Against the backdrop of increasing credit and liquidity risk, we explore how risk managers can help their organisations to mitigate these threats

The recent banking crisis has drawn other weak spots within the global economy into sharp focus. This has concentrated the minds of business leaders on the need to protect themselves against further contagion. 

However, with forecasts predicting that the $30trn global liquidity gap is here to stay, payment behaviours will likely deteriorate in 2023 emphasising the credit risk in the real economy.

business no money credit

Increasing liquidity risks in the system mean more companies are likely to experience cash-flow problems.

Allianz Trade’s latest Day Sales Outstanding (“DSO”) report assesses payment behaviours experienced by a global sample of listed companies.

DSO is a measure of the average number of days taken between delivering goods or services and the receipt of payment, something that can have a significant impact on the cash flow and profitability of a business.

”Suppliers’ role as the invisible bank is coming back in full force, increasing liquidity risks in the system”

DSO has contributed to an annual rise in Global Working Capital Payments (“WCR”), with 17% of companies worldwide being paid after 90 days.

Suppliers’ role as the invisible bank is coming back in full force, increasing liquidity risks in the system and the potential for more companies to experience cash-flow problems.

Operational costs themselves are proving more costly too, with WCR for listed companies increasing by over 9 days to 72 days of turnover in 2022 – the largest annual increase since 2008. Western Europe recorded the highest increase.

“As a result, companies are spending a lot of their financial resources simply running their business day-to-day rather than spending on investment, product development, geographical expansion, acquisitions, modernisation or debt reduction,” said Maxime Lemerle, Lead Analyst for Insolvency Research.

”Companies are spending a lot of their financial resources simply running their business day-to-day”

Similarly, the physical supply disruptions of 2021 have continued to affect corporate balance sheets. The shift from “just-in-time” inventory management to “just-in-case” has turned shortages into oversupply.

Today, 34% of companies have inventories exceeding 90 days of turnover, with transport equipment (46%), textiles (39%), electronics (38%) and machinery equipment (36%) proving to be the most exposed.

Against a backdrop of slowing economic activity, oversupply in manufacturing sectors and tightening financial conditions, inventories are likely to decrease while payment delays should increase as in previous economic downturns.

Firms with large inventories and slowing demand might be tempted to lower their standards when choosing customers in order to get rid of their oversupply, while those in sectors with less oversupply might become more selective in a more uncertain environment.

What does it mean for risk managers?

The increasing liquidity gap is a big problem for risk managers since it increases any exposure companies may have to late-paying clients, creating knock-on cash-flow issues and leaving businesses on the hook for bad debts.

However, there are some tactics risk managers can employ to help counter this threat.

How to mitigate credit risk

Andy Hodson, Risk Director, Allianz Trade UK & Ireland, said: “Tracking your cash flow is essential to keep your business safe. As part of a good cash flow management, you should create a cash flow statement and make projections.

“By bringing all the information you have together in a cash flow statement and, separately, creating a cash flow forecast, you’ll be able to conduct a good cash flow analysis and have a much greater awareness of likely opportunities and potential threats.

”Tracking your cash flow is essential to keep your business safe”

“In addition, keeping a cash buffer, like a rainy-day fund that your business can access in an emergency, can also be a good practice, in case a piece of key machinery breaks down or a big invoice becomes overdue.

“It’s also important to evaluate potential clients using alternative intelligence. You should dig beyond their financial ratings and look into whether their strategy and culture are in line with your own.”