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Coronavirus Impact on Companies' Accounts Receivable and Credit Decisions - Revisited

Updated: Jul 16, 2021

The degree to which businesses are adversely impacted by COVID-19, varies by product, industry, transacting methodologies, supply chain, and geographic location. I want to focus on the impact on both managing Receivables integrity and Credit decisions.

Receivables Integrity

We understand that, a) as receivables age they become less collectible, b) this is a unique but repeatable crisis, c) Customers must be preserves, d) reasonable accommodation is to be made for our Customers, and e) the fiduciary responsibility, with which we are charged is unchanged and unaffected.

'Fiduciary Responsibility' for Credit is a charge to protect the Company by identifying risk, communicate the risk effectively, and explain the potential risk/rewards. By definition, Credit is not to make decisions inconsistent with, the perceived risk and, limits set consistently with the Company's tolerance for risk. It is the responsibility of leadership to make 'business decisions' that consider perceived risk and adjust tolerances, in light of the businesses' needs and goals.

So how do we protect our business and current Receivables?

Credit and collection functions are expected to leverage AP contacts, internal Sales contacts, and Sales' ongoing communications with customers, to identify decision-makers. Establish communications promptly and in a coordinated effort. Engage Sales about their key role in crafting individual solutions for at-risk Customers. Well drafted solutions, now, will have a long-term impact in the Company's relationships with its Customers.

Businesses remember suppliers that were there in critical times. They, more vividly, remember who did not support them, and who were not there at all. Which suppliers are more apt to be considered 'preferred' going forward? Restoring relationships and trust can be insurmountable.

Steps in preserving Receivables

Coordinate Customers communications. For those that are paying promptly or consistently, thank them. Whether they are prompt or slowing, ask the businesses how they are managing the crisis.

Listen and engage them in conversations that help you understand the health of the businesses and their key hurdles. Ask about sales, cost pressures, debt management, and how they are doing personally. Be tactful overall on who asks the questions, but the last question is often revealing. My experience is that businesses want to talk about their experiences, successes, and struggles. They often look to you for solutions and will ask for your advice.

One general point on communications: If your business is not engaged with Customers, in close partnership, sales are probably not where they should be, and are at risk. Do Customers think you are 'sold and supportive' to their vision or goals?

Credit should coordinate conversations about the information received, to

formulate a risk profiles. Make supportable assumptions to risk, based on information received. Communicate perceived risk to Sales and Management.

For customers that are struggling, establish a cadence of communication to workout payments, and build the relationship. This effort will put you at the head of the Payables schedule. If payment commitments are not specific, work towards a 'payment plan'. Formalize a schedule of payments, and talk through the elements that need to exist and events that need to occur, before funds are remitted to your Customer, and those funds can be turned around by the Customer.

You have a plan but do you have comfort or security? If repayment will be take months, you need further assurances. Will Customers share their most recent published financials? The review, of financials, can determine what can be reasonably expected, identifies related entities, and among other thing can forecast cash depletion. Will they agree to guarantees or security?

A progression of requests:

a) A conversation and update on the business,

b) Payment,

> Short-term payment plan, formalized,

> Long-term payment plan with a good faith payment, formalized,

c) Financials? (an annual cadence, mitigates risk and can maximize sales),

d) Corporate or parent company guaranty?

e) Can they execute a security interest?

f) Can they open a standby letter of credit?

g) A schedule for the next call.

Credit Decisions in a Crisis

The current crisis is primarily a one-factor triggered event, exacerbated by the oil price-war between Russia and Saudi Arabia. Once the Coronavirus restrictions progressively loosen, treatment protocols are established, and hospital/resource utilization projection are adjusted, markets will rebound.

What does it mean for people and businesses? At a minimum, economies shrink from a cessation of activity, public spending increases, private/business wealth diminishes and industries restructure.

What should Credit functions be doing now?

Credit should review the Customer portfolio with available tools and reports. Be current on Company to Customer communications, by engaging staff and Sales. Credit reporting tools should be set to notify of changes in ratings. The portfolio review should be determined by looking at the largest debtors, critical segments, or low margin Customers.

Financials should be pulled from available sources or requested of Customers. This does not have to be a hard conversation and frankly they know the request is coming. The simple truth is the best tact: 1) the reason is that you company has to assess it's risk by reviewing the Customer portfolio, 2) your company must insure confidentially within credit decision-makers, and 3) there are benefits to the customer (disclosure can increase comfort).

Financials should provide insights into: cost and ability to service debt, cash on hand versus a cash burn rate, equity and leverage for loan availability, and general perceptions on management.

Credit actions are key and critical:

a) Engage with Sales and Management on newly identified risk,

b) Update Customer reviews,

c) Seek financials and set schedule (private companies finalize in the Spring),

d) Revise scoring models and 'tolerances towards risk' based on the crisis,

e) Present plans to reduce perceived high-risk exposures,

f) Drive 'Customer support', 'risk mitigation' and 'opportunities' conversations.

Risk mitigation tools on at-risk Customers consist, among others, payment schedule agreements, shipment restrictions, guarantees, the relaxing of return policies, or securitization. If the account limits must be restricted, shortening terms reduces exposure but carries limited preference risk. Prepaid or letter of credit collateralized sales are generally 'preference proof'.

For Customer with 'cash flow problems' as distinguished from 'financial problems', Credit should not look to change terms. The temporary relaxing of terms should only be entertained if the Customer a) is financially viable, b) signs a formal agreement for the temporary action, and c) agrees they will revert back their Payables terms. Terms decisions are generally made by management, and once terms are changed, they are hard to reverse without that formal agreement.

Manage limits for risk mitigation and discuss holding shipments where communications are weak or do not produce agreements on a path forward.

Finally, understand bankruptcy law fundamentals and key provisions, including a) critical vendor, b) preference, and c) reclamation. Manage credit terms and tolerance with in the risk mitigation attributes of these provisions.

Write if you have questions, or check out my other blogs.

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