Delayed Payments and Defaults are a Growing Concern for Finance Executives

Only 25 percent of executives in a poll indicate customers are generally paying on time, leading to concern despite the end of the global financial crisis. In a receivables survey conducted by CFO Innovation, seventy five percent of the executives polled say payments are late by up to 15 days (35%) or by more than 15 days (40%). The survey, sponsored by Atradius, analysed how companies are dealing with trade issues after the crisis and what lasting impact it has had upon their business.

 

Download survey results here.

 

The survey found that methods of self-protection enterprises in Asia are using include choosing to reducing their exposure to customers they judge to be less creditworthy, followed by moving away from open account in favour of letter of credit, or by taking out trade credit insurance.

 

In terms of receivables as a proportion of assets, sixty-eight percent of the executives surveyed from Singapore, Hong Kong, China, Malaysia and other places in Asia put the amount of accounts receivable as a percentage of current assets at the end of last year at 40% or less. Thirty eight percent peg it even lower, at 20% or less. It also indicates that companies in Asia are getting paid on time and have avoided the expensive situation of having a large part of their cash tied up in receivables.

 

However, it is more likely that the ‘cash-rich’ situation of businesses in Asia not only has the effect of reducing the level of receivables as a proportion of assets, but also acts as a buffer and has helped protect them against the non-payment domino effect that plagued European and US businesses.

 

Nevertheless, late payments remain problematic for Asia’s businesses, as only a quarter of the executives surveyed indicate that customers are generally paying on time.

 

Late payments are not a new phenomenon in Asia. Even before the global financial crisis, many companies in China, for example, have been habitually delaying payments, particularly since they pay in cash. 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.

 

“There are clear indications within the CFO Innovation study that payment delays, in general, are increasing with almost half of the respondents reporting that requests for extended payment terms are also growing,” commented Atradius in the report. “Late payments can penalise businesses further, by costing them money to explore and secure other finance streams, which enable them to maintain cash flow, such as potentially expensive bank finance, loans and other options.”

 

The survey also finds that there is a low usage of trade credit insurance, which may be due to limited knowledge about this product. But those respondents who know credit insurance say their experience with it is net positive, citing that the insurance company they dealt with met their expectations, which include charging reasonable premiums and providing information about counterparty creditworthiness.

 

Key Findings:

  • On the face of it, late payments or outright defaults appear to be a manageable problem in Asia.
  • But a large majority of respondents say their company has been experiencing delayed payments.
  • Little wonder that many companies remain worried despite the apparent end of the global financial crisis.
  • To protect themselves, enterprises in Asia are reducing their exposure to customers they judge to be less creditworthy.
  • The low usage of trade credit insurance may be due to limited knowledge about this product.
  • Going forward, companies in Asia will focus on requiring advance payment to mitigate payment risk.

 

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