CREDIT MANAGEMENT
Preserving The Value Of Debtors In An Inflationary Environment
By Wasilwa Miriongi
Quoting from the article by Cytonn titled Cytonn H1 ’ 2022 Markets Review it states that “ According to the Kenya National Bureau of Statistics ( KNBS ) Q1 ’ 2022 Quarterly GDP Report , the Kenyan economy recorded a 6.8 % expansion in Q1 ’ 2022 , up from the 2.7 % growth recorded in Q1 ’ 2021 . The performance was bolstered by rebounds in most economic activities , which had contracted significantly in the Q1 ’ 2021 as a result of Covid-19 control measures . However , H1 ’ 2022 saw increased inflationary pressures with the average inflation rate increasing to 6.3 %, compared to 5.9 % in H1 ’ 2021 , largely attributable to a rise in food and fuel prices stemming from persistent supply bottlenecks . This was reflected in the business environment , which deteriorated noticeably as consumers cut back on spending , with the average Stanbic Purchasing Managers Index ( PMI ) coming in at 49.7 in the first five months of 2022 , unchanged from what was recorded in the same period in 2021 ”. No doubt a challenging economic environment lies ahead .
Let us focus on the solutions that will cushion the impact of inflation on your cash flow , debtors , and revenue . If you wonder why we appear to be going a little off the reservation by including revenue , it is because credit is an integral part of the terms and conditions involved in sales , and is a key factor in preserving profit .
Impact of Inflation on debtors , Cash Flow and Revenue
Inflation reduces the real value of the money you will receive . Take a case of an invoice paid two months late . This will be worth even up to 2 % less in real terms assuming an 8 % inflation rate . That presents a significant reduction in value ( purchasing power ) of that cash .
Inflation will be a financial hardship for most of your clients . This will result in more late payments , and an increase in the credit risk of default . A higher portion may not survive or will otherwise file bankruptcy to get reorganized . Price disputes and deductions on payments will likely increase as well .
There will be resistance to your attempt to increase prices . Clients will want the price increases delayed as long as they can . Many
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Consider that it is time to reduce costs to compensate for the expected reduction in revenue and gross profit . This is never easy . When used effectively , debtor ’ s outsourcing and automation are two relatively quick ways to achieve this . will not accept the full inflation adjustment required ( you get what you negotiate !). Others will reduce the volume of purchases . These factors will ultimately result in reduced sales volume and gross margins .
What then are the solutions to mitigate the impact of inflation ?
Economics experts argue that low inflation is good for commercial activities and inflation should not only be taken from the negative light as there are positives as well . Below are the action steps that will help cushion that impact on the company :
Ramp up the company collection efforts ( increase collection effectiveness ). When inflation rears its ugly head , companies get more aggressive in their cash flow management by slowing payment to their suppliers . That is why you need to ramp up your collection efforts . Increasing effectiveness is just as important as focusing more time and effort on collections . If you allocate more internal resources to collections , be sure to also provide ample training . Providing a bonus for meeting cash collection targets is another way to boost productivity . Using a collection agency or engaging a debtors outsourcing partner are ways to add external capabilities . Focus on larger accounts who consistently pay more than seven days beyond terms and those who are a high credit risk . These actions will reduce the decline in cash flow .
Avoid extending terms by extending the credit days . Some firms , instead of just paying more slowly , will be more upfront about what they are doing and ask you for extended terms by extending the credit days , typically an additional 15 to 60 days .
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