- inflation rates at record levels in Europe
- deterioration in customer payment practices
- negative consequences of inflation exacerbated on all sides
The figures are dramatic: In October 2022, the inflation rate in the euro zone was 10.7 percent. Never since the introduction of the euro in 2022 has the value of the currency reduced so rapidly. Only a short time before, the inflation rate across the European Union had reached a negative record level: In August, at 10.1 percent, it was at its highest level ever since the foundation of the EU in 1993.
This was due, in part, to the policies of the central banks, which provided all economic participants with money at an inexpensive rate. Then came the coronavirus crisis, which not only caused financial bottlenecks for many private and business customers, but also stalled the supply of goods and materials, leading to a general rise in prices. In addition to a decrease in purchasing power, companies have also had to contend with huge increases in energy prices since the outbreak of the war in Ukraine.
All in all, this has formed the basis for a number of threatening scenarios: In a study published in October 2022, the international credit insurer Allianz Trade forecast a global rise in company insolvencies of 10 percent for the whole of 2022 and a further 19 percent through to the end of 2023.
Inflation exacerbates the effects of payment defaults.
A problem that is already placing various companies in jeopardy is now being exacerbated further in the form of payment defaults and late incoming payments. According to the EOS study “European Payment Practices”, which polled 3,200 financial executives from 16 European countries, this development is already a key issue for many companies. In Western European countries, every fifth customer pays late or not at all and, in Eastern Europe, the figure is every fourth customer. This trend has increased significantly in the last three years in particular. Among those surveyed, 60 percent stated that the reason for late payment was due to their business and private customers having to contend personally with payment defaults.
Price increases and falling purchasing power are likely to fuel this trend further in the coming months, and may even trigger a chain reaction among companies. This is not only due to their available capital experiencing an appreciable reduction in value, but also due to its actual reduction as a result of defaulting customers. Even companies that do eventually receive their money suffer from the effects of inflation, as the purchasing power of the money often decreases dramatically in the time that they have been waiting for it to be repaid.
Bad debts, which were previously a nuisance, are now becoming an existential threat. According to the study by EOS, more than half (51 percent) of the creditor companies are already having to contend with profit setbacks, and well over a third are already suffering liquidity shortages (42 percent). Almost a third of the companies have reduced investments or increased the prices of products and services, thus unintentionally accelerating the dire trend.
Efficient receivables management can relieve the pressure on companies.
One way for companies to break this vicious cycle is to focus on their core business, thus enabling decision-makers to explore means of mitigating inflation internally to better effect, for example through leaner processes, more precise calculation of dedicated prices, alternative purchasing options, or the identification of further energy-saving options.
The outsourcing of receivables management to specialized companies or the complete sale of receivables can also help such companies in this regard, saving them time, effort and personnel, which they can use for their core business. Another way is to generate financial flexibility, as a key advantage for collection agencies in times of soaring inflation is time. They can quickly provide companies with fresh capital.
This is made possible by an efficiency that is difficult for non-specialized companies to establish. EOS, for example, relies heavily on digital technologies and processes, which facilitates structured access to data and the automated analysis thereof.
The entire economy benefits from professional receivables management. In Germany alone, the member companies of the Federal Association of German Debt Collection Agencies (BDIU) transfer around six billion euros to their clients every year. Over the past three years, debt collection agencies such as EOS have succeeded in securing an average of six percent of the revenue for their client companies. This is a crucial factor for companies that must safeguard their own purchasing power and ability to invest in times of record inflation.
Would you like to know more about professional receivables management? Feel free to contact us!
Photo credits: Stocksy, EOS