In recent months we have seen the highest inflation rates in ages, and in just about every country. Across the entire Eurozone, inflation was 8.1%. And in the United States, inflation was as high as 8.6%, the highest rate in four decades.
Whatever the reason for inflation, several recent events have put pressure on the cash flow of quite a few companies:
- The COVID-19 pandemic
- The supply crisis
- Rising interest rates
- The search for suitable personnel
- The conflict in Ukraine
- The shift to green energy
We can almost speak of the ‘perfect storm’. One that does not look like it will abate any time soon.
For you as a creditor, these are already challenging times. There is an increasing risk that payments to suppliers will be delayed. Payments by debtors will have to be postponed. In this article we look at what this inflation actually means and how you can best organise your credit management.
What is inflation?
Prices of goods and services are constantly changing in a market economy. Inflation occurs when there is a general increase in the prices of goods and services, not just individual products. As a result, you can buy less with €100 than you could yesterday or last month. In other words: 1 euro becomes worth less.
To determine the rate of inflation, you need to look at all the goods and services that households consume, such as daily groceries, consumer durables and services.
In the euro area, the Harmonised Index of Consumer Prices (HICP) is used to measure consumer price inflation. ‘Harmonised’ means that all countries of the European Union use the same method. This makes it possible to compare data from different countries.
The task of the European Central bank (ECB) is to maintain price stability as far as possible and ensure that inflation remains low, stable and predictable. An inflation rate of 2% is often cited as appropriate . And we are currently well above that.
The consequences of inflation
Inflation has a direct impact on your business and a big impact on debtors with ‘bad’ debts. The invoices you sent to your customers last month no longer bring in the same revenue as today. That’s to say, the revenue decreases in value in line with the percentage rate of inflation.
And the longer these debts remain outstanding, the less that money is worth when payment is finally made. Because with that same amount of money, you can now purchase fewer goods yourself due to inflation. This, of course, also applies to the debtor who has less purchasing power.
Moreover, if you have a loan or line of credit running or you need to take out a new one, these costs will also increase, because interest rates will rise.
As a company you can opt to pass these costs on to your customers and by increasing your prices. But this method has its limits and should not be used too abruptly. After all, you don’t want sales to suffer.
And even if you increase the prices for your services, what they already owe to you does not increase, which means you have effectively granted a discount to these customers.
Inflation also causes interest rates to rise. When an economy suffers from rising prices and wages, lenders are more inclined to increase their interest rates to compensate for the increased risks. Debtors then also contribute indirectly by paying a higher fee to compensate for this inflation. As you can guess, this makes it even more difficult to collect debts.
The profits and financial stability of many companies are therefore seriously affected by inflation. When your customers are struggling, you can quickly start to feel it. Customers who are under pressure may try to pay later during this period. It is a way of preserving their own cash flow.
If debtors’ cash flow problems do not improve, there is a risk of payment delays. If inflation continues and the economic situation does not improve, more companies will be in trouble and unable to pay their outstanding invoices.
Fortunately, there are several ways to get payments for your business in on time and greatly reduce the chances of late or non-payment.
Assess risks faster
Check the creditworthiness of customers and prospects on a regular basis; limit credit terms if required and set credit limits. These simple steps can significantly reduce the risks to your cash flow. The challenge is to identify these risks in advance so you can take timely action.
Send invoices out on time
Take a good look at when your invoices go out the door. Maybe they are sent out a little too late? Or maybe too many invoices are sent at the same time, making it difficult to follow up on them?
You can save a lot of time by working with electronic invoices. The customer can pay faster, for example if you provide a payment link. But the internal processes of your company can also be made more efficient. Incoming and outgoing money transfers are more quickly visible.
Put clear terms of payment on the invoice
It is best to stipulate the general terms and conditions of sale and the payment conditions beforehand and put them in clear terms on the invoice. Also mention the deadline for payment and the clauses governing non-payment.
For bad payers, it may be advisable to draw up stricter payment conditions. For example, asking for an advance or prepayment and putting greater emphasis on the payment deadline in every communication.
Conversely, you could also grant a discount when invoices are paid on time.
Keep the lines of communication open and stay on the ball
Stay in close contact with your customers. With constant communication and timely reminders, you make it difficult for your customers not to give you priority. The reminder can even be sent out a few days before the due date.
Make sure that all the necessary information is present, and that the customer preferably has all the information available to pay immediately.
For this you need to set up an efficient system that sends out automatic reminders in good time. Software for debtor management and credit management can help you with this. With sophisticated and robust procedures you can monitor everything properly.
Keep on top of workloads
When the number of outstanding invoices increases suddenly, software can offer a helping hand in keeping an overview and in coping with the increasing workload.
With iController debtor management software, every credit controller can easily follow up every day on outstanding tasks via a personal worksheet. Tasks are prepared automatically as much as possible, but also manual tasks can be created from almost any place in the tool. For example, to make a phone call or to follow up internally.
Offer flexibility when your customers are going through a rough patch. A payment plan can be a solution. The great advantage of a payment plan is that spreading the debt over several smaller amounts makes repayment much more bearable for the debtor.