201504 CM April

Andy began his career at one of the UK'S largest trade credit insurance
underwriters, Euler Hermes over 29 years ago. After working at a senior level
for several specialist brokers he established EFCIS in 2000.
of claim payment certainity and credit
limit cover, the higher the level of funding
they will be prepared to offer you. Make
sure your funder is aware that you have an
extremely well run policy. Provide them with
regular credit limit updates and compliance
reports.
What risk?
Grading individual debtors gives you a
platform to potentially align the grade to
margins as well as collection stance. These
debtor grades can be made available by
the credit insurance underwriter within the
scope of your policy. They are based on
the most up-to-date financial information
including management accounts when
available and trading information (payment
delays and reportable adverse events).
Combined they provide a robust guide to
the individual trading risks which can then
be aligned to profit margins and collection
stance. These grades should then be
monitored and reviewed on an ongoing
basis to ensure they reflect today’s trading
position.
Consider increasing the margin for highrisk
graded debtors to generate additional
profit or to simply increase the bad debt
reserve to reflect the increased probability
of future payment default.
Also consider the potential DSO and
working capital benefit of greater alignment
to individual debtor grades with your
collection stance. Consider too proactively
chasing payment from below average
debtors. This will have a positive impact on
DSO, cashflow and ultimately profit.
More coverage
The UK Government is keen to support
increased levels of export sales to help
the UK economy recover after a prolonged
period of recession. However, it is generally
accepted that there is greater degree of
uncertainty and risk when trading with
a number of these countries due to the
increased potential of non-payment due to
a political event. A credit insurance policy
can include political risk cover such as
contract frustration, contract cancellation,
currency transfer and export/import
restrictions.
The credit insurance policy can also
cover binding orders, work in progress,
extended credit cover, non-cancellable
limits, dispute cover and trade specific
clauses for sectors such as advertising,
construction and the oil and gas industry.
With the support of your specialist
broker conduct a risk audit twice a year
to ensure that all potential risks that can
be covered are included within the scope
of the policy. Why not ask you broker to
arrange for a dummy claims inspection to
highlight any potential policy breaches and
agree what steps are required to ensure
policy compliance?
THE credit manager of an importer
and distributor of meat, with estimated
insured sales of £22 million, was
becoming frustrated with its invoice
finance provider; restricted credit limits
were impacting negatively on available
funding. The company did not have the
available working capital to grow the
business and its high fixed costs were
negatively impacting on profit. Key
credit limits were increased by £2.2
million resulting in increased working
capital to support future growth and
profit.
This additional working capital
assisted the company in securing
£6 million additional sales during the
course of the year at four percent net
margins, generating £240,000 profit (the
policy premium was £70,000).
A vehicle leasing and contract hire
company had an initial DSO of 193 days;
understandably this was having a dire
impact on working capital and profit.
Its credit insurance policy provided
individual debtor grades (including
highlighting the riskier debtors). Not only
was the company not being paid by a
number of its customers, but it
was also at risk of claims on its
policy being refused because it was
not complying with the insurer’s
requirements.
The company now has a higher
percentage of insured sales on its
ledger and the DSO has reduced from
193 days to 59 days. This level of
DSO an improvement combined with
the improved credit insurance policy
compliance has resulted in a £5.5 million
improvement in cash utilisation freed
up from its receivables, combined with
a decrease in inherent risk. It also has
the added benefit of peace of mind from
improvement in trading certainty through
limit utilisation and increased policy
compliance.
CASE STUDIES
THE credit manager of a major IT
distributor wanted to supply goods on
credit to a number of overseas markets,
but was struggling to obtain financials to
support potential sales of £7.5 million.
There was also concern that in the event
of a payment default it did not have
a local presence in these markets to
collect the debt.
The company commenced trading
with the full support of the underwriter
from a risk, cover and collection point of
view and generated additional sales of
£4.7 million in 12 months and additional
net profit of eight percent (£376,000)
was generated. The policy premium was
£110,000.
However, one of its overseas
customers was unwilling to pay the
amount due. It used the fact that it was
insured as leverage to secure payment.
Its customer did not want its grade to
be adversely affected, nor to be on
the receiving end of collection and
legal action. At all times during these
discussions the company knew that
in the event of a bad debt they were
insured for 90 percent of the insured
debt.
The recognised standard in credit management
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