The Credit Leader’s Guide to Preparing for a Recession

Best practices in managing cash flow amid heightened risk

The headlines are dire about an impending economic recession in the UK as a result of the novel coronavirus causing countries to suspend commerce and education in order to “flatten the curve.” Economists are reporting that economic growth will slow sharply, unemployment levels will spike, and earnings growth will slow and/or turn negative. Meanwhile, government revenues will be severely diminished, providing both short- and long-term challenges to the UK economy, according to Adam Morehouse, Dun & Bradstreet’s Economist.

This is an abrupt departure from where the economy was just two months ago. While some red flags existed, major segments of the economy, such as the labor market, were very strong, while the investment outlook was improving following an easing of external trade tensions. I was talking to credit and finance leaders about optimizing credit limits to accelerate growth.

Now it seems the economic fallout from the coronavirus will overpower any economic growth momentum that existed prior to the outbreak.

“The abrupt closures of businesses and extreme social measures adopted to slow the virus have permanently altered the outlook for short- and long-term growth and stability in the UK. This shock will result in immediate negative impacts on the labor market, revenue and earnings results, financial stability, functioning of and access to credit markets, business and consumer confidence, and the investment outlook,” Morehouse said.

Managing Business Credit and Collections Amid Unprecedented Global Risk

Twin shocks that affect both supply and demand simultaneously are rare, Morehouse said, and the abrupt nature of the shocks has given companies and households a shortened time frame in which to react and plan.

Certain conditions should provide some reassurance for recovery, including a well-capitalized banking system that has far more resilience than it did during the 2008 global financial crisis.

Still, we are facing unprecedented global risk as the scale of the initial economic impact from store closures and self-isolation continues to grow. Certain companies in certain industries will experience more serious cash flow problems because they haven’t been able to record revenue (restaurants and bars, for example), and so they can’t pay their invoices, much less their employees.

Now is a time for the finance and credit professionals to be flexible and forward-thinking about what they can do to better manage cash flow during this economic downturn.

Consider Supply Chain Data – Credit professionals are used to looking at their customers’ credit data to consider creditworthiness, but it’s important now to consider supply chain data as part of your comprehensive risk assessment. It’s not enough to know the financial strength of your customer; you now need to know the financial health of their suppliers and their suppliers’ suppliers. If your customers are dependent on a few suppliers to help produce their goods, they may face increased risk if alternative methods of production aren’t available. What’s their plan B? As a global leader in business decisioning data and analytics, Dun & Bradstreet provides both Third-Party Risk Management Solutions and Finance Solutions to provide businesses with a comprehensive view of upstream and downstream risk.

Maintain Customer Relationships – Remember, we’re all in this together. We’ve got to keep commerce going, and flexibility in times of a sustained cash flow crunch may be more appropriate than strict punitive measures against late payers. Talk to your customers to help them understand that you need to stay in business too. If your company is able to, perhaps you can waive late fees on accounts past due up to 90 days for industries that are known to be in severe distress. Now might be a better time to set up a payment plan on severely delinquent accounts rather than placing a credit hold and sending the account to your third-party collections agency. Here is also where predictive data can provide much-needed insight – scores such as the D&B® Delinquency Predictor Score, which can predict whether a company may pay late.

It’s also important to review your company’s pricing and margins to see what you can “afford” to be flexible with. This means more partnering internally across finance, sales, and operations to keep everyone aligned on projected cash flow.

Perform Ongoing Portfolio Management – As we all do our best to service our customers during this pandemic, understanding your customers’ financial condition will allow you to better manage the relationship. Setting up alerts for credit risk monitoring can be crucial right now, particularly if changes will have a material or financial impact on your business. Being notified of deteriorating credit scores and legal events (such as lawsuits and liens, which can signal a pending bankruptcy) is important. Monitoring can help you stay ahead of additional, otherwise unforeseen circumstances that may require a level of decision-making and business readiness that would normally be overlooked when times are good.

Get Back to Basics With the 5Cs of Credit – The foundational practices employed for many years are once again prevalent in these turbulent times. While we have analytics and automated solutions to assist credit teams, those efficiencies are supplemental support to comprehensive credit analysis. The analysis should focus on the core principles of credit management – what we call the 5Cs of credit – character, capacity, capital, conditions, and collateral. Certainly conditions are a primary focus, as this variable calls for considering the economic impact your customers are facing – its industry, supply chain, and geographic location, to name a few variables.

Character, of course, hearkens back to my second point about maintaining customer relationships. While character is a subjective concept, you might find yourself needing to take less aggressive collections tactics when dealing with those customers and companies that you consider to have upstanding character.

By employing all 5 Cs as you reevaluate your credit policies and best practices, these foundational components will help you establish a comprehensive and diligent process to maintain positive cash flow.