Overview of payment practices
Improvements made to efficiency of invoice collection
On average, 53% of the total value of the invoices issued in the agri-food industry is currently overdue, compared to 45% last year. However, respondents reported making an effort to collect on large debts, halving
the amount of longterm (over 90 days) overdue invoices to an average of 8% (down from last year’s 15%). DSO now averages 40 days, one week shorter than last year. Write offs decreased to 6%, down from 10% last year.
Businesses increasingly use credit insurance
Almost a quarter of businesses in the agri-food sector have recently adopted credit insurance (71% compared 47% last year). However, 75% of survey respondents told us they retained credit risk in-house, an increase on
last year’s 59%. In addition 48% of respondents frequently adjusted credit terms in line with customer credit risk profiles, offered discounts for early payment and spent more on chasing late payments.
Safeguarding of liquidity levels central to industry’s credit risk management
nearly one third of respondents consider maintaining adequate liquidity levels to be the greatest challenge to business profitability over the coming months. This concern stems chiefly from pandemic uncertainty and its effects on the global economy and international trade. This may explain why nearly half of the respondents believe the domestic economy will drive improvements in their business
performance (sales and profits) rather than export trade. Against this backdrop, trading on credit will play a bigger role in their trade relationships, as a way to allow customers longer time to pay invoices. To minimise the impact of customer credit risk on the business, half of survey respondents (55%) anticipate resorting to selfinsurance and increasing efficiency in collection of overdue invoices over the coming months.
Write-offs three times higher than last year
Write-offs in the construction industry grew by three times year-on-year (now 6% of all credit sales), although at 54%, the average total value of overdue invoices is not significantly different from last year. Long-term outstanding receivables (those more than 90 days overdue) average 10% (compared to 13% last year).
On average, it takes the industry one week longer than last year to settle
overdue invoices and, overall, DSO is twice as long as last year (averaging 49 days). These findings point to a pressure on the liquidity levels of the Australian construction industry. In response, businesses tend to increase their overdue collection efforts (as reported by 52% on respondents) and take longer to pay their own suppliers (reported by 48% of respondents compared to 25% last year).
Increased focus on customer credit risk management
Far more respondents in the construction industry (80%) told us they opted for in-house retention and management of customer credit risk than last year (62%).
The most frequently used risk management techniques are the
adjustment of credit terms to reflect different risk profiles and requests for letters of credit. Outsourcing customer credit risk management to insurers is also far more frequent among survey respondents in the industry than one year ago (70% compared to last year’s 60%).
Industry more concerned over DSO increase then last year
The construction industry told us the administrative costs most commonly incurred when offering trade credit include the resources spent on collecting overdue payments, as well as the costs related to external financing to keep their day-to-day operations going.
To keep these costs under control, 57% of respondents alike avoid offering
credit, avoid concentrations of credit risk, or request letters of credit. Despite such measures, 40% of the industry respondents expect DSO levels to increase over the next year, up from 30% one year ago. That said, 68% anticipate business performance (sales and profits) to improve over the next 12 months due to a positive outlook for the domestic economy.
Half of the total value of long-term overdue invoices is written off
An average of 57% of the total value of the chemicals industry invoices is overdue, 8% is more than 90 days overdue and 4% of these have been written off. On average, it took chemicals businesses three weeks past the due date to settle overdue invoices. These late payments are reflected in the DSO.
This averages 35 days and although has remained stable for 75% of respondents, it has increased for 22%. In addition to late payments, this increase may be in part due to a more liberal approach to payment terms over the past 12 months.
Trade credit insurance is the leading source of risk management
86% of chemicals industry respondents employ trade credit insurance as their preferred risk management tool. However, a significant percentage also told us that they manage credit risk in-house (82%). This involved allocating resources to collecting on late invoices and strengthening internal credit management procedures.
However, half of the respondents resorting to selfinsurance, told us they needed to access external financing to fund their day-to-day business operations, and also delayed payments to their suppliers to retain liquidity as long as possible.
Pandemic poses greatest threat to future profitability
Nearly half of the survey respondents from the Australian chemicals industry told us they consider the uncertain outlook surrounding the end of the pandemic to be the greatest challenge to their business profitability over the next months.
However, 30% believe their business performance will improve over the same time frame, mainly due to the consolidation of the domestic economic rebound, as well as healthier export flows. Only 2% of respondents anticipate a deterioration of their business performance, while the remainder expect their performance to continue unchanged.
Offering trade credit will continue to be an established business practice among respondents. In particular,
most (67%) believe that the businesses that most successfully adapted to the pandemic challenges, will more often accept trade credit requests from their customers going forward. To mitigate the impact of customer credit risk associated with the increased extension of credit over the coming months, most industry respondents said they will use trade credit insurance, while 65% will opt for retaining and managing customer credit risk in-house. This will chiefly involve adjusting payment terms to account for differences in the credit risk profile of the customers, as well as offering discounts for early payment of invoices to improve cash flow.