How chemical organizations can mitigate trade receivables risk
In the face of the outlook of a global economic downturn, chemicals businesses’ ability to improve the cash-conversion cycle has become more important than ever.
Globally, the chemicals industry seems to be performing well: generally robust business financials, good payment records, and low insolvency rates compared to other industries. There is high demand for chemicals from key end-markets, including automotive, construction, and electronics.
However, the chemicals industry is characterised by intricate supply chains that are vulnerable to external risk factors. This in turn exposes international businesses to major challenges and financial risks.
- The chemicals industry is cyclical, highly dependent on changes in the global economy, which appears to have peaked at 3.0% in 2018. The loss of global GDP growth momentum is set to persist, together with the looming threat of escalating trade disputes amid geopolitical turbulence.
- One side effect of the rising uncertainty surrounding trade and monetary policy is the increase in commodity price volatility, including oil and gas – the primary commodities the chemicals industry relies on.
- International competition is intensifying, especially from China and the U.S. The shale gas boom and the surge of natural gas liquids supply have turned the U.S. chemicals sector into one of the lowest-cost producers and put global sales prices under pressure.
There are certain measures you can take to mitigate these risks: diversifying customers geographically, avoiding significant concentration of credit risk, or dealing only with financial counterparties that have sufficiently high credit ratings.
To prevent credit risk from trade receivables, ageing analysis is a good first step. However, once the risk materialises, concrete actions need to be taken immediately to mitigate the impact.
Benefits of entrusting an agency
The benefit of having international debt collection agencies like Atradius Collections recover your past due trade receivables is twofold.
First, the agency provides you with global recovery capacity and a cushion against the ripple effect of a global economic downturn.
Second, recoveries are an increasingly important source of cash – the windfall could increase your balance sheet's flexibility and provide you with re-investment opportunities.
This is an effective curative measure to be implemented next to your existing preventive measures, ensuring that your business is resistant to risk no matter how the global economy unfolds.