products in the new digital solutions available on the market that can help automate the work that accompanies collection activities, so as to "free up" specialised resources, dedicating themto preventive "micro-surveillance" activities that anticipate, minimise or avoid recovery activities. I am thinking of the automation of collection management, the reconciliation of account statements, and the introduction of new services capable of rationalising and making effective the reporting from the Otc (Order to Cash) world. Speaking of preventive activities, how certain are we that we will be able to identify which client companies are having difficulty in accessing bank credit and which, therefore, will have the greatest difficulty in finding finance for their company to restart investments, once the acute phase, characterised by the so-called "Guaranteed Credit", is over? When all that remains is to look for new financing for their investments, through the creation of new debt, making their financial structure increasingly unsustainable and unsuitable to deal with the recovery, we will see a lot. For this reason, it is essential that this recovery comes soon and that it is sustained with continuity by the various state incentives that must necessarily be carefully and scrupulously targeted, especially in the world of SMEs and Mid-Caps. For this reason, the national economic policy choices made in this period will be decisive for the future in the coming months and beyond.

The increase in insolvencies

It is undeniable that in this period there are companies and entrepreneurs who have brilliantly overcome the first phase of contraction of the domestic market in the spring of 2020, but who are looking with conscious apprehension to the near future (you can look for some interesting interviews on the web in this regard, including the one given by Remo Ruffini of Moncler, who cautiously states that "zero risk does not exist" and hopes that the "injections of liquidity into the system should not only be allocated, but made immediately available", an operation that is neither trivial nor easy). At a time when global corporate insolvencies are expected to rise by 26% in 2020, as the coronavirus pandemic pushes the world economy into recession, we must also consider the news coming out of the world.

The international situation

China is the only major market expected to escape recession. Being ahead of the epidemic curve, it felt the greatest impact in the first quarter of 2020, while in the second quarter economic activity recovered by 3.2%, with a projected closing rate of 4.9% for 2020, and almost double that in 2021. The recovery in 2021 is in any case uncertain. The extent of the economic contraction varies from country to country as it is influenced by several factors. First, the economic downturn is expected to be greater in countries where longer and more restrictive lockdowns have been implemented. Such lockdowns limit the production and consumption of products and services. In addition, demand may fall as workers lose income and increased economic uncertainty increases the propensity to save.

Italy, France and Spain, countries severely affected by the virus and which have implemented long and severe containment measures, are likely to see a sharp contraction in GDP in 2020, as their economic activity is heavily dependent on tourism and services, which are limited by the coronavirus outbreak. Northern European countries are generally expected to see smaller contractions. Germany, Denmark, Austria and the Netherlands are doing better at containing new infections, with economies that seem to adapt more easily to social restrictions. Sweden had the lowest GDP contraction of all the countries surveyed. But despite its relatively mild approach, the Swedish economy will still enter recession this year. The UK stands out as the northern European country with the highest GDP contraction. The UK government also initially tried to implement a policy of herd immunity, however, the economy was then forced into an abrupt and severe lockdown as it became apparent that the healthcare system was unable to cope with the high infection rate. What further complicates the situation is that the economy is suffering from Brexit-related uncertainty.

Outside Europe, the US, Japan and Australia have a more positive outlook. The US, although severely affected by Covid-19 infections, has curtailed economic activity to a lesser extent. In addition, the population is likely to have reduced consumption less than in Europe, as the US administration has sent more tentative signals about the severity of the health crisis. Australia ranks among the best performing developed countries. It is a successful example of containing new infections, although the Australian economy is still vulnerable due to the high importance of the tourism sector and exports to South-East Asia. Finally, Japan is relatively more vulnerable than the previous two countries, as its mixed approach of tight restrictions at the start of the crisis, followed by premature openings and a second significant increase in infections, will impact economic activity, with GDP expected to contract by 6% in 2020.

Returning to the domestic market, let us prepare for 2021 in the hope that the recovery will take place quickly in order to mitigate the effects that increases in our companies' debt will bring us in the new year.

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