A Compact Guide To Trade Credit Insurance
Financial executives and decision makers are continuously in the position to balance the cost of doing business with the risk of doing business. Each time a dollar of revenue is produced, all costs of generating that dollar have been thoroughly analyzed in an effort to maximize the profit margin.
However, in an economy where eighty percent of trade is conducted on open terms, far too little analysis is done with respect to the effect of bad debt write-offs on the bottom line and what can be done to avoid that impact.
The hundreds of billions of dollars in losses associated with bad debt write-offs during and subsequent to The Great Recession of 2008 and 2009 brought new attention to managing risk and operational costs associated with trade receivables.
Accounts receivable, which typically represent more than 40% of a company’s assets, are a vital component of a healthy business. Any company that has receivables on its balance sheet has a potential exposure to loss from the inability or failure of a customer to pay them.
On average, one in every ten invoices becomes delinquent, with many ultimately becoming an unpaid bad debt. When a major customer — or even multiple customers — defaults on a debt, there are devastating consequences to a company’s cash flow, earnings, and capital. In a worst-case scenario, this could literally put a company out of business.
These risks require thorough analysis and ongoing monitoring at the buyer, sector, country, and macroeconomic levels. In the face of today’s changing domestic and global economic climate, recognizing and managing future risks has become a priority for business leaders.
Losses attributed to non-payment of a trade debt or bankruptcy can and do occur regularly. Default rates vary by industry and country from year-to-year, and no industry or company is immune to trade credit risk. This is evidenced by the data tracked in the Euler Hermes Global Index of Business Failures
Take a look at our guide to find out how a credit insurance policy works.
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3moGreat read!