Turbulent times calls for resilient credit professionals

Despite the challenging times faced by credit professionals, they continue to serve as the backbone of their organisation.

Credit professionals play a crucial role in managing risk and ensuring their businesses receive payment for the sales and services delivered. They draw on their unique information sources and experience to provide clarity on how economic conditions are impacting their customers. Although sales levels may provide a strong indicator, these can often be driven by optimistic assumptions. By closely monitoring customer trends and behaviour, credit professionals obtain a clearer view of their customers’ true health.

Credit professionals can gain insights into future developments by analysing both recent and historical trends. They use this analysis to reflect on their results and speculate on what to expect in the face of growing pressures. By considering a range of factors, credit professionals can make informed decisions to mitigate potential risks and ensure their organisation’s financial health in a period of uncertainty.

Signs risk is on the rise

When we surveyed AICM members for last year’s risk report, there was uniform agreement that payment times and bad debts remained at historical lows driven by the government financial support, low or no ATO enforcements and supply constraints incentivising early payment to ensure continued supply.

With ATO action continuing to escalate and a cost-pressures growing exponentially, many may expect this year’s report would see the pressures start to impact customers and the performance of collections targets.

We have found through a survey of almost 100 members that collections have continued to perform very well with only 5% seeing collections performance deteriorate, a similar proportion to last year. However, the proportion to improve is much lower in 2022 at 36% compared to over 60% in 2021, as seen in graphs 1 and 2.

The survey also showed that investing in experienced and trained credit professionals leads to better performance, with CCE’s experiencing significantly less deterioration and greater improvement in results as seen in graph 3.

The drop in members able to improve performance is not surprising 2 years of record lows. While very few members experienced a deterioration in results during 2022 the number of companies entering insolvency increased 43% on 2021, in tight correlation to the rises in interest rates, as seen in graphs 3 and 4.

By month

By month

The result of the AICM members survey tracks inline with the levels of personal insolvencies which has seen record low levels continue as seen in graph 5 (see page 6). This is despite the survey responses being largely in the commercial sector.

The 2021-2022 ATO annual report provides some insight as to why corporate insolvencies are rising while personal insolvencies are not. The Total ATO debt which is mainly owed by businesses rather than individuals has continued to escalate through the COVID period with total debt increasing 13% and collectable debt increasing 16%. With small businesses making up the largest proportion of the debt, being $29.3bn of the $44.8bn collectable debt (i.e. debt not subject to insolvency, objection or appeal as seen in graphs 6 and 7).

This data supports the on the ground experiences of the surveyed members who reported that the majority of customers are still impacted by the impacts of the pandemic as seen in graph 8 (see page 7). Additionally small business groups report that the ATO debt accumulated during COVID is driving corporate insolvencies with many small businesses succumbing to the pressure of this debt despite being able to meet current trading obligations.

Analysing the factors that contributed to deterioration or improvement of results shows clearly that while most organisations have sought to implement technology, automation and AI the right team members continue to be the number one driver of achieving best results in credit management as seen in graphs 9 and 10 (see page 8).

What does the future hold?

AICM members are relatively optimistic on the future of their collections performance with only 34% expecting deterioration of results and 25% expecting improvement as seen in graph 11 (see page 8).

This view may indicate that credit professionals are well prepared to weather increasing levels of insolvency and risk that may be on the way.

On the other hand, Chief Executive Officer of The Australian Financial Securities Authority Tim Beresford, predicts a significant rise in personal insolvencies as seen the article on page 73.

Graph 9: What factors contributed to deterioration in collections/DSO?

Graph 10: What factors contributed to improvement in collections/DSO?

Graph 11: How do you expect your

Graph 12: What is your prediction for

Additionally, on further examination of the number of companies entering insolvency compared to the RBA cash rate in graph 3, we can see levels are returning to those seen pre-pandemic however the trajectory of insolvencies to the RBA cash rate may indicate we are experiencing a lag and levels of insolvency may continue to rise sharply as cost pressures flow through the economy.

The predictions of increased insolvency levels are supported by AICM members, with 98% of members expecting insolvencies to continue at the same level as 2022 (20%) or rise (77%) as seen in graph 12.

The pressures of interest rates and inflation are the most relevant risk factors for many members, with several members as seen in graph 13. Additionally, members highlighted the prospect of the ATO taking a tougher stance on enforcement as the another factor causing significant concern.

The difference between credit professionals’ optimism for their own results and the pessimism over levels of insolvencies can be attributed to the fact credit professionals have an armoury of tools at their disposal to mitigate the growing insolvency risk. When comparing expectations of CCE’s in graph 14 and non-CCE’s it seems they are more confident in their abilities to mitigate the turbulent times, perhaps driven by a greater understanding of what methods and resources can be deployed.

As Blair Chapman, Director, Deloitte Access Economics shared during his update at the NSW Economic Breakfast “Now-casting, working out where the economy is now, is hard enough before economists start to forecast where we will be in 6-12 months”.

While credit professionals have greater insight on the now through the daily tracking of their customers, the future is just as tricky to predict. The one thing we do know is that credit professionals will continue to face new and increasing pressures to achieve the same or better results. By using their skills, knowledge, resources, and networks of peers they will remain the backbone of their organisation.

Graph 13: Factors that will most impact credit risk in 2023

COVID-19

Industrial relations changes

Environmental disasters

War in Ukraine

Australia’s relationship with China

Property prices

Energy prices

Labour shortage/ the great resignation

Supply constraints

Inflation/Price rises

Interest rates

Sourced from a survey of AICM CCE’s conducted in March 2023.

Graph 14: How do you expect your collections/DSO to perform in 2023?

CCE’s non-CCE’s

Sourced from a survey of AICM CCE’s conducted in March 2023.