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2012, May 24

What to Do When Your Customers Do Not Pay

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What to Do When Your Customers Do Not Pay

by Cesar Bacani, 23 May 2011
topics:
Cash and Liquidity Management Finance and Banking
tags:
advance payment Atradius Coface credit insurance letter of credit Mulitex payments receivables

Like many CFOs in economically vibrant Asia, S. Venkateswaran has been seeing new names being added to his company’s client roster now that the global financial crisis appears to have waned. “But we’ve only been consciously looking for A, B and C customers,” says the Group Finance Director of Mulitex, one of Hong Kong’s oldest garments makers.

 
The company used the crisis as an opportunity to look hard into the quality of its customer list and effectively purge the rolls of D and E clients – customers that had excessive delays in, or defaulted on, payments – while lowering the credit limits extended to B and C customers (small and mid-sized companies with fair-to-good payment records) and refocusing on A clients (trusted and large buyers).
 
Now that the global economy appears to be back on track, Mulitex is aggressively expanding and acquiring new accounts, particularly in the growth areas of South America and Asia. “But you don’t really know whether [the new clients] really belong to the ABC categories,” Venkateswaran observes. “You don’t know whether they really are Ds and Es trying to act like ABC companies.”
 
That’s one of the dilemmas that finance in Asia faces these days. Sales and marketing are finding (or are approached by) many new customers, particularly from emerging markets like the BRICS countries – that’s Brazil, Russia, India, China and South Africa. But there is not much that people here know about them.
 
“It’s very difficult to assess somebody absolutely well, so to some extent you have to go with your gut feel,” says Venkateswaran. “Many customers are not as transparent as we would like them to be, even listed companies.”
 
You don’t want to turn away business, especially in fast-growing emerging economies that are encouraging domestic consumption. On the other hand, you want to get paid too, and equally important, to make sure that the nascent relationship can become a durable and lucrative one.
 
Delayed payments
This dynamic is evident in the new CFO Innovation insight survey, Receivables After the Crisis: Asia’s CFOs & Elevated Risk. Sponsored by credit insurance provider Atradius, the research surveyed 184 CFOs, finance directors, controllers and other places in Asia in March this year.
 
A key finding is that a large majority of companies are experiencing delayed payments. The worst of the global financial crisis may have passed, but only 25% of the executives surveyed say that customers are generally paying according to terms. Three-quarters of respondents are seeing payments that are late by 15 days or longer.  
 
This is not exactly a new phenomenon in Asia. Coface, another credit insurance provider, surveyed companies in China three years ago, some time before the financial crisis became full-blown. Nine out of ten of the executives experienced overdue payments on domestic sales.
 
“This does not appear to be a function of financial distress, but a practical way to manage finances in an environment where bank borrowings can be difficult,” the CFO Innovation report speculates. Adds Atradius: “Individual countries in Asia, like those across the rest of the world, will have their own business cultures and operate within differing interpretation of ‘acceptable delay’.”
 
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