A report published by global trade credit insurer Euler Hermes has found several major concerns among chief financial officers (CFOs) in the US. The risks keeping CFOs up at night range from an economic downturn or potential recession, to global trade tensions, the growing unpredictability of cash flow, the challenging US regulatory environment, and of course, the impact of the novel coronavirus outbreak.
The second annual Euler Hermes ‘Risky Business’ survey, which analysed responses from 250 US CFOs and their direct reports in companies with at least $5 million of annual revenue, found that 99% of CFOs are at least slightly concerned with the risks and uncertainties facing their companies in 2020, up from 75% at the same time last year. More than 50% of CFOs cited high or moderate levels of concern, a percentage that will likely increase throughout 2020 as the COVID-19 outbreak causes massive global disruption.
Read next: What is trade credit insurance?
One of the biggest concerns for CFOs is a potential slowdown in the global economy. Through 2019, there were concerns around the US-China trade war and the uncertainties around the future of the North American Fair Trade Agreement (NAFTA). In fact, many macro-economic indicators started to slow down in the second half of 2019. Euler Hermes’ predictions (prior to the coronavirus outbreak) were that the US economy would slow down from about 2% GDP growth to around 1.6%. This is all very concerning for CFOs.
“CFOs are concerned about rising costs as a consequence of the trade wars,” said James Daly (pictured), president and CEO of Euler Hermes Americas. “Many of the businesses we surveyed are consumer industries, like manufacturing, food production and retail, where they tend to feel the impact of economic slowdown a little bit earlier. Essentially, CFOs are concerned about their ability to achieve their growth targets in 2020, and, when that happens, they tend to become more conservative in terms of how they spend money or invest money into their organizations. They’re getting ready for a rainy day.
“The predictability of cash flow is always a challenge for CFOs. What we see during an economic slowdown is that the time it takes for businesses to get paid starts to get pushed out. In the supply chain, more companies are looking to use supplier credit as an alternative form of funding, so they try to push out the payment terms as much as possible. That exposes the supply chain to more risk and the chance of bad debt increases. Alongside that, the access to finance for a lot of smaller organizations is becoming more challenging. There isn’t a full-on cash crunch in the US, but we do find that around 80% of SMEs are challenged to find funding from the traditional sources, particularly the institutional banks and so on.”
CFOs face some difficult choices when heading into a slowing economy and dealing with the possibility of sales starting to flatten out or drop. Many choose to halt investments into projects that will not generate margin immediately. Some might decide to reduce their workforce and re-cut their business models to take on e-commerce competitors. Essentially, all of these decisions revolve around their need to deliver the cash required to run their businesses, pay the payroll, pay the facilities and the rent, and so on.
“One way for SMEs to raise funding is to use their accounts receivables as an asset, and to leverage those receivables,” Daly told Insurance Business. “They can either sell them to a factor, if they can use other forms of receivable finance that are out there at the moment. Or, they might leverage some of the assets that they own, using asset-based lending, where entities provide some liquidity which collateralizes those assets. So, there are ways to create liquidity, but they’re expensive. What you tend to see when a lot of SMEs come into this crunch, they go into such a low pattern that it’s difficult for them to actually deliver any growth or make enough margin.”
Companies can mitigate these ever-changing economic risks by purchasing trade credit insurance. This protects manufacturers, traders and service providers against losses from non-payment of a commercial trade debt. If a buyer does not pay or pays very late (perhaps due to an economic slowdown or recession), the trade credit insurance policy will pay out a percentage of the outstanding debt.
Daly commented: “The important thing is that SMEs start talking to us about trade credit insurance before their country, or a country they do business in, goes into recession. It’s important to get a policy in place when there’s capacity in the market. During times of economic slowdown, that capacity is either going to disappear, or it will be locked down.”