There is always a lag in publicly reported information which is far from ideal, especially now - when keeping ahead of events that could adversely impact solvency or liquidity is more important than ever.
In essence – be inquisitive and question the reasoning for any change in behaviour from your clients. Any departure from the ‘norm’ could be a sign of distress, so enter regular dialogue with your clients and seek to understand what is driving any change in their normal trading behaviour.
Having a good understanding of your clients current working capital requirements and liquid resources available is key. Changes in these levels either way (see hidden perils below) can be an indication that a frank conversation is needed to ensure losses are mitigated and/or avoided.
There are some key warning signs of potential declining solvency and/or liquidity that you can look out for with your clients:
There is always a lag in publicly reported information which is far from ideal, especially now - when keeping ahead of events that could adversely impact solvency or liquidity is more important than ever.
In essence – be inquisitive and question the reasoning for any change in behaviour from your clients. Any departure from the ‘norm’ could be a sign of distress, so enter regular dialogue with your clients and seek to understand what is driving any change in their normal trading behaviour.
Having a good understanding of your clients current working capital requirements and liquid resources available is key. Changes in these levels either way (see hidden perils below) can be an indication that a frank conversation is needed to ensure losses are mitigated and/or avoided.
There are some key warning signs of potential declining solvency and/or liquidity that you can look out for with your clients:
Client information regularly obtained by Credit Insurers:
A good Credit Insurer will also investigate and convey live issues impacting your clients such as:
Client information regularly obtained by Credit Insurers:
A good Credit Insurer will also investigate and convey live issues impacting your clients such as:
Supply chain finance (SCF) enables suppliers to receive payment early and buyers to pay later (see below):
In the main, SCF greatly benefits supply chain liquidity, but in some instances, it can create unexpected liquidity crises and a false sense of normality in terms of the timing of payments.
When used prudently, SCF can be a useful tool in managing working capital and increasing liquidity in a supply chain, but overreliance can create significant risk in the overall network. This risk is due to the distortion of the natural working capital requirements in an industry and the severe impacts on liquidity occurring if the facilities are withdrawn.
In severe circumstances, firms can go from a picture of health using traditional ratios to insolvent, virtually overnight when a SCF facility is withdrawn. Lack of disclosure in audited accounts often makes SCF facilities very difficult to identify (although new reporting standard requirements are expected to address some of this soon).
Supply chain finance (SCF) enables suppliers to receive payment early and buyers to pay later (see below):
In the main, SCF greatly benefits supply chain liquidity, but in some instances, it can create unexpected liquidity crises and a false sense of normality in terms of the timing of payments.
When used prudently, SCF can be a useful tool in managing working capital and increasing liquidity in a supply chain, but overreliance can create significant risk in the overall network. This risk is due to the distortion of the natural working capital requirements in an industry and the severe impacts on liquidity occurring if the facilities are withdrawn.
In severe circumstances, firms can go from a picture of health using traditional ratios to insolvent, virtually overnight when a SCF facility is withdrawn. Lack of disclosure in audited accounts often makes SCF facilities very difficult to identify (although new reporting standard requirements are expected to address some of this soon).
Key points to evaluate:
Thoroughly understand your client’s financial position and plans
A thorough and regularly updated understanding of their financial position and how they are approaching any impending issues
Include any exposures to “the hidden perils”
Active discussion about any off-balance sheet financing being used including Supply Chain Finance. In the case of supply chain finance, understanding any contingency plans in place to work through potential withdrawal of the facilities. How are your clients using the excess cash derived from SCF payments?
Don’t rely on history!
The warning “Historical results may not be an indicator of future performance” is particularly true as we work through the longer-term impacts of the pandemic. Relying purely on credit ratings based on 2019 or even 2020 financial results risks missing major issues in supplier financial position.
Ensure you are insured against any issues that do arise.
Ensuring you and even your extended network have trade credit insurance in place to cover any unexpected exposures can help ensure the cash owed for goods and services continues to flow even when issues do arise.
Be proactive and work with your suppliers
You, your suppliers, and your buyers form an important commercial network – you are part of the supply chain! Therefore, keeping the line of communication open and working with your suppliers/buyers to move through potential issues can often be the most expedient and least costly approach to dealing with supply chain shocks.
Key points to evaluate:
Thoroughly understand your client’s financial position and plans
A thorough and regularly updated understanding of their financial position and how they are approaching any impending issues
Include any exposures to “the hidden perils”
Active discussion about any off-balance sheet financing being used including Supply Chain Finance. In the case of supply chain finance, understanding any contingency plans in place to work through potential withdrawal of the facilities. How are your clients using the excess cash derived from SCF payments?
Don’t rely on history!
The warning “Historical results may not be an indicator of future performance” is particularly true as we work through the longer-term impacts of the pandemic. Relying purely on credit ratings based on 2019 or even 2020 financial results risks missing major issues in supplier financial position.
Ensure you are insured against any issues that do arise.
Ensuring you and even your extended network have trade credit insurance in place to cover any unexpected exposures can help ensure the cash owed for goods and services continues to flow even when issues do arise.
Be proactive and work with your suppliers
You, your suppliers, and your buyers form an important commercial network – you are part of the supply chain! Therefore, keeping the line of communication open and working with your suppliers/buyers to move through potential issues can often be the most expedient and least costly approach to dealing with supply chain shocks.
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