Credit insurance supports companies' profitable growth - FECMA
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Credit insurance supports companies’ profitable growth
An independent research study of 2,000 businesses in 10 European economies
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Background. During the first semester of 2006, the Credit Management Research Centre based at the University of Leeds Business School, in the United Kingdom, was commissioned by Euler Hermes to carry out a study on Credit Management Practice in ten European economies.
Objectives The study aims to examine the importance of trade credit, variations in credit policies, credit management practices and the impact of credit insurance on corporate performance. The research focuses on the key differences between credit insured and non credit insured companies and compares the way companies in various markets manage their credit function.
Methodology A total of 2,000 companies were surveyed in the 10 following economies: Belgium, France, Germany, Hungary, Italy, the Netherlands, Poland, Portugal, Spain, and the United Kingdom. The study methodology employed a number of fieldwork techniques including a postal survey combined with follow-up telephone interviews.
Sample characteristics The study panel has been analysed by: Size by number of employees, Size by turnover, Breakdown of survey panel by industrial sector and Breakdown by specific activity.
Breakdown of survey panel by industry
Size by number of employees
Agriculture, hunting & forestry Business/financial services
50
Construction
40
Energy and water
30
Hotels/recreation
20 % of 10 firms 0
Manufacturing Repairs (vehicles/household goods) Under 10 (Micro)
10 to 49 (Small)
50 to 249 (Medium)
250 + (Large)
Retail distribution Transport/communication
Number of employees
Wholesale distribution 0
10
20
30
40
10
20
30
40
% of firms
Breakdown of survey panel by manufacturing Food, beverages, tobacco
Size by turnover
Textiles and textile products, upholstery 50
Paper and paper products, publishing, printing
40
Chemicals, plastics, petroleum
30
Non metallic products
20 % of 10 firms 0
Metals and fabricated metal products Machinery and equipment ‹1
1-2.4
2.5-4.9
5-9.9
10-19.9 20-49.9
› 50
Electrical and optical equipment Turnover level - € millions
Transport equipment 0 % of firms
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Editorial
“
Credit insurance improves overall credit management practice and corporate value” More than 80% of daily business-to-business transactions are on credit terms. This is the most important form of short-term financing within the corporate sector. Trade debts are one of the main assets on most corporate balance sheets. They can represent up to 35% of total assets. Credit management is therefore crucial for companies and can be an important strategic or competitive tool for capturing new business. Better credit terms improve supplier-customer relationships and signal financial health and “reputation”. Granting a payment delay to customers can cause cash flow or financing difficulties for many firms, especially for small ones. Credit insurance improves the profitability of businesses and therefore helps them to grow in a profitable way and avoid the risk of insolvency. In a project with Professor Nick Wilson, director of the Credit Management Research Centre, at Leeds University Business School in the UK, we investigated credit management usage in ten major European economies. The results of this study provide evidence to support the professionals’ view that customer late payment does affect cash flow. The study shows how companies are aware of it and how they usually treat this issue. Among all the credit management measures the study shows that credit insurance helps to improve banking relationships and access to finance. With credit insurance, companies protect both their current and future cash flow and net profits. The management of credit insured companies can then concentrate on their core activities, e.g. the development of production, commercial operations, new markets... We are proud to present you the detailed results of this first European research study on credit management usage. We trust you will find them instructive and their insight valuable. Clemens von Weichs, CEO Euler Hermes
Key findings The Credit Insurance impact • Operational stability through supplier relationships • Improved banking relationships and access to finance • Increased commercial dynamism from enhanced customer relationships • Excellent information on companies’ risk through the credit reference information provided • Comprehensive protection against the risk of insolvency Credit insurance improves the quality of companies’ bottom line
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Default and late payment: a real challenge for company directors
The vast majority of business to business transactions across Europe are undertaken on a trade credit (open account) basis. Consequently businesses have to devote resources to managing credit relationships and the resultant credit risk. Data analysis includes typical credit periods and terms granted; credit policies; the collection and recovery cycle; risk assessment and management; the use of third parties, credit services and outsourcing. We start by examining the extent and causes of payment delays.
A widespread threat among all countries On most balance sheets trade debtors represent up to 30-35% of total assets, on average, for all companies. Of the companies surveyed, 83% sell across all countries between 81-100% of their goods and services on trade credit. Germany, 94%, Poland, 92%, and France with 86% have the highest proportion of countries within this 81-100% bracket. The Netherlands holds the highest percentage of companies (27%) whose overall sales on trade credit are between 0-20% followed by Portugal with 24%.
Question
4
?
What percentage of your overall sales are on trade credit terms? (Percentage response)
0-20%
21-40%
41-60%
61-80%
81-100%
All countries
12
3
1
1
83
Belgium (BE)
15
3
0
0
82
France (FR)
10
2
1
1
86
Germany (GE)
2
1
2
1
94
Netherlands (NL)
27
3
0
1
69
Hungary (HU)
9
2
1
0
88
Italy (IT)
13
2
0
0
85
Spain (SP)
10
3
2
0
85
Poland (PL)
6
1
0
1
92
Portugal (PT)
24
9
5
0
62
United Kingdom (UK)
13
1
1
1
84
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76% of all companies’ cash flow has been affected by customer late payment 98% of all companies experience late payment by their customers. A third of them think it is an ongoing problem.
Question
?
Has your cash flow been affected by customer late payment? (Percentage response)
In Germany and the Netherlands, almost 80% of companies surveyed claim that their cash flow is hardly ever affected by late paying customers, with only 20% claiming that cash flow has “sometimes” been affected in this way. Italian companies (12%) are the most likely to “always” have their cash flow affected by late paying customers. The same issue would not appear to be as frequent a problem in Belgium, Germany, Hungary and Poland. Never
Always
1
2
3
4
5
All countries
24
30
29
14
3
Belgium (BE)
28
24
30
17
1
France (FR)
19
21
34
17
9
Germany (GE)
48
30
12
8
2
Netherlands (NL)
43
34
14
6
3
Hungary (HU)
46
31
15
6
2
Italy (IT)
20
31
31
6
12
Spain (SP)
31
34
24
6
5
Poland (PL)
10
36
45
8
1
Portugal (PT)
11
31
30
25
3
United Kingdom (UK)
19
33
27
16
5
Why do customers pay late? The main reasons why companies feel that their customers pay late are due to Collection Department Inefficiencies (the highest percentage of responses was given by Italian firms- 22%); Poor Risk/Credit Assessment (Poland 36% vs. Belgium 9%); and Inaccurate Invoicing (The Netherlands holds the highest percentage, 30%, and Portugal the lowest 2%). Poor After Sales Service seems to be the least likely reason why customers pay late, with only 7% of the sample identifying this as a likely cause of late payment.
5
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Default and late payment: a real challenge for company directors
The risk of trade debt The average “DSO*” is 45 days. In terms of “Payment Beyond Due Date”, the average is 15 days and most firms in participating countries do not have a figure beyond 20 days apart from Spain (23), Germany (21) and Portugal (21).
Question
?
What is the average DSO and payment beyond due date, in days?
N° of days 100 80 60 40 20 0
ALL BE FR GE NL HU
IT
SP
PL
PT
UK
■ Days sales outstanding ■ Payment beyond due date
The average accounts which are reported to be paid on time across the sample are 71% for sales accounts** and 67% of customer accounts***. Conversely, this means that 29% of sales accounts and 33% of customer accounts are paid after the due date. *DSO: days sales outstanding. ** Sales account: whole amount added. *** Customer account: number of customers.
Ensure payment on delivery to improve liquidity Among all the methods which can be used by companies to protect their cash flow and provide enough liquidity for the business to operate, most companies delay their own payment (42%) and offer discount to suppliers for prompt payment (32%). This method is particularly popular in Poland with 65% of companies using it. Companies use trade debtors to secure borrowing (14%) and factoring (12%) the least to improve their cash flow and liquidity.
Question
?
What methods do you use to improve your cashflow position? (Percentage response)
Offer discount for prompt payment
Delay own payment to suppliers
% of Firms
% of Firms 100
100
80
80
60
60
40
40
20
20 0
0
ALL BE FR GE NL HU
■ Yes
6
■ No
IT
SP
PL
PT
UK
ALL BE FR GE NL HU
■ Yes
■ No
IT
SP
PL
PT
UK
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How companies face debt challenges
60% of the overall sample claim that Trading Relationships are the most important factor that influences their credit policies. This relates to important aspects such as customer bases, order frequency, geography, repeat purchase etc. Competitive Position and Availability of Finance also influence the trade credit policy of the majority of firms. Parent Company Policy least determines most firms’credit policy.
Written policy: communication leads to greater efficiency The existence of a well-documented written credit policy helps to place the management of credit in the context of the firm’s overall mission and objectives. 75% of companies agree terms in writing before a sale.
42% of companies have a written credit policy Question
?
Do you have a written credit policy?
% of Firms 80 60 40 20 0
ALL
■ Yes
BE
FR
GE
■ No
NL
HU
IT
SP
PL
PT
UK
It is most likely to be in place in the Netherlands (70%), Belgium (63%) and Germany (60%). In contrast, companies in markets such as Hungary (12%), Poland (28%) and Portugal (27%) are least likely to hold a written credit policy which suggests a less formal approach to credit management practice in these countries.
75% of the entire research sample agree written terms prior to sales Companies that give preference to agreeing payment terms prior to sales in writing include Germany (86%), Belgium (81%), the UK (80%) and Hungary (73%). Respondents from Spain (50%), Portugal (34%) and the UK (30%) indicate that they agree terms prior to sales verbally. A large proportion of French (39%), Spanish (33%) and Hungarian (27%) companies agree to payment terms after sales (by invoice). The majority of firms, in all markets, display their credit terms on invoices. Significantly, fewer companies display terms on statements. 7
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How companies face debt challenges
Managing DSO as the most relevant sign of management efficiency Question
?
In your company credit control and collection performance is primarily measured by: (Percentage indicating a positive response)
Managing debtor days (DSO)
Achieving cash collection targets
Maintaining bad debt/sales ratios
Reduced bad debt write off
All countries
69
36
54
20
Belgium (BE)
43
60
27
13
France (FR)
81
14
74
29
Germany (GE)
47
40
67
33
Netherlands (NL)
47
47
50
9
Hungary (HU)
41
29
57
25
Italy (IT)
54
17
53
20
Spain (SP)
75
25
68
8
Poland (PL)
73
64
55
27
Portugal (PT)
81
32
47
24
United Kingdom (UK)
80
37
51
15
69% of respondents mention managing debtor days outstanding as the most popular measurement of a company’s credit control and collection performance. Particularly within France and Portugal (81%). Reduced bad debt write off is the least popular measurement in the majority of countries surveyed (20%): only 9% of respondents in the Netherlands and 8% in Spain view this as a very important measurement of departmental performance.
Outsourcing credit management Using third parties to undertake credit management activities is a strategic issue that will have a bearing on overall performance. Risk management is the most likely activity to be outsourced by companies, with almost two thirds (64%) using external resources in this area.
Question
8
?
Do you manage your credit function internally and what external resources, if any, are employed by the business? (Percentage indicating a positive response)
% Managing credit internally
% Outsourcing risk assessment
% Outsourcing collection
% Outsourcing legal
% Outsourcing recovery
All countries
90
64
58
46
46
Belgium (BE)
87
46
58
40
46
France (FR)
78
46
36
73
73
Germany (GE)
82
71
39
13
21
Netherlands (NL)
97
50
67
50
38
Hungary (HU)
80
46
50
33
32
Italy (IT)
94
90
97
68
68
Spain (SP)
85
57
86
57
57
Poland (PL)
75
68
40
50
50
Portugal (PT)
97
96
92
89
94
United Kingdom (UK)
98
85
72
46
46
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90% of companies in all countries manage their credit activities internally. The UK (98%), Portugal and the Netherlands (both with 97%) hold the highest percentage overall. Germany holds the highest percentage of firms with a separate credit department. In terms of outsourcing for risk assessment, companies from Italy, Hungary, Portugal and Poland are most likely to do so. Companies from Hungary, Portugal and Germany are the most likely to outsource legal and recovery work.
Over 80% of companies outsource debt collection When their in-house collection efforts fail, 83% of companies use external agents. 57% of companies using those third parties do so for both their domestic and export collection activities. Only 6% of respondents use third parties solely for export collections which is most likely to be the case for Italian firms (15%) and Portuguese (14%). Firms from Spain (57%) and Hungary (58%) are the most likely to use third parties for their domestic collection activities only.
Question
?
Companies using third parties for collection?
% of Firms 100 80 60 40 20 0
ALL
BE
■ Domestic
FR
■ Export
GE
NL
HU
IT
SP
PL
PT
UK
■ Domestic & export
For 55% of companies, legal action is the most common debt collection method Question
?
What was the percentage of companies who used collection agents last year? (Percentage response)
% Using agents in last year
Average number of agents used
% Satisfied with collection agents
All countries
80
1
66
Belgium (BE)
73
1
55
France (FR)
81
1
60
Germany (GE)
84
1
88
Netherlands (NL)
86
1
65
Hungary (HU)
55
1
50
Italy (IT)
91
2
75
Spain (SP)
33
1
25
Poland (PL)
89
2
61
Portugal (PT)
75
1
60
United Kingdom (UK)
74
1
66
80% of companies have used collection agents within the last year, although only one third of Spanish firms claim to have done so. Only 25% of Spanish firms were satisfied with the performance of their collection agents, compared to an overall average for the study’s population of 66%. Germany has the highest levels of satisfaction with the collection agents being used (88%), followed by Italy (75%). 9
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How companies face debt challenges
Why do companies choose not to use debt collection agents’ services? Among all the reasons given as to why companies choose not to use the services of debt collection agents, 89% of companies mention using their In House Methods first. Belgium (96%), Portugal (96%) and Italy (91%) hold the highest percentage. All countries also seem to fear the possible negative impact on customer relationships of using collection agents (75%). Companies in Poland (97%) and Germany (93%) being especially wary of the impact outsourcing to agents may have on their customers. The reasons with the least influence are quality (48%) and cost (47%) of the service provided by agents.
69% of companies would withhold supplies from slow paying accounts Question
?
Do you withhold supplies from slow paying accounts?
% of Firms 80 60 40 20 0
ALL
■ Yes
BE
FR
GE
NL
HU
IT
SP
PL
PT
UK
As a reaction to payment delay, the vast majority of companies surveyed would retain supplies from their slow paying clients. Especially in the UK, the highest percentage (81%), and Spain (56%) and Portugal (57%) the lowest.
■ No
COMPANIES ATTITUDE TOWARDS CREDIT INSURANCE Question
?
Why are companies credit insured?
?
Why are companies not credit insured?
1 Peace of mind 77% 2 Protection of cash flow 71% 3 Need to improve knowledge about the customer base 64%
Question
1 Cost 74% 2 Cover not appropriate enough 59% 3 Not simple enough 54%
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The positive impact of credit insurance
By minimising slow payment from customers, effective credit management can make a noticeable difference to the short-term finances and long-term viability of any business. But there can be significantly more to credit management than collecting cash. The research shows that many credit managers in business (being at the main interface with the customer) now find themselves as much aligned to the marketing function as to finance. The study’s findings prove that adopting a credit insurance policy can benefit many aspects of a business including: customer relationship management; supplier relationships and banking as well as financing relationships.
Credit insured companies enjoy suppliers’ attractive conditions From the perspective of current and potential suppliers a credit insured company is a better risk as they are protected against the “knock-on” effects of bad debt. Credit insured companies experience more stable supplier relationships than non insured firms. They also have fewer suppliers which leads to greater efficiencies within the credit department. This ultimately impacts on the efficiency of the business as a whole since the costs of financing supplies are reduced.
Credit insured firms achieve better credit terms from suppliers Credit insured firms are clearly able to negotiate more flexible payment arrangements with suppliers: 90% of credit insured companies state that suppliers are willing to offer trade credit versus 73% of non insured companies. Credit insured firms have longer payment periods (50 days versus 41 days), with a greater discount offered for early payment of almost 1% (3.4% vs 2.5%). Average Credit Days (i.e. the length of time it takes respondents to pay their suppliers) is on average 7 days higher for insured companies (54 days vs 47 days). On the contrary, additional time allowed for Payment Beyond the Due Date is on average higher for uninsured firms (16 days vs. 13 days). This means that credit insured firms gain access to longer payment periods which impacts positively on the cash flow position of the company.
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The positive impact of Credit Insurance
Credit insured firms get better access to finance from banks Credit insured companies tend to have a better and longer relationship with their current banks than non insured respondents: an average of 21 years compared to 16 years for non insured firms. 49% of insured firms have managed to obtain a bank loan in the last year compared to 34% of uninsured businesses. The average interest rate obtained by insured firms (3.5%) is lower on average than for non insured (3.95%).
Question
?
When your company needs to raise finance which of the following does it use? (Percentage indicating a positive response)
Credit insured
Non insured
Bank overdraft facilities
62
55
Secured banks loans (short term)
30
42
Secured bank loans (long term)
49
34
Leasing/hire purchase
47
47
Commercial mortgages
15
15
Commercial paper (bonds)
10
3
Factoring
24
5
Invoice discounting
28
40
Extended trade credit
41
16
Venture capital
7
3
Group funds
34
33
Credit insured businesses are most likely to use bank overdraft facilities (62% vs 55%), secured long term bank loans (49% vs 34%), factoring (24% vs 5%) and extended trade credit (41% vs 16%).
Credit insurance enhances Customer Relationship Management Credit insured companies have more repeat sales than uninsured companies (73% vs 67%). Their strength gives them more flexibility and 54% of credit insured companies view giving credit as a Customer Relationship Management marketing decision, compared to only 26% of non insured companies.
Credit insured firms are more customer focused For credit insured companies an increased customer loyalty (i.e. how many customers are tied into a long term relationship with respondents) is the result of the specific attention they pay to improving customer relationships: 84% of credit insured firms regard it as important, compared with 79% of non insured firms.
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How do you manage your customer relationships?
Uninsured score
Insured score
% Of customer base with credit account
51
69
18% more customers with a credit account
% Of customer base with a credit limit
62
77
15% more customers with a credit limit
Number of requests for credit received
656
1416
% Requests for credit accepted
Potential Impact
More requests for credit received per annum
72
81
44.5
46.2
% Of sales exported
24
30
6% more sales exported
Average number of countries exported to
3
6
Greater international market penetration
% Likely to introduce new products/services
57
64
More likely to introduce new products and services
Number of customer accounts as a % of sales
0.34
0.83
Days Sales Outstanding
9% more credit requests accepted +2 days credit flexibility
Higher % of customer accounts to sales
Credit insured companies are ready to adapt credit terms to gain business Clearly credit insured companies are more pro-active in terms of flexibility to “gain customers generally” (30% vs 19%), to “beat the competition” (32% vs 27%), to attract large customers (56% vs 50%), and respond to a change in customer risk (45% vs 34%). Credit insured companies also appear more responsive to external influences on their business environment with 30% (vs 18%) of insured companies stating that they would vary terms as a direct response to changes in economic conditions.
Question
?
If you do vary your credit terms how likely are you to do so for the following reasons? (Percentage response) Very likely
Not at all likely
Very likely
Not at all likely
Credit insured
1
2
3
4
5
Non insured
1
2
3
4
5
To attract large customers
17
10
17
40
16
To attract large customers
14
17
19
38
12
To gain customers generally
20
21
29
26
4
To gain customers generally
21
26
34
16
3
To beat the competition
13
27
28
23
9
To beat the competition
21
20
32
23
4
To promote a new product/service
37
20
28
11
4
To promote a new product/service
32
24
27
12
5
To gain export orders
31
16
24
24
5
To gain export orders
44
10
28
14
4
In response 23 to economic conditions
17
30
26
4
In response 26 to economic conditions
21
35
14
4
In response to a 37 change in interest rates
29
26
6
2
In response to a 44 change in interest rates
24
25
5
2
In response to a 24 change in customer risk
10
21
26
19
In response to a 21 change in customer risk
20
25
23
11
To help a customer 21 with cashflow problems
20
21
33
5
To help a customer 22 with cashflow problems
19
29
25
5
To overcome own cashflow problems
15
31
12
5
To overcome own cashflow problems
21
27
7
14
37
31
13
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The positive impact of Credit Insurance
The financial impact of credit insurance The financial impact of credit insurance is generated through higher levels of repeat business, lower levels of customer queries and disputes, more profitable sales, better DSO and on-time payments, lower levels of bad debt and incidences of fraud and lower overall average costs of credit management. Credit insured firms also have access to lower costs and better quality credit information and market intelligence. The key performance differences between credit insured and non credit insured companies can also be converted into a “Euro saving” according to a percentage of sales. Uninsured score
Insured score
Potential Impact
Bad debt as % of sales
0.74
0.38
0.36% of sales saved
Credit operating costs as % of sales
1.94
0.56
1.38% of sales saved
Average credit salary as a % of sales
0.65
0.49
+0.16% of sales saved
Average spend on credit information
0.49
0.25
0.24% of sales saved
Amount of frauds as a % of sales
0.20
0.18
0.02% of sales saved
% Interest rate on bank loans
3.95
3.5
0.5% of the cost of capital saved
A direct financial impact has been calculated based on the percentage savings calculated for various measures in the study. In terms of credit operating costs as a percentage of sales on average 1.38% of a company’s annual turnover could be saved by the existence of a credit insurance policy. This means that for a company with a turnover of 10 million euros this would represent a balance sheet saving of 138,000 euros. By having a policy in place, similar findings can also be seen in terms of bad debt write off as a percentage of sales (0.36%), average credit salaries (0.16%), average spend on credit information (0.24%) and levels of fraud (0.02%). In addition, raising finance through loans is also more likely to be cheaper for credit insured firms with an average of 3.5% for insured firms versus 3.95% for non insured companies.
Conclusion: Credit insurance reduces the risk of insolvency Poor management is behind most of corporate insolvencies (according to a study carried out for Euler Hermes Krediversicherungs-AG, by the University of Mannheim published on September 27, 2006 on German companies). The Credit Management Research Centre study shows that there are a number of ways that companies can review the elements of the credit management process which make it easier to prevent any unforeseen operational difficulties with the company. This in turn helps to ensure a steady cash flow and reduces the risk of financial difficulty among credit insured companies. Credit insured firms have less cash tied up in stocks and customer debt as a result of disciplined working capital management. This not only represents a financial saving but means that a firm is less vulnerable to insolvency through over trading and poor cash management.
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Design and production
- 6577 - Photography: Euler Hermes, Yves Denoyelle
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Euler Hermes protects companies of all sizes and industry sectors from the risk of customer default. The leading credit insurance group with a global market share of 34.4% and presence in over 45 countries, Euler Hermes offers a range of integrated credit management services covering each phase of the transaction between the policyholder and its customer: protection from customer non-payment, debt collection and loss indemnification. A subsidiary of AGF and a member of the Allianz group, Euler Hermes has the necessary financial strength to provide long-term support to its clients. Euler Hermes is rated AA- by Standard & Poor’s.
1, rue Euler – 75008 Paris – France Tel.: + 33 1 40 70 50 50 – Fax : + 33 1 40 70 50 17 www.eulerhermes.com
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Credit insurance supports companies’ profitable growth
An independent research study of 2,000 businesses in 10 European economies
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Background. During the first semester of 2006, the Credit Management Research Centre based at the University of Leeds Business School, in the United Kingdom, was commissioned by Euler Hermes to carry out a study on Credit Management Practice in ten European economies.
Objectives The study aims to examine the importance of trade credit, variations in credit policies, credit management practices and the impact of credit insurance on corporate performance. The research focuses on the key differences between credit insured and non credit insured companies and compares the way companies in various markets manage their credit function.
Methodology A total of 2,000 companies were surveyed in the 10 following economies: Belgium, France, Germany, Hungary, Italy, the Netherlands, Poland, Portugal, Spain, and the United Kingdom. The study methodology employed a number of fieldwork techniques including a postal survey combined with follow-up telephone interviews.
Sample characteristics The study panel has been analysed by: Size by number of employees, Size by turnover, Breakdown of survey panel by industrial sector and Breakdown by specific activity.
Breakdown of survey panel by industry
Size by number of employees
Agriculture, hunting & forestry Business/financial services
50
Construction
40
Energy and water
30
Hotels/recreation
20 % of 10 firms 0
Manufacturing Repairs (vehicles/household goods) Under 10 (Micro)
10 to 49 (Small)
50 to 249 (Medium)
250 + (Large)
Retail distribution Transport/communication
Number of employees
Wholesale distribution 0
10
20
30
40
10
20
30
40
% of firms
Breakdown of survey panel by manufacturing Food, beverages, tobacco
Size by turnover
Textiles and textile products, upholstery 50
Paper and paper products, publishing, printing
40
Chemicals, plastics, petroleum
30
Non metallic products
20 % of 10 firms 0
Metals and fabricated metal products Machinery and equipment ‹1
1-2.4
2.5-4.9
5-9.9
10-19.9 20-49.9
› 50
Electrical and optical equipment Turnover level - € millions
Transport equipment 0 % of firms
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Editorial
“
Credit insurance improves overall credit management practice and corporate value” More than 80% of daily business-to-business transactions are on credit terms. This is the most important form of short-term financing within the corporate sector. Trade debts are one of the main assets on most corporate balance sheets. They can represent up to 35% of total assets. Credit management is therefore crucial for companies and can be an important strategic or competitive tool for capturing new business. Better credit terms improve supplier-customer relationships and signal financial health and “reputation”. Granting a payment delay to customers can cause cash flow or financing difficulties for many firms, especially for small ones. Credit insurance improves the profitability of businesses and therefore helps them to grow in a profitable way and avoid the risk of insolvency. In a project with Professor Nick Wilson, director of the Credit Management Research Centre, at Leeds University Business School in the UK, we investigated credit management usage in ten major European economies. The results of this study provide evidence to support the professionals’ view that customer late payment does affect cash flow. The study shows how companies are aware of it and how they usually treat this issue. Among all the credit management measures the study shows that credit insurance helps to improve banking relationships and access to finance. With credit insurance, companies protect both their current and future cash flow and net profits. The management of credit insured companies can then concentrate on their core activities, e.g. the development of production, commercial operations, new markets... We are proud to present you the detailed results of this first European research study on credit management usage. We trust you will find them instructive and their insight valuable. Clemens von Weichs, CEO Euler Hermes
Key findings The Credit Insurance impact • Operational stability through supplier relationships • Improved banking relationships and access to finance • Increased commercial dynamism from enhanced customer relationships • Excellent information on companies’ risk through the credit reference information provided • Comprehensive protection against the risk of insolvency Credit insurance improves the quality of companies’ bottom line
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Default and late payment: a real challenge for company directors
The vast majority of business to business transactions across Europe are undertaken on a trade credit (open account) basis. Consequently businesses have to devote resources to managing credit relationships and the resultant credit risk. Data analysis includes typical credit periods and terms granted; credit policies; the collection and recovery cycle; risk assessment and management; the use of third parties, credit services and outsourcing. We start by examining the extent and causes of payment delays.
A widespread threat among all countries On most balance sheets trade debtors represent up to 30-35% of total assets, on average, for all companies. Of the companies surveyed, 83% sell across all countries between 81-100% of their goods and services on trade credit. Germany, 94%, Poland, 92%, and France with 86% have the highest proportion of countries within this 81-100% bracket. The Netherlands holds the highest percentage of companies (27%) whose overall sales on trade credit are between 0-20% followed by Portugal with 24%.
Question
4
?
What percentage of your overall sales are on trade credit terms? (Percentage response)
0-20%
21-40%
41-60%
61-80%
81-100%
All countries
12
3
1
1
83
Belgium (BE)
15
3
0
0
82
France (FR)
10
2
1
1
86
Germany (GE)
2
1
2
1
94
Netherlands (NL)
27
3
0
1
69
Hungary (HU)
9
2
1
0
88
Italy (IT)
13
2
0
0
85
Spain (SP)
10
3
2
0
85
Poland (PL)
6
1
0
1
92
Portugal (PT)
24
9
5
0
62
United Kingdom (UK)
13
1
1
1
84
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76% of all companies’ cash flow has been affected by customer late payment 98% of all companies experience late payment by their customers. A third of them think it is an ongoing problem.
Question
?
Has your cash flow been affected by customer late payment? (Percentage response)
In Germany and the Netherlands, almost 80% of companies surveyed claim that their cash flow is hardly ever affected by late paying customers, with only 20% claiming that cash flow has “sometimes” been affected in this way. Italian companies (12%) are the most likely to “always” have their cash flow affected by late paying customers. The same issue would not appear to be as frequent a problem in Belgium, Germany, Hungary and Poland. Never
Always
1
2
3
4
5
All countries
24
30
29
14
3
Belgium (BE)
28
24
30
17
1
France (FR)
19
21
34
17
9
Germany (GE)
48
30
12
8
2
Netherlands (NL)
43
34
14
6
3
Hungary (HU)
46
31
15
6
2
Italy (IT)
20
31
31
6
12
Spain (SP)
31
34
24
6
5
Poland (PL)
10
36
45
8
1
Portugal (PT)
11
31
30
25
3
United Kingdom (UK)
19
33
27
16
5
Why do customers pay late? The main reasons why companies feel that their customers pay late are due to Collection Department Inefficiencies (the highest percentage of responses was given by Italian firms- 22%); Poor Risk/Credit Assessment (Poland 36% vs. Belgium 9%); and Inaccurate Invoicing (The Netherlands holds the highest percentage, 30%, and Portugal the lowest 2%). Poor After Sales Service seems to be the least likely reason why customers pay late, with only 7% of the sample identifying this as a likely cause of late payment.
5
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Default and late payment: a real challenge for company directors
The risk of trade debt The average “DSO*” is 45 days. In terms of “Payment Beyond Due Date”, the average is 15 days and most firms in participating countries do not have a figure beyond 20 days apart from Spain (23), Germany (21) and Portugal (21).
Question
?
What is the average DSO and payment beyond due date, in days?
N° of days 100 80 60 40 20 0
ALL BE FR GE NL HU
IT
SP
PL
PT
UK
■ Days sales outstanding ■ Payment beyond due date
The average accounts which are reported to be paid on time across the sample are 71% for sales accounts** and 67% of customer accounts***. Conversely, this means that 29% of sales accounts and 33% of customer accounts are paid after the due date. *DSO: days sales outstanding. ** Sales account: whole amount added. *** Customer account: number of customers.
Ensure payment on delivery to improve liquidity Among all the methods which can be used by companies to protect their cash flow and provide enough liquidity for the business to operate, most companies delay their own payment (42%) and offer discount to suppliers for prompt payment (32%). This method is particularly popular in Poland with 65% of companies using it. Companies use trade debtors to secure borrowing (14%) and factoring (12%) the least to improve their cash flow and liquidity.
Question
?
What methods do you use to improve your cashflow position? (Percentage response)
Offer discount for prompt payment
Delay own payment to suppliers
% of Firms
% of Firms 100
100
80
80
60
60
40
40
20
20 0
0
ALL BE FR GE NL HU
■ Yes
6
■ No
IT
SP
PL
PT
UK
ALL BE FR GE NL HU
■ Yes
■ No
IT
SP
PL
PT
UK
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How companies face debt challenges
60% of the overall sample claim that Trading Relationships are the most important factor that influences their credit policies. This relates to important aspects such as customer bases, order frequency, geography, repeat purchase etc. Competitive Position and Availability of Finance also influence the trade credit policy of the majority of firms. Parent Company Policy least determines most firms’credit policy.
Written policy: communication leads to greater efficiency The existence of a well-documented written credit policy helps to place the management of credit in the context of the firm’s overall mission and objectives. 75% of companies agree terms in writing before a sale.
42% of companies have a written credit policy Question
?
Do you have a written credit policy?
% of Firms 80 60 40 20 0
ALL
■ Yes
BE
FR
GE
■ No
NL
HU
IT
SP
PL
PT
UK
It is most likely to be in place in the Netherlands (70%), Belgium (63%) and Germany (60%). In contrast, companies in markets such as Hungary (12%), Poland (28%) and Portugal (27%) are least likely to hold a written credit policy which suggests a less formal approach to credit management practice in these countries.
75% of the entire research sample agree written terms prior to sales Companies that give preference to agreeing payment terms prior to sales in writing include Germany (86%), Belgium (81%), the UK (80%) and Hungary (73%). Respondents from Spain (50%), Portugal (34%) and the UK (30%) indicate that they agree terms prior to sales verbally. A large proportion of French (39%), Spanish (33%) and Hungarian (27%) companies agree to payment terms after sales (by invoice). The majority of firms, in all markets, display their credit terms on invoices. Significantly, fewer companies display terms on statements. 7
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How companies face debt challenges
Managing DSO as the most relevant sign of management efficiency Question
?
In your company credit control and collection performance is primarily measured by: (Percentage indicating a positive response)
Managing debtor days (DSO)
Achieving cash collection targets
Maintaining bad debt/sales ratios
Reduced bad debt write off
All countries
69
36
54
20
Belgium (BE)
43
60
27
13
France (FR)
81
14
74
29
Germany (GE)
47
40
67
33
Netherlands (NL)
47
47
50
9
Hungary (HU)
41
29
57
25
Italy (IT)
54
17
53
20
Spain (SP)
75
25
68
8
Poland (PL)
73
64
55
27
Portugal (PT)
81
32
47
24
United Kingdom (UK)
80
37
51
15
69% of respondents mention managing debtor days outstanding as the most popular measurement of a company’s credit control and collection performance. Particularly within France and Portugal (81%). Reduced bad debt write off is the least popular measurement in the majority of countries surveyed (20%): only 9% of respondents in the Netherlands and 8% in Spain view this as a very important measurement of departmental performance.
Outsourcing credit management Using third parties to undertake credit management activities is a strategic issue that will have a bearing on overall performance. Risk management is the most likely activity to be outsourced by companies, with almost two thirds (64%) using external resources in this area.
Question
8
?
Do you manage your credit function internally and what external resources, if any, are employed by the business? (Percentage indicating a positive response)
% Managing credit internally
% Outsourcing risk assessment
% Outsourcing collection
% Outsourcing legal
% Outsourcing recovery
All countries
90
64
58
46
46
Belgium (BE)
87
46
58
40
46
France (FR)
78
46
36
73
73
Germany (GE)
82
71
39
13
21
Netherlands (NL)
97
50
67
50
38
Hungary (HU)
80
46
50
33
32
Italy (IT)
94
90
97
68
68
Spain (SP)
85
57
86
57
57
Poland (PL)
75
68
40
50
50
Portugal (PT)
97
96
92
89
94
United Kingdom (UK)
98
85
72
46
46
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90% of companies in all countries manage their credit activities internally. The UK (98%), Portugal and the Netherlands (both with 97%) hold the highest percentage overall. Germany holds the highest percentage of firms with a separate credit department. In terms of outsourcing for risk assessment, companies from Italy, Hungary, Portugal and Poland are most likely to do so. Companies from Hungary, Portugal and Germany are the most likely to outsource legal and recovery work.
Over 80% of companies outsource debt collection When their in-house collection efforts fail, 83% of companies use external agents. 57% of companies using those third parties do so for both their domestic and export collection activities. Only 6% of respondents use third parties solely for export collections which is most likely to be the case for Italian firms (15%) and Portuguese (14%). Firms from Spain (57%) and Hungary (58%) are the most likely to use third parties for their domestic collection activities only.
Question
?
Companies using third parties for collection?
% of Firms 100 80 60 40 20 0
ALL
BE
■ Domestic
FR
■ Export
GE
NL
HU
IT
SP
PL
PT
UK
■ Domestic & export
For 55% of companies, legal action is the most common debt collection method Question
?
What was the percentage of companies who used collection agents last year? (Percentage response)
% Using agents in last year
Average number of agents used
% Satisfied with collection agents
All countries
80
1
66
Belgium (BE)
73
1
55
France (FR)
81
1
60
Germany (GE)
84
1
88
Netherlands (NL)
86
1
65
Hungary (HU)
55
1
50
Italy (IT)
91
2
75
Spain (SP)
33
1
25
Poland (PL)
89
2
61
Portugal (PT)
75
1
60
United Kingdom (UK)
74
1
66
80% of companies have used collection agents within the last year, although only one third of Spanish firms claim to have done so. Only 25% of Spanish firms were satisfied with the performance of their collection agents, compared to an overall average for the study’s population of 66%. Germany has the highest levels of satisfaction with the collection agents being used (88%), followed by Italy (75%). 9
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How companies face debt challenges
Why do companies choose not to use debt collection agents’ services? Among all the reasons given as to why companies choose not to use the services of debt collection agents, 89% of companies mention using their In House Methods first. Belgium (96%), Portugal (96%) and Italy (91%) hold the highest percentage. All countries also seem to fear the possible negative impact on customer relationships of using collection agents (75%). Companies in Poland (97%) and Germany (93%) being especially wary of the impact outsourcing to agents may have on their customers. The reasons with the least influence are quality (48%) and cost (47%) of the service provided by agents.
69% of companies would withhold supplies from slow paying accounts Question
?
Do you withhold supplies from slow paying accounts?
% of Firms 80 60 40 20 0
ALL
■ Yes
BE
FR
GE
NL
HU
IT
SP
PL
PT
UK
As a reaction to payment delay, the vast majority of companies surveyed would retain supplies from their slow paying clients. Especially in the UK, the highest percentage (81%), and Spain (56%) and Portugal (57%) the lowest.
■ No
COMPANIES ATTITUDE TOWARDS CREDIT INSURANCE Question
?
Why are companies credit insured?
?
Why are companies not credit insured?
1 Peace of mind 77% 2 Protection of cash flow 71% 3 Need to improve knowledge about the customer base 64%
Question
1 Cost 74% 2 Cover not appropriate enough 59% 3 Not simple enough 54%
10
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The positive impact of credit insurance
By minimising slow payment from customers, effective credit management can make a noticeable difference to the short-term finances and long-term viability of any business. But there can be significantly more to credit management than collecting cash. The research shows that many credit managers in business (being at the main interface with the customer) now find themselves as much aligned to the marketing function as to finance. The study’s findings prove that adopting a credit insurance policy can benefit many aspects of a business including: customer relationship management; supplier relationships and banking as well as financing relationships.
Credit insured companies enjoy suppliers’ attractive conditions From the perspective of current and potential suppliers a credit insured company is a better risk as they are protected against the “knock-on” effects of bad debt. Credit insured companies experience more stable supplier relationships than non insured firms. They also have fewer suppliers which leads to greater efficiencies within the credit department. This ultimately impacts on the efficiency of the business as a whole since the costs of financing supplies are reduced.
Credit insured firms achieve better credit terms from suppliers Credit insured firms are clearly able to negotiate more flexible payment arrangements with suppliers: 90% of credit insured companies state that suppliers are willing to offer trade credit versus 73% of non insured companies. Credit insured firms have longer payment periods (50 days versus 41 days), with a greater discount offered for early payment of almost 1% (3.4% vs 2.5%). Average Credit Days (i.e. the length of time it takes respondents to pay their suppliers) is on average 7 days higher for insured companies (54 days vs 47 days). On the contrary, additional time allowed for Payment Beyond the Due Date is on average higher for uninsured firms (16 days vs. 13 days). This means that credit insured firms gain access to longer payment periods which impacts positively on the cash flow position of the company.
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The positive impact of Credit Insurance
Credit insured firms get better access to finance from banks Credit insured companies tend to have a better and longer relationship with their current banks than non insured respondents: an average of 21 years compared to 16 years for non insured firms. 49% of insured firms have managed to obtain a bank loan in the last year compared to 34% of uninsured businesses. The average interest rate obtained by insured firms (3.5%) is lower on average than for non insured (3.95%).
Question
?
When your company needs to raise finance which of the following does it use? (Percentage indicating a positive response)
Credit insured
Non insured
Bank overdraft facilities
62
55
Secured banks loans (short term)
30
42
Secured bank loans (long term)
49
34
Leasing/hire purchase
47
47
Commercial mortgages
15
15
Commercial paper (bonds)
10
3
Factoring
24
5
Invoice discounting
28
40
Extended trade credit
41
16
Venture capital
7
3
Group funds
34
33
Credit insured businesses are most likely to use bank overdraft facilities (62% vs 55%), secured long term bank loans (49% vs 34%), factoring (24% vs 5%) and extended trade credit (41% vs 16%).
Credit insurance enhances Customer Relationship Management Credit insured companies have more repeat sales than uninsured companies (73% vs 67%). Their strength gives them more flexibility and 54% of credit insured companies view giving credit as a Customer Relationship Management marketing decision, compared to only 26% of non insured companies.
Credit insured firms are more customer focused For credit insured companies an increased customer loyalty (i.e. how many customers are tied into a long term relationship with respondents) is the result of the specific attention they pay to improving customer relationships: 84% of credit insured firms regard it as important, compared with 79% of non insured firms.
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How do you manage your customer relationships?
Uninsured score
Insured score
% Of customer base with credit account
51
69
18% more customers with a credit account
% Of customer base with a credit limit
62
77
15% more customers with a credit limit
Number of requests for credit received
656
1416
% Requests for credit accepted
Potential Impact
More requests for credit received per annum
72
81
44.5
46.2
% Of sales exported
24
30
6% more sales exported
Average number of countries exported to
3
6
Greater international market penetration
% Likely to introduce new products/services
57
64
More likely to introduce new products and services
Number of customer accounts as a % of sales
0.34
0.83
Days Sales Outstanding
9% more credit requests accepted +2 days credit flexibility
Higher % of customer accounts to sales
Credit insured companies are ready to adapt credit terms to gain business Clearly credit insured companies are more pro-active in terms of flexibility to “gain customers generally” (30% vs 19%), to “beat the competition” (32% vs 27%), to attract large customers (56% vs 50%), and respond to a change in customer risk (45% vs 34%). Credit insured companies also appear more responsive to external influences on their business environment with 30% (vs 18%) of insured companies stating that they would vary terms as a direct response to changes in economic conditions.
Question
?
If you do vary your credit terms how likely are you to do so for the following reasons? (Percentage response) Very likely
Not at all likely
Very likely
Not at all likely
Credit insured
1
2
3
4
5
Non insured
1
2
3
4
5
To attract large customers
17
10
17
40
16
To attract large customers
14
17
19
38
12
To gain customers generally
20
21
29
26
4
To gain customers generally
21
26
34
16
3
To beat the competition
13
27
28
23
9
To beat the competition
21
20
32
23
4
To promote a new product/service
37
20
28
11
4
To promote a new product/service
32
24
27
12
5
To gain export orders
31
16
24
24
5
To gain export orders
44
10
28
14
4
In response 23 to economic conditions
17
30
26
4
In response 26 to economic conditions
21
35
14
4
In response to a 37 change in interest rates
29
26
6
2
In response to a 44 change in interest rates
24
25
5
2
In response to a 24 change in customer risk
10
21
26
19
In response to a 21 change in customer risk
20
25
23
11
To help a customer 21 with cashflow problems
20
21
33
5
To help a customer 22 with cashflow problems
19
29
25
5
To overcome own cashflow problems
15
31
12
5
To overcome own cashflow problems
21
27
7
14
37
31
13
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The positive impact of Credit Insurance
The financial impact of credit insurance The financial impact of credit insurance is generated through higher levels of repeat business, lower levels of customer queries and disputes, more profitable sales, better DSO and on-time payments, lower levels of bad debt and incidences of fraud and lower overall average costs of credit management. Credit insured firms also have access to lower costs and better quality credit information and market intelligence. The key performance differences between credit insured and non credit insured companies can also be converted into a “Euro saving” according to a percentage of sales. Uninsured score
Insured score
Potential Impact
Bad debt as % of sales
0.74
0.38
0.36% of sales saved
Credit operating costs as % of sales
1.94
0.56
1.38% of sales saved
Average credit salary as a % of sales
0.65
0.49
+0.16% of sales saved
Average spend on credit information
0.49
0.25
0.24% of sales saved
Amount of frauds as a % of sales
0.20
0.18
0.02% of sales saved
% Interest rate on bank loans
3.95
3.5
0.5% of the cost of capital saved
A direct financial impact has been calculated based on the percentage savings calculated for various measures in the study. In terms of credit operating costs as a percentage of sales on average 1.38% of a company’s annual turnover could be saved by the existence of a credit insurance policy. This means that for a company with a turnover of 10 million euros this would represent a balance sheet saving of 138,000 euros. By having a policy in place, similar findings can also be seen in terms of bad debt write off as a percentage of sales (0.36%), average credit salaries (0.16%), average spend on credit information (0.24%) and levels of fraud (0.02%). In addition, raising finance through loans is also more likely to be cheaper for credit insured firms with an average of 3.5% for insured firms versus 3.95% for non insured companies.
Conclusion: Credit insurance reduces the risk of insolvency Poor management is behind most of corporate insolvencies (according to a study carried out for Euler Hermes Krediversicherungs-AG, by the University of Mannheim published on September 27, 2006 on German companies). The Credit Management Research Centre study shows that there are a number of ways that companies can review the elements of the credit management process which make it easier to prevent any unforeseen operational difficulties with the company. This in turn helps to ensure a steady cash flow and reduces the risk of financial difficulty among credit insured companies. Credit insured firms have less cash tied up in stocks and customer debt as a result of disciplined working capital management. This not only represents a financial saving but means that a firm is less vulnerable to insolvency through over trading and poor cash management.
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Euler Hermes helps you to secure your business all over the world
•Australia •Austria •Belgium •Brazil •Canada •China •Czech Republic •Denmark •Estonia
•Finland •France •Germany •Greece •Hungary •India •Indonesia •Ireland •Italy •Japan
•Latvia •Lithuania •Luxemburg •Malaysia •Mexico •Morocco •Netherlands •New Zealand •Norway •Philippines
•Poland •Portugal •Romania •Russia •Singapore •Slovakia •South Korea •Spain •Sweden •Switzerland
For further details, please visit our website www.eulerhermes.com
•Taiwan •Thailand •Tunisia •Turkey •United Kingdom •United States •Vietnam
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Design and production
- 6577 - Photography: Euler Hermes, Yves Denoyelle
6577_EULER_PLA_COUVE_sans_rabat
Euler Hermes protects companies of all sizes and industry sectors from the risk of customer default. The leading credit insurance group with a global market share of 34.4% and presence in over 45 countries, Euler Hermes offers a range of integrated credit management services covering each phase of the transaction between the policyholder and its customer: protection from customer non-payment, debt collection and loss indemnification. A subsidiary of AGF and a member of the Allianz group, Euler Hermes has the necessary financial strength to provide long-term support to its clients. Euler Hermes is rated AA- by Standard & Poor’s.
1, rue Euler – 75008 Paris – France Tel.: + 33 1 40 70 50 50 – Fax : + 33 1 40 70 50 17 www.eulerhermes.com
