An in depth analysis of 124 large Nordic companies in 2019 showed aggregated overdue payments of EUR 18.5 billion, equal to 22% of total gross accounts receivables. With total overdue payments already increasing by 4% from 2018, the after effects of the coronavirus are expected to create an even larger growth in overdue payments in the coming months.
Nordea’s Working Capital Management Advisory team analysed the 2018 and 2019 annual reports of 124 listed Nordic large cap companies in order to study the share and volume of overdue payments of accounts receivables. With a total aggregated amount of EUR 18.5 billion in overdue payments for the 124 companies included in the survey, the level of receivables exceeding the defined payment terms amounted to 22% of total accounts receivables.
The survey showed some differences between industries, with the ratio between overdues and accounts receivables varying from 15% to 36% depending on the sector. Industrials and Telecommunications proved to be the sectors with the highest late payment ratios. Consumer Goods and Utilities were the best performing sectors, receiving around one sixth of total payments later than the agreed payment terms.
In a 2019 survey commissioned by the credit management services company Intrum, the most common causes for late payments were found to be ‘debtors in financial difficulties’ followed by ‘administrative inefficiency of customers” and ‘intentional late payment’.
Henrik Anbelin, Working Capital Management at Nordea, says: “For companies in the survey with overdues above 90 days, this level of late payment obviously turns into a credit risk. Some large companies are already beginning to try to monitor the credit risk of each of their customers. Particularly in this corona epidemic environment, credit risk is becoming a big issue and payment terms are being decreased accordingly. In times of scarce liquidity companies are wondering who is going to pay and how much is going to be lost.”
For shorter periods of late payments, we can assume that these might be due to administrative or other issues with internal processes. When companies are decentralised, they often don't have holistic set ups such as common ERP systems in place which means that a focus on accounts receivables can tend to slip.
Henrik Anbelin, Working Capital Management at Nordea
“For shorter periods of late payments, we can assume that these might be due to administrative or other issues with internal processes. When companies are decentralised, they often don’t have holistic set ups such as common ERP systems in place which means that a focus on accounts receivables can tend to slip,” adds Henrik
Johnny Thiel, Head of Cash Management Sweden Wholesale, adds: “Companies need to find out what the actual problem is regarding the late payments to eventually take it onto a strategic level. We all know that the treasury continuously looks into this but sometimes it falls between the chairs somewhere and most probably it’s between the local and decentralised subsidiaries. Certainly with a number of larger companies we have seen the introduction of, for example, payment factories has helped to centralise the payments process in recent years. This can be a good way to make sure that the level of late payments are reduced. Also, dedicated employees in a payment factory would probably not accept late payments if that would adversely affect their KPIs.”
Corona overdues ahead
With the coronavirus and associated lockdowns placing further demands on available liquidity, the proportion of late payments is only expected to increase further in 2020.
Richard Hayes, Global Head of Working Capital Advisory at Nordea, says: “One concern when looking at this analysis is that these numbers are derived from a pre-coronavirus situation. Once you start factoring in some of the liquidity issues that have been occurring since the beginning of the crisis, 22% of payments overdue is a very high number to begin with if things are going to become worse. These results provide a barometer that shows there is a lot of work that can be done within a company around its overdues to provide both working capital and efficiency benefits. If companies were not addressing their overdue payments pre-coronavirus, they really need to start looking at them now.”
These results provide a barometer that shows there is a lot of work that can be done within a company around its overdues to provide both working capital and efficiency benefits. If companies were not addressing their overdue payments pre-coronavirus, they really need to start looking at them now.
Richard Hayes, Global Head of Working Capital Advisory at Nordea
Cathrine Sandgren, Head of Cash Management Sweden, says: “Cash forecasting and keeping track of incoming payments was of course of high importance previously but that has only increased in importance post corona because of the tight liquidity situation many companies are in. So if that was previously high on the agenda, it’s even higher now.”
Focus on forecasting
Finding ways of maintaining liquidity in the light of reduced cash flows and minimising trade risks are essential steps in ensuring businesses can maintain stability. Increased focus on cash forecasting might help to highlight more quickly where overdue payments may become problematic.
Johnny says: “Some companies today are already using advanced tools like AI (Artificial Intelligence) for cash forecasting and I believe that smart ways of working in this area will become even more important in the future. The main focus today is usually placed on when the money will be received and sent but I believe it also could be used in other areas as well.”
Cathrine says: “Establishing an automated process can help to identify when these slippages of payments start happening, even before the human eye can discover them. When liquidity is tight, which it has been during the corona downturn, it is even more important to identify early on where you have problems with payments to be able to take action. This may mean stop selling to a particular customer who won’t be paying or taking other action. Introducing a solution based on machine learning that can predict the timing of incoming payments and detect changes in payment patterns will help planning and allow companies to act quickly.”
Johnny adds: “If a company proves to be a consistently late payer, an automated procedure could be introduced that sends a new invoice to the company immediately the same day as the payment was not received. Especially if it´s known that the payer only makes a payment after one or two reminders have been sent.”
Cathrine adds: “Even if you have a very large customer that always pays late you should at least be aware of it and make sure that you get compensated for the cost of those extra days. If you start a discussion with the customer related to the costs of late payment then you can maybe shift their behaviour.”
When liquidity is tight, which it has been during the corona downturn, it is even more important to identify early on where you have problems with payments to be able to take action.
Cathrine Sandgren, Head of Cash Management Sweden at Nordea
Working with supply chain finance
A focus on reducing the amount of overdues, creates an opportunity for companies to take stock of their treasury policies to streamline their approach and increase efficiency.
Richard says: “There are certain things that can be done across the board to help companies with savings be it through programmes and solutions that we can put in place and also by taking a strategic approach. Companies need to understand what they can do internally to position themselves to help mitigate some of the costs that there are as a result of these overdues which we expect to get worse in the short term.”
“Overdues create a link between cash management, trade finance and working capital. Historically many companies have thought that receivables programmes (when a company sells their receivables to a bank) are there to generate cash. So you do it in a situation when you don’t have any other access to liquidity, be it through CP markets, short term debt or anything else. In reality a properly structured receivables programme gives you a risk mitigation element as well. Helping the treasury policy by de-risking certain customers means it’s not just a cash generation exercise but a treasury risk mitigation one as well,” concludes Richard.
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